Tuesday, July 16, 2013

Today's Gloom and Doom Report

This is from a newsletter I get from Foreign Policy magazine:
Top news: Chinese economic growth slowed to 7.5 percent in the second quarter of the year amid efforts by the country's new leaders to rein in credit and pivot toward reforms. 
Monday's economic figures are the second straight quarter of weaker economic growth in what is the world's [second-largest] economy and came on lower investment and declining trade figures. Growth in industrial output compared to a year ago fell to 8.9 percent from 9.3 percent in May, and for the first time in a year, exports declined in June. 
But there is no sign from the Chinese central government that they plan to intervene in the economy and inject more stimulus. The government has set a growth target for 7.5 percent for 2013, and Monday's economic news raises the spectre that the country could miss it, which would be the first time since the Asian financial crisis that China has not met its stated goal for economic growth. 
"I think the second half will be even weaker. The government's tolerance for slower growth is definitely higher," Zhu Haibin, a JP Morgan economist, told the Financial Times. "Seven per cent is probably the growth floor."
Why this could be a sign that things are really, really bad: A great many economists are of the opinion that China lies a lot about their economic figures (you’re shocked, I know). If they are willing to admit to these numbers, then the reality probably is much, much worse.

Why this may not be all that bad: The government of China doesn’t seem to be worried at all. If we assume that the government knows what it’s doing (always a risky assumption, where governments are concerned), then perhaps that tells us things are basically okay, and they are confident they can manage a soft landing for the economy.

Why we better hope that they are right: A collapse (or even a significant contraction) of the Chinese economy could be disastrous globally. Japan hasn’t been growing much for the past twenty years, the US is now in the fifth year without decent growth, and Europe is, well, Europe. If the four biggest economies in the world were all struggling simultaneously, things could get very ugly.

Why we better really hope they are right: A serious downturn in the Chinese economy could mean major unrest or violence there, since the government gets what legitimacy it has from the success of the economy. That of course would lead to further declines in the economy and a downward spiral.

Why we better really, really hope they are right: A government that is facing serious domestic problems often tries to distract the populace with a foreign crisis that whips up nationalistic fervor and support for the government (e.g., Argentina and the Falklands). Not a big deal when it’s a nothing country like Argentina. Potentially a very big deal when it’s China. And an extremely big deal for the Philippines, which is currently engaged in a heated dispute with China over who owns what in the South China Sea.

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