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December 3, 2008
Another interest rate cut by the Reserve Bank. Another sign that the economic storm clouds are brewing offshore as the optimists pen their op-eds on growth and bargains galore on the local share market. The Liberal opposition has yet to adopt a new talking point: fairness is a luxury for countries in decline.
Alan Moir
Everybody is slashing interest rates these days. Chinese exports are declining as is it's manufacturing output. So much for the optimist's myth that China can decouple itself from the US economy, thanks to a strengthened domestic economy. Asia's export-driven economies are being battered by the chilly winds of faltering demand in the US and Europe. (Don't you just love the weather metaphors for economics?)
The global economy is already headed toward a recession. A hard landing in China will have severe effects on growth in emerging market economies in Asia, Africa and Latin America and in Australia, since Chinese demand for raw materials and intermediate inputs has been a major source of economic growth for emerging markets and commodity exporters.
The World Bank’s latest China Quarterly Update says that China really is a manufacturing and investment driven economy and that China ultimately has to produce for Chinese demand not world demand. However, wages have fallen from around 50% of China’s GDP at the start of the decade to around 40% of GDP and so consumption is a low share of GDP.
As Nouriel Roubini pointed out in Forbes several months ago:
For the last few years, the global economy has been running on two engines: the U.S. on the consumption side and China on the production side, both lifting the entire global economy. The U.S. has been the consumer of first and last resort, spending more than its income and running large current account deficits, while China has been the producer of first and last resort, spending less than its income and running ever larger current account surpluses.
If the US engine of growth has effectively shut down, then the Chinese engine of growth has stalled. An aggressive easing of monetary and credit policy will not prevent a hard landing since monetary and credit-policy easing may be ineffective given the overinvestment of the last few years has led to a glut of capital goods.
Could fiscal policy rescue the day? The Chinese government has massive infrastructure projects for the next five to 10 years; but front-loading most of that multi-year spending over the next 12 to 18 months will be close to impossible.
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I read somewhere that the Chinese government is expanding subsidies for farmers purchases of home appliances and mobile phones in order to boost sales. Its an attempt to arrest the decline in economic growth.