Don’t blame China for global eco­nomic jit­ters

The Pak Banker - - OPINION - Ha-Joon Chang

THE US stock mar­ket has just had the worst start to a year in its his­tory. At the same time, Euro­pean and Ja­panese stock mar­kets have lost around 10% and 15% of their val­ues re­spec­tively; the Chi­nese stock mar­ket has re­sumed its head­long dash down­ward; and the oil price has fallen to the low­est level in 12 years, re­flect­ing (and an­tic­i­pat­ing) world­wide eco­nomic slow­down.

Ac­cord­ing to the dom­i­nant eco­nomic nar­ra­tive of re­cent times, 2016 was the year when the world econ­omy would re­cover fully from the 2008 crash. The US would lead this re­cov­ery by gen­er­at­ing growth and jobs via fis­cal con­ser­vatism and pro-busi­ness poli­cies. Re­flect­ing the econ­omy's ro­bust growth, the US stock mar­ket reached new heights in 2015, al­though dis­rupted by the mess in the Chi­nese stock mar­ket over the sum­mer. By last Oc­to­ber, US un­em­ploy­ment had fallen from the post-cri­sis peak of 10% to 5%, bring­ing it back close to the pre-cri­sis low. In a show of con­fi­dence, last month the US Fed­eral Re­serve fi­nally raised its in­ter­est rate for the first time in nine years.

Not far be­hind the US, the story goes, have been Bri­tain and Ire­land. Hit harder than the US by the fi­nan­cial cri­sis, they have, how­ever, re­cov­ered hand­somely be­cause they kept their nerve and stuck to the right, if un­pop­u­lar, poli­cies. Spend­ing cuts, fo­cused on waste­ful wel­fare spend­ing, ac­cel­er­ated job cre­ation by mak­ing it more dif­fi­cult for peo­ple to live off the tax­payer. They sen­si­bly didn't give in to the banker-bash­ers and chose not to over-reg­u­late the fi­nan­cial sec­tor.

Even the con­ti­nen­tal Euro­pean economies have been fi­nally pick­ing up, it was said, hav- ing ac­cepted the need for fis­cal dis­ci­pline, labour mar­ket re­form and cut­ting busi­ness reg­u­la­tions. The world - at least the rich world - was fi­nally set for a full re­cov­ery. So what has gone wrong?

Those who put for­ward the nar­ra­tive are now try­ing to blame China in ad­vance for the com­ing eco­nomic woes. Ge­orge Os­borne has been at the fore­front, warn­ing this month of a "dan­ger­ous cock­tail of new threats" in which the de­val­u­a­tion of the Chi­nese cur­rency and the fall in oil prices (both in large part due to China's eco­nomic slow­down) fig­ured most promi­nently. If our re­cov­ery was to be blown off course, he im­plied, it would be be­cause China had mis­man­aged its econ­omy. Ad­ver­tise­ment

China is, of course, an im­por­tant fac­tor in the global econ­omy. Only 2.5% of the world econ­omy in 1978, on the eve of its eco­nomic re­form, it now ac­counts for around 13%. How­ever, its im­por­tance should not be ex­ag­ger­ated. As of 2014, the US (22.5%) the eu­ro­zone (17%) and Ja­pan (7%) to­gether ac­counted for nearly half of the world econ­omy. The rich world vastly over­shad­ows China. Un­less you are a de­vel­op­ing econ­omy whose ex­port bas­ket is mainly made up of pri­mary com­modi­ties des­tined for China, you can­not blame your eco­nomic ills on its slow­down.

The truth is that there has never been a real re­cov­ery from the 2008 cri­sis in North Amer­ica and western Europe. Ac­cord­ing to the IMF, at the end of 2015, in­fla­tion-ad­justed in­come per head (in na­tional cur­rency) was lower than the pre-cri­sis peak in 11 out of 20 of those coun­tries. In five (Aus­tria, Ice­land, Ire­land, Switzer­land and the UK), it was only just higher - by be­tween 0.05% (Aus­tria) and 0.3% (Ire­land). Only in four coun­tries - Ger­many, Canada, the US and Swe­den - was per-capita in­come ma­te­ri­ally higher than the pre-cri­sis peak.

Even in Ger­many, the best per­form­ing of those four coun­tries, per capita in­come growth rate was just 0.8% a year be­tween its last peak (2008) and 2015. The US growth rate, at 0.4% per year, was half that. Com­pare that with the 1% an­nual growth rate that Ja­pan notched up dur­ing its so-called "lost two decades" be­tween 1990 and 2010.

To make things worse, much of the re­cov­ery has been driven by as­set mar­ket bub­bles, blown up by the injection of cash into the fi­nan­cial mar­ket through quan­ti­ta­tive eas­ing. Th­ese as­set bub­bles have been most dra­matic in the US and UK. They were al­ready at an un­prece­dented level in 2013 and 2014, but scaled new heights in 2015. The US stock mar­ket reached the high­est ever level in May 2015 and, af­ter the dip over the sum­mer, more or less came back to that level in De­cem­ber. Hav­ing come down by nearly a quar­ter from its April 2015 peak, Bri­tain's stock mar­ket is cur­rently not quite so in­flated, but the UK has an­other bub­ble to reckon with, in the hous­ing mar­ket, where prices are 7% higher than the pre-cri­sis peak of 2007.

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