Many of the commentators are reading the tea leaves and see the glass "half full" in the US economic numbers. I am still a glass "half empty" kind of guy. This is a test of filtering and judgement.I see nothing that has been done to address the structural issues in the US/Chinese/European economies.
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In August, I published a post on how the idea that economic growth of the BRICS can decouple from the global economy is a fantasy. Now, as I predicted, we see India is beginning to decelerate.
From 'The Economist': :"EXPECTATIONS for India’s economic growth rate have been sliding inexorably. In the early spring there was still heady talk about 9-10% being the new natural rate of expansion, a trajectory which if maintained would make the country an economic superpower in a couple of decades. Now things look very different. The latest GDP growth figure slipped to 6.9% and industrial production numbers just released, on December 12th, showed a decline of 5.1% compared with the previous period, a miserable state of affairs. The slump looks broadly based, from mining to capital goods, and in severity compares with that experienced at the height of the financial crisis, in February 2009, when a drop of 7.2% took place. Bombast is turning to panic. " Good luck cheerleaders. However, the price of oil seems higher than warranted given global economic activity. This remains a mystery to me. Two weeks ago, I wrote an article for this month’s Geopolitics of Energy. The article tied oil prices to oil demand and oil demand to global GDP growth. I suggested that the global economy would grow far less than most mainstream analysts were forecasting for the following reasons: the global economy will take a decade to delever, the Eurozone is unstable and at least some countries will have to leave, there is an issue of structural unemployment in the US and European economies, and China is going to begin an extended period of slow growth around 2015.
These issues are not new to the readers of these pages. I identified them early on when I launched the blog. http://www.economicpresence.com/4/post/2011/08/it-is-going-to-be-a-tough-decade-for-the-global-economy-and-the-brics-will-not-save-us.html Well it turns out that the Conference Board has released a report that essentially agrees with my points about slower global growth and China slowing down. Haven’t read the report but here is an excerpt from a review: “The report, well covered in the Wall Street Journal, is a sober read. Overall, world growth is expected to decline, with both China and India leading the decline. The advanced countries are expected to recover from the current slump, but growth will remain anaemic for years to come. In other parts of the developing world, growth could slow to a crawl, presumably reflecting poor demand for basic commodities in a slow growth world.” That’s what I said. Here are my words, verbatim,on China for GoE. "China The market is severely overestimating future growth from China. The “Country Forecast China September 2011 Update” by the Economist Intelligence Unit forecasts Chinese growth at 8.2% in 2015. And yet China is primarily an export-driven and investment-fuelled economy. Consumption in 2010 was roughly 33% of GDP, nearly half the level seen in developed economies. Investment, on the other hand, represents an astonishing 45% of the Chinese total economy. If demand is set to be weak in Europe and the US over the next several years, who will buy Chinese exports? Professor Michael Pettis predicts growth will slow down to between 3% (or lower) by 2015. When China slows down, there will be a disproportionate decline in investment. This decline in investment will invariably flow through as a decline in demand for non-agricultural commodities, including oil. By keeping its currency fixed to the US dollar, China has been importing inflation and, as a result, has to contend with a real estate bubble of its own. As a second order effect, one might question how efficiently these investments have been for future consumption in China, as much of the growth has come through capital-intensive, state-owned enterprises and there is evidence of an overinvestment in real estate. Since running a trade deficit means a country is borrowing internationally, China will be forced to modify its economic model as the US and Europe seek to close their trade deficits. The sooner China begins this process and the more gradually it implements change, the less likely it is to see social unrest." You can contrast my thinking with McKinsey's, which this month, is warning business to prepare for a spike in oil demand. Which risks are greater? You be the judge. https://www.mckinseyquarterly.com/Energy_Resources_Materials/Oil_Gas/Another_oil_shock_2873 Unfortunately, I agree with much of the sentiments of Michael Pettis and have been teaching them in my International Macro classes (in the case of the Euro) for the past decade. For various reasons, I continue to prefer Brazil out of the BRICS and believe things will be substantively better for them than for the others. Other than that, my views pretty much line up with Pettis.
Those wanting just a summary click here. Those wanting more in Pettis own words click here. As I pointed out in my last blog, there are millions of jobs that have been lost in manufacturing since China joined the WTO. Absent intervention, these jobs are gone forever, and with the loss of millions of construction jobs, unemployment for the low skilled will become chronic. I have suggested that that this will lead to a level of social unrest not seen in Amercia since the 60s. Pettis believes that both the US and UK will become trade protectionist. I see this as the easiest and most likely way that policy makers will deal with problems of social inequality. Fundamental reform of education is much tougher, especially in a budget constrained enviroment. |
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