It started in America. It moved on to Europe. Now the fear is that
the big economies of the emerging world are about to join the west in a
blanket slowdown. This would be a new and worrying development.
While the United States, Britain and Europe were having it worse than at
any time since the 1930s, Brazil, Russia, India and China grew by 25%
between 2008 and 2010.
The so-called Bric countries are growing, but since the start of 2012
there have been unmistakable signs that economic problems are not
confined to Europe, North America and Japan. India has slowing growth
and high inflation; Russia's industrial weakness has been masked by a
high oil price; Brazil has felt the backwash from weak growth in the US;
and China's export-led model has started to falter. The only real
surprise is why anybody should be surprised by these developments.
Globalisation of production over the past quarter of a century has meant
not just interconnectedness but interdependency. China's big export
markets are Europe, which has been in the throes of a sovereign debt
crisis for the past two and a half years, and the US, experiencing a
sub-par recovery by historic standards.
There was talk of a changing of the guard, of a shift in economic power
from west to east and from north to south. It was certainly the case
that without the strong growth in the big emerging markets, the downturn
that followed the financial crisis of 2008 would have been
significantly worse. Nor is China the only Asian exporter seeing reduced demand for its
products. Singapore joined Hong Kong in registering falling growth rates
in the second quarter of 2012, and Monday's Japanese GDP figures are
likely to show a marked deceleration in activity between the first and
second quarters of the year.
Beijing has started to respond to the
slowdown in China. Official interest rates have been cut and the
authorities are starting to make credit available for investment
projects, albeit with a bit more caution than they showed during late
2008-09, when emergency action was taken to prevent the economy grinding
to a halt.
But just as Europe has been kicking its sovereign debt can down the
road, and the US has been delaying the moment when the budget deficit
has to be tackled, so China is looking for a short-term fix in the hope
that something will turn up. That "something" is the pick-up in the global economy
that will occur when the European Central Bank delivers on its promise
to do whatever it takes to hold the single currency together, thereby
providing the boost to confidence that will allow America finally to
recover strongly and the Chinese to again become the workshop of the
world.
China has oodles of capacity. Investment accounted for almost half of
gross domestic product in 2011 (compared with less than 20% in the UK
and the US), and much of the spending in recent years has been wasteful.
In a more open economy, a combination of high domestic inflation and
falling overseas demand would be leading to capital scrapping rather
than investment in new plant and machinery.
A resolution to Europe's problems will enable Barack Obama to win a
second term, allowing the US to shuffle away from the edge of the fiscal
cliff, the big package of tax increases and spending cuts planned for
2013. Once the west is fully recovered, the good times will return to
China and the other big Asian exporters. This may be indeed what
happens over the next six months. Equally, it could be the case that the
ECB has merely bought Europe's policymakers a quiet August and that
when they get back from the beach in September the old worries will
resurface.
So, this is a world in which the Bank of England has bought a third of
UK gilts, a world in which the Federal Reserve has pumped trillions of
dollars into the US economy for fear the money supply will collapse, a
world in which the ECB props up European banks so they can buy
government bonds nobody else will touch, and a world in which China can
keep its growth model functioning only through manipulation of the
exchange rate and unproductive investment. Apparently, this is the "new
normal". There doesn't, to be frank, seem much normal about it.
