A recession seems possible – keeping commodity prices depressed
WHILE THE EYES of the world remain fixed on the West’s banking crisis there’s what are described as “disturbing developments” in China, on which so much hope is being placed by commodity exporters such as South Africa. French banking group Société Générale has just released a report predicting China – just like the United States – is going to land up in a recession. If that happens it would mean there’s more bad news ahead for the JSE’s commodity shares.
The writer of the report, Albert Edwards, doesn’t trust the official figures saying that China recorded a growth rate of 6,8% in the year to the beginning of the fourth quarter 2008. Nevertheless, that compares with 13% for 2007 and is therefore even lower than the minimum growth rate of around 8% China is claimed to require in order to forestall more domestic unrest.
Edwards says electricity consumption is a reliable indicator of what’s going on in that huge economy. And in the year to the fourth quarter that fell by 6%, against an average increase of 15%/year over the preceding five years.
Edwards says that in the past, growth in electricity consumption has always run handin-hand with growth in the gross domestic product. Heavy industries that use a lot of electricity, such as steel manufacturing, are having an especially hard time. Industrial production consequently increased by only 5,7% last year, as against an annual figure of 18% towards the end of 2007.
At the same time, warning lights are being flashed by the Organisation for Economic Co-operation and Development’s (OECD) leading indicator for the Chinese economy. Economic activity has fallen to the lowest level in 26 years, according to that indicator. Thousands of factories in China have already closed, leaving millions unemployed. Some of those have been observed joining demonstrations by other dissatisfied citizens.
Many factories still producing are shaky after overseas demand for their products has fallen sharply. The HSBC banking group estimates China’s exports in the current quarter could fall by 19% against a year earlier.
While China’s exports are falling there’s also great concern in another area. That’s the weakened state of its home building industry, which was actually brought about by the authorities themselves due to their measures to avoid overheating. That’s hit the demand for a wide variety of commodities, from steel and copper to cement. It’s hoped efforts to stimulate housing construction will produce results fairly soon. But that won’t be easy, since the millions of unemployed are having a negative effect on the entire country.
As part of its efforts to maintain growth an infrastructure programme of almost US$600bn (around R6 000bn) is planned. However, several analysts are sceptical about the results that will achieve, because China’s central government will finance less than 25% of that amount while its banks – like elsewhere in the world – are hesitant to lend to businesses under pressure.
But China’s major banks are controlled by the state and their chairmen appointed by Beijing. As one commentator says: “If government says grant the loans, the loans will be granted!”
What’s encouraging is that retail sales were strong over the past year, despite the many dismissals. They increased by 18% against 2007 and in order to try to maintain the momentum a rebate of 13% will, for example, be granted to rural consumers when they buy so-called white goods (fridges, stoves, etc).
It’s clear China’s authorities will go out of their way to stimulate the economy. However, it’s also clear Beijing underestimated the effects of the worldwide downturn and the question is whether it will be able to act quickly enough to ward off a serious downturn – even a recession.
But what brings hope for countries such as SA is that China is expected to return to the market by the second half 2009 as a steady buyer of commodities, since the stockpiles currently being used can’t last for ever.