World stock markets seem initially pleased that China’s growth has slowed to no less than a 7.5% annual rate. A year ago, China shifting to a full-year of 7.5% growth would have been seen as a disaster for the global economy: with the Euro area still contracting (!), US growth at around 2%, and India and Brazil slowing down to 5% or less, double-digit Chinese growth was considered essential to lifting the world economy out of its funk and onto a trajectory to return to 5+% global growth.
But it is symptomatic of adjustment to the “new normal” — high corporate profits based on a stable top line of revenues but an increasing bottom line fueled by cutting labor costs, with overall growth much lower than it was in the 1980-2007 period — that the slow-down in China is not causing greater alarm.
Analysts now expect the US economy to be gathering steam and taking over more of the heavy lifting of the world economy. And that would be great if it were true. But I wonder — China is shifting its growth model, from export-led growth plus massive state investments to higher wages and more domestic consumption. Still, that shift will not be accomplished in six months. More like three to five years. And even then, the outcome will be much more domestic consumption of Chinese output, and a moderate increase in consumption of middle class goods and commodities, rather than a big spur to other economies. In the US the signs of growth may be misleading. Yes the housing market has improved, but that was large because investors have bought up foreclosed properties to rent out, not because families have recovered and are increasing home ownership. Banks are again dealing in derivatives, and families are again increasing their borrowing, buoyed by the stabilization of employment.
But is that really a recipe for American growth — new financial instruments and higher debts? Surely we remember that we have been here before, and how that ended? A real and lasting return to growth would exhibit rising real wages for most workers, gains in employment that are greater than population increases, and a sustained rise in the fraction of potential workers who have jobs and are able to work as much as they desire. We have seen NONE of those changes yet.
So I am not convinced that we really have good news in hand. Perhaps the absence of calamity, even the news is modestly bad, is what suffices for good news today.