Europe will slow, but China is already crawling….

Eight months ago, this blog ran a post titled “Ten Reasons why Growth is Dead.”   Every one of those reasons still looks solid (unfortunately).   Number 6, that Europe had pension and other state obligations that are unsustainable, was pretty straightforward.  Despite a trillion dollars in ECB money, Spain’s bonds rose above 6% again this week — an unsustainable interest rate — Italy’s banks were downgraded, and Greece?  Well, Greece is slipping down the rabbit hole very quickly as popular opposition to austerity has created a hung parliament and Greece’s EU loans and Euro membership look to be in jeopardy.

Reason number 4, though, was more widely doubted.  This was that growth in China would slow, as its export markets stalled and its growth model based on cheap labor and massive government investment and lending for property and infrastructure was unsustainable too.

Today’s data on China’s economy shows just how fast that slowdown is coming.  Ignore the GDP figures, which are cooked to show good performance for China’s regional and local leaders.  Look instead at real gauges of economic activity — electricity consumption, rail cargo, money supply and bank lending — and you get a more accurate picture.

Today, that picture is not pretty.

Elecctricity consumption had been growing at a 10-12% annual rate through the summer of 2011, then fell to 8-9% in winter, then to 7% in February and March of 2012.  That figure fell to ZERO.7 (0.7) percent in April 2012.  Rail cargo volumes for early 2012 are growing in the low single digits, and bank lending and property prices are falling like a rock.  Housing sales slumped by 25pc in Q1 2012, and bank lending fell by one-third between March and April.  China’s exports in April were up only ZERO.3% (0.3) from a year earlier.

This is only one month’s data, but it looks like a rather hard landing for the world’s second largest economy.  With the Eurozone in recession (again), the U.S. showing negative growth in the number employed and heading for a fiscal cliff, Japan coping with a debt of 200% of GDP and again facing deflation, and Brazil and India slowing too — EVERY major motor of the world economy looks to be stalling or in reverse.

Under these conditions, Europe’s talk of switching from austerity to a growth policy looks increasingly utopian.  How to produce growth when no growth is everywhere around you?

Writing off debts, splitting the Euro, and taking a short-term hit to create conditions for internal growth seem the only way out.  But will anyone want to go there?  Or will “growth policies” be yet another way of trying to kick this can further down a long and winding road?

About jackgoldstone

Hazel Professor of Public Policy at George Mason University
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