The World Economy — Flying Blind, but probably headed down

Data, data, data.  The numbers churned out each day, week and month by the Labor Department, the Treasury Department, the IMF, Eurostat, the World Bank, the UN, the governments of Europe, China, and the commodities, bond, and equity markets are enough to drown us.  So even if we can’t control where the economy is going, we can at least know where we are and where we’re going — right?

Unfortunately, no.  The national and global economies are so complex that efforts to aggregate trillions of transactions (hiring, firing, and searching for jobs; sales and orders of commodities, homes, and services; imports and exports of thousands of firms in each country) into a few simple numbers takes months or years.  In the meantime, the headline numbers we get are estimates subject to revision; and the revisions often are so large as to halve, double, or even reverse some of the numbers.

Last week, there were glimmers of hope in the US market — a tiny fall in new unemployment claims, a substantial (but hugely seasonally adjusted) increase in jobs — that led some to think the long-awaited turn-around was at hand.  However, as I have repeatedly argued, this is all from an optimism bias: investors desperately need greater returns, and so grab frantically onto any possible good news as a reason to shift to higher-risk investments.

But today, hope reversed on new data from China, showing that imports, exports, manufacturing, and bank lending were all growing less than last month, and year-on-year growth much less than earlier this year.  With Europe in recession, the US stalled, and India and Brazil faltering, China is the world’s last best hope as an engine of growth.  So this is bad news.
Yet it should not be a surprise.  As I wrote last year, the main drivers of China’s economic growth are in the past.  Rapid urbanization, big increases in the young labor force, rapid gains in education, and huge surges in exports while being largely self-sufficient in raw materials drove China’s growth from 1980 to 2005.  Those trends are all OVER — urbanization has slowed by half or more, labor force growth is approaching zero and will soon reverse (the number of Chinese aged 15-24 has already DECLINED by 10%, from 250 million to 225 million, between 1990 and 2010, and will fall by another one-third to 168 million by 2030 — thank you, one-child policy!). China’s export markets are stalling and slowing their consumption, while China’s consumption has driven it to become the world’s largest importer of oil and a major importer of iron ore, copper, and feed grains.  Easy and rapid growth is over, as is the era of ‘cheap China.’

In response to the global market crash of 2008, China’s government intervened by using its massive pile of reserves to invest in infrastructure and push up bank lending.  But while this sustained growth, it did so at the cost of investments that will have little or no return while also fueling a bubble in home prices and property development that is now deflating.  So this course cannot be sustained any longer either.

In a battle of the data, which is more important — the US economy showing flickers of improvement, or the Chinese economy showing consistently lower growth?  I have to say the latter is more likely to indicate the real direction, but stay tuned — more data is always on the way.

About jackgoldstone

Hazel Professor of Public Policy at George Mason University
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