The slowdown in the global economy is starting to bite from one end of Latin America to the other. The OECD forecasts that growth in the region in 2012 will slow to 3.2% from 4.4% last year. That would be the first deceleration in a decade. Just last week Argentina reported that its GDP growth in September was only one tenth of a percentage point higher than in the same month last year. Far to the north, Mexico said its third-quarter growth, at one half of a percentage point over the previous quarter had been its lowest since the first quarter of last year. Mexico, Latin America’s second largest economy, can at least comfort itself with the fact that its growth for the full year is likely to come in at 4%. Brazil, is looking at 2% growth for 2012, if it is lucky.
Mexico’s policy makers will have to wrestle with balancing cuts in interest rates to stimulate a sluggish economy with the risk of stoking inflation. That is a classic central banker’s dilemma, at least. Argentina, the region’s third largest economy after the other two, is facing problems as much of its own making as of the global slowdown’s. A poor grain harvest may have been outside the government’s control, but high inflation and import and currency controls on investment were not. The country’s long boom has come to an abrupt and ugly end this year.
The government’s newly lowered forecast of 3.4% growth for the year now looks optimistic. Private economists say 2% would be more realistic. If that is so, it would be a huge problem for Buenos Aires. Annual growth falling to 3.26% triggers $4 billion worth of payments next year to holders of Argentina’s GDP-growth-linked debt. Already embroiled in one international row over the accuracy of the country’s official inflation figures, another one on the GDP numbers now looks to be on the cards.
China’s GDP growth will slow to less than 5% a year by 2016, according to three out of every five of the more than 1,000 global investors, analysts and traders who responded to a Bloomberg poll. More than one in eight thought that would happen within a year, and nearly half thought that such a slowdown would occur in two to five years. Potential property bubbles, bad bank debt, persistent inflation and extended weak demand in US and European export markets were the cause of the pessimism.
This Bystander is tempted to recall the Japanese political saying that an inch in front of your nose is darkness. The economic forecasting goggles that can clearly see five years out are yet to be invented, let alone the night-vision version. Few in 2006 thought the world would look in 2011 as it does. We don’t doubt that China’s economic growth is more likely than not to slow from the double-digit growth rates it has averaged over the past three decades. The natural arc of development and demographics all but ensure it. Yet, a fall to 5% annual GDP growth would constitute “a hard landing” in our book, even allowing for the mitigating effects of variables like the speed of the deceleration, the impact on jobs and the composition of the economy at that point.
The new five-year plan, to 2015, assumes an annual average of 7% growth over its life, which might, arithmetically, mean there will have to be some 5% growth rates towards its end to balance out the current 9%+ growth. Yet we have always taken the official 7% figure to be unrealistically modest, signaling domestically that growth would inevitably slow, but giving the Party plenty of room to gloriously overdeliver on its underpromise.
A 5% growth rate in China would have serious consequences for the global economy as well as domestic stability. We accept that all the reasons to be bearish cited by respondents to the Bloomberg poll are legitimate risks to growth. As we have noted before, progress on economic reform is going to be slow for some years, which will make the necessary changes to the structure of the economy harder to bring about. The sheer size of the economy also makes sustaining percentage increases harder each year. A $6 trillion economy growing at 7% a year needs to add $420 billion of GDP in the first year but $550 billion in year five. Plus the Party’s reliance on infrastructure spending to carry the economy through rough spots, is going to run its course at some point. The growth in the debt outpaces the growth in the ability to repay it. Yet, these are challenges, not inevitabilities. If the global conventional wisdom about China is as gloomy as the Bloomberg poll suggests, we are only reinforced in our view that there is a case for greater optimism.
First published on China Bystander.
The eurozone debt crisis has changed the short-term plans of China’s economic policymakers. The second half of this year was meant to be when the stimulus measures put in place for the global financial crisis were unwound and the assets bubble they produced deflated in measured manner so growth could continue at a brisk but not dangerously rapid pace. Instead they are having to deal with the consequences of the fiscal austerity measures being put in place by indebted European governments.
Those will affect China directly as Europe is the main export market for its manufacturers and indirectly though the brake they will impose on global economic recovery and an increased risk of a double-dip recession. For now, China’s leaders are signaling that they will do what is necessary to sustain growth. That will mean no rush to wind down existing stimulus measures and a readiness to provide more should a slowdown in the growth rate warrant it.
Absent spectacularly negative events in Europe, we don’t think that will be needed. We still expect the economy to grow by 10% in the third quarter, thanks to strong domestic demand, recovery in the U.S. and the revival of world trade. That would be down from the 11.9% growth rate of the first quarter, but still comfortably above the 8% level that sends political alarm bells ringing in Beijing and opens the public spending coffers.
The uncertainty that pervades policy makers will likely mean a pause in their slow but steady tightening of monetary policy already underway. Fixed asset growth is slowing, showing that some of the measures the authorities have been taking to deflate the property bubble are having an effect (the euro crisis has taken care of the bubble in stock prices). The central bank has raised banks’ capital reserve requirements three times this year to rein in the lending that is fueling the property boom. However, new bank lending is proving more intractable than the central bank would like: 3.4 trillion yuan ($498 billion) of new loans were made in the first four months of the year, on track for a number for the full year closer to last year’s 9.6 trillion yuan than this year’s target of a reduction to 7.5 trillion yuan.
Similarly consumer price inflation is bumping up against its targets (3% for the year). Beyond soaring housing prices, food prices are up following a long run of wretched weather in key crop growing areas. Commodity prices are rising worldwide and labor cost pressures are increasing beyond the well publicized wage rises at Foxconn and Honda. Both those trends showed up in the 6.8% increase in the producer price index in April. Key questions are how much of those price pressures can manufacturers pass onto domestic and export customers, and with what effect on sales. None the less, inflation pressures aren’t so great that the central bank needs to raise interest rates again. Given the overall uncertainty over the economic outlook, it has no great desire to do so anyway.
Keeping the economy steady and growing until it is clear what the fallout from the euro crisis is remains the priority. A wild card for the economy is the leadership succession. We are seeing evidence of the behind the scenes factional jostling for position breaking through in foreign policy every now and then. No reason to suppose that couldn’t happen with economic policy, too, especially as the two are now so connected. Arguably with the yuan revaluation issue, it already has.
China’s economy grew at its slowest pace in five years in the third quarter. Latest numbers from the Statistics Bureau show 9% growth in the quarter, down from 10.1% growth in the previous three months and below expectations (consensus forecast was 9.7%).
Weak export orders and factory furloughs for the Olympics depressed the growth in industrial output, but the underlying concern is that the global financial crisis is pushing China’s key European and American export markets into recession. Stephen Green, Shanghai-based head of China research at Standard Chartered told Bloomberg that export growth may fall from 22% in the first nine months of this year to “zero or even negative growth” in 2009.
The question is whether China is on the verge of a much sharper slowdown in growth, which would undermine global growth prospects. The policy response from Beijing will be a third cut in interest rates for the year, more public spending on infrastructure, particularly railways (which need it), and more export-tax rebates, all to stimulate the economy. The relatively tight fiscal policies adopted earlier this year to control inflation will be eased back.