Hopes that the continuation of
China’s long boom will drag the
rest of the developed capitalist world – the so-called advanced economies –
back from contraction have been further dashed
The country’s part in the global economic spiralling slowdown was underlined yesterday when rating agency Moody’s joined Fitch in downgrading the country’s credit outlook. The downgrade from positive to stable was the agency’s response to the news that
China’s growth rate has slowed to
7.7%, continuing the downward trend of the last two years.
News of the slowdown - greater than expected by market speculators who were banking on 8% or higher – reverberated around the world. Prices on the commodity and stock exchanges dropped sharply as demand for key inputs, including copper and oil, will fall.
Fitch downgraded its
China rating last week. The agency
sees warning signs in the massive expansion of credit from 130% of gross
domestic product in 2008 to 200% in 2012. This is partly the result of the state’s
huge investment in new cities and transport infrastructure, which was the
response to the 2007-8 financial crash.
But the growth in credit is also the product of a hardly-regulated shadow banking industry offering “wealth-management” products to the minority of new rich who’ve benefited from
China’s emergence as the world’s
second largest economy.
The investment from abroad in search of cheap labour, which drew millions of Chinese into the workforce serving the profits of global corporations is now in decline as companies like Foxconn, which runs Apple’s assembly plants is looking elsewhere in the world. Some corporations are even returning to the
where real incomes have been driven down.
"Another year of propped-up growth via state spending and a credit deluge would, we fear, push
dangerously close to proving Wen Jiabao correct - that the current economic
model is 'unsustainable'," said Alistair Thornton, senior China economist
at IHS Global Insight. "If something is unsustainable, at some point, it
won't be sustained."
Despite the warning signs,
China’s central bank has cut
interest rates twice since June to reduce borrowing costs for businesses and
consumers and increase lending.
is far from exempt from the continuing global slowdown. Yesterday the International
Monetary Fund once again cut its forecast for world growth to 3.3% for 2013,
from its January prediction of 3.5% whilst trying but failing to convince the
markets that it remains upbeat about the future.
The IMF’s latest World Economic Outlook sees the eurozone as a whole contracting by 0.3%, the
slowing to 1.9% growth as the government slashes spending, but it also saw
growth slowing in large emerging economies like Russia,
China, Brazil and India.
Summarising the latest set of global data, leading economics professor Eswar Prasad says: “The global economic recovery remains stuck below takeoff speed, unable to achieve liftoff and facing the risk of stalling.”
Prasad’s warning that “politicians around the world continue to avoid tough structural reforms, instead relying on central banks to continue propping up growth”, implies a redoubling of the assault on living standards that has produced 60% unemployment among young people in Greece and Spain.
Without these more vicious “reforms”, says Prasad, “policy and political uncertainty remain sources of drag that could prevent the world economy from attaining liftoff, raising the risk of a crash”.
On the day that
UK unemployment rose by 70,000, you
have to say that the “crash” Prasad warns about is a more likely outcome than