Ja­pan, EU, China are flash­ing eco­nomic warn­ing signs

The Pak Banker - - OPINION - An­drew Rosen­thal

EVEN be­fore the re­cent plunge in com­mod­ity and stock mar­kets, the world econ­omy was weak. But re­cent data from China, Europe, Ja­pan and other coun­tries sug­gest that growth is slow­ing more sharply than many an­a­lysts had an­tic­i­pated. That puts the bur­den on pol­icy mak­ers in these coun­tries to come up with more cred­i­ble ways to bol­ster their economies.

The most wor­ry­ing signs are com­ing from China, the world's sec­ond-big­gest econ­omy. Af­ter two decades of rapid growth, China's econ­omy is de­cel­er­at­ing and its lead­ers are fail­ing to strengthen it - by, for in­stance, de­creas­ing its re­liance on in­vest­ment and putting greater em­pha­sis on con­sumer de­mand. In a sign of how quickly busi­ness ac­tiv­ity is fall­ing, ex­ports de­clined more than 8 per­cent in July from June and auto sales were down more than 6 per­cent com­pared to a year ear­lier. Gross do­mes­tic prod­uct grew at 7 per­cent in the sec­ond quar­ter, the slow­est pace in six years.

China's com­mu­nist gov­ern­ment has seemed to make mat­ters worse by in­ter­ven­ing force­fully in the fi­nan­cial mar­ket. First, it or­dered state-owned com­pa­nies and the secu- ri­ties in­dus­try to buy stocks, but the move did not shore up con­fi­dence in the in­flated stock mar­ket, and shares have kept fall­ing. The Shang­hai com­pos­ite in­dex tum­bled 8.5 per­cent on Mon­day. Mean­while, China's de­ci­sion to greatly de­value its cur­rency, the ren­minbi, has sent the cur­ren­cies of other de­vel­op­ing na­tions sharply lower against the dol­lar.

Many an­a­lysts had hoped that China's rise could be good for the global econ­omy, by cre­at­ing another big source of growth be­sides the United States. But the gov­ern­ment's mis­han­dling of its econ­omy this sum­mer sug­gests that China will not be ready to play that role any­time soon. The prob­lem is that much of the rest of the world is also strug­gling.

Last week, the Ja­panese gov­ern­ment said the coun­try's econ­omy con­tracted by 0.4 per­cent in the sec­ond quar­ter of the year. Ex­ports and in­dus­trial ac­tiv­ity have been slow­ing in the coun­try, partly as a re­sult of weaker de­mand from China. But the gov­ern­ment of Prime Min­is­ter Shinzo Abe also needs to do more to en­cour­age busi­nesses to in­vest more and raise wages.

The euro cur­rency union, which is made up of 19 coun­tries, is do­ing a lit­tle bit bet­ter, but not much. The eu­ro­zone grew at 0.3 per- cent in the sec­ond quar­ter, down from 0.4 per­cent growth in the first three months of the year. While growth picked up in Spain and a few other coun­tries, other economies like France and Italy slowed. Euro­pean lead­ers should be try­ing to stim­u­late their economies with public spend­ing, but they are not do­ing that in a mis­guided at­tempt to re­duce their bud­get deficits.

The economies of other coun­tries such as Brazil and Rus­sia, which de­pend heav­ily on ex­port­ing com­modi­ties like oil and iron ore, are also fal­ter­ing as China and other na­tions im­port fewer raw ma­te­ri­als. Oil prices have fallen by more than half in the last year, to just un­der $40 a bar­rel. Com­mod­ity-ex­port­ing na­tions need to di­ver­sify their economies, even though that is a long-term process that is un­likely to de­liver a quick boost.

Amer­ica's econ­omy is in bet­ter shape, but it is not grow­ing fast enough to help the rest of the world. The slow­downs abroad could, in fact, serve to dampen growth in the United States by re­duc­ing de­mand for Amer­i­can ex­ports. In re­cent months, the dol­lar has strength­ened con­sid­er­ably against other cur­ren­cies, mak­ing Amer­i­can goods more ex­pen­sive to con­sumers else­where.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.