Despite massive state intervention, including two interest
rate reductions and huge injections of credit, the Chinese economy has been
unable to withstand the consequences of global overcapacity.
The contraction in China ’s
immense, globally-significant manufacturing sector is recorded by two,
complementary measures. HSBC, the
global financial conglomerate, measures activity in the smaller, private firms,
and its index has been in contraction territory for ten months in a row.
Last month the official government-maintained measure of
manufacturing activity, focussing on big state-owned firms which have been
heavily supported by government spending on infrastructure, fell to a
lower-than-expected 49.2 in August.
The impact of the growing Chinese downturn is being felt
sharply in the United States .
In August, manufacturing activity shrank for the third month in row. The
Purchasing Managers’ Index recorded that new orders – an indicator of future
demand – fell to 47.1 from a reading of
48 in July.
Anything above 50 indicates expansion. Below 50 means
contraction. August’s figure is the lowest since the depths of the post-crash
recession in April 2009.
Looking deeper we discover that In the US manufacturing
comprises only 12% of economic activity, and its continuing growth has been
founded upon a drive to lower wages.
Millions of relatively well-paid skilled jobs were lost
following the crash as unemployment soared to be replaced by a much smaller
number of low-paid workers in the service sector.
A new report
from the National Employment Law Project shows that companies in the United States
eliminated about 8.1 million jobs after the recession began in late 2007. The
economy has since recovered only about 3.3 million of those jobs, starting in
early 2010..
During the recession, employment losses occurred throughout
the economy, but were concentrated in mid-wage occupations. By contrast, during
the recovery, employment gains have been concentrated in lower-wage
occupations, which grew 2.7 times as fast as mid-wage and higher-wage
occupations. Specifically:
- Lower-wage occupations were 21% of recession losses, but 58% of recovery growth.
- Mid-wage occupations were 60% of recession losses, but only 22% of recovery growth
- Higher-wage occupations were 19% of recession job losses, and 20% of recovery growth.
In the US unemployment benefits cease after 23 months and
many workers either disappear off the employment statistics altogether or are
forced into low-paying jobs. James Paulsen, chief investment strategist at
Wells Capital Management sums it up very bluntly: “The cost of labour is very
cheap,”
Whilst cheap labour is good for short-term profit, which is
reflected in the results of US corporations in particular, in the longer term
it adds another twist to the downward spiral. This is because the decline in
real incomes, which is being felt throughout the world, results in weaker
demand.
According to Ethan Harris, co-head of
global economics research at Bank of America Corp in New York , the proliferation of “very
distressed workers” hurts consumption, which, he estimates is likely to
increase just 1.5% in the next six quarters.
But the drive to lower wage costs is just as relentless as
the global manufacturing contraction and workers in the US and Europe
face further attacks in the competitive drive to the bottom.
Foxconn Technology Group's is the main manufacturer of Apple
products like the hugely successful iPads and iPhone, and Apple became the
world’s most valuable company ever in August surging to $624 billion in market
value.
The company has been criticised for factory conditions in China resulting
in a series of deaths and suicides. Foxconn is now investing $10 billion in Indonesia where manufacturing wage costs are 60%
percent of China 's.
Just think of that the next time you use an ubiquitous Apple product.
Gerry Gold
Economics editor
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