Economic Slowdown

This week, The Economist published an article entitled 'Fears of a slowdown' that describes the current state of the global economy. Are we headed for a soft landing after 17 consecutive rate hikes, slower growth in the housing market and GDP, and rising commodity prices? Is China headed towards an economic meltdown in a couple of years? While this article might not answer all of your queries, it is an interesting look at the global economy. Here are some snippets:

America has long been dubbed the engine of the world economy. Voracious American consumer demand, buoyed by a strong property market, has become the mainstay of export-driven growth in many corners of the globe. And if America is the engine, China is the world’s boiler: the entry of its 1.3 billion people into the labour market has provided the energy for years of rapid growth combined with low inflation in America and elsewhere.

This global dependence naturally makes economists worry about potential train wrecks. So far the dynamic duo has hauled its load uphill, helping to keep world growth at a lively 5.3%, despite increasingly difficult circumstances. But there are signs of creakiness. On Friday July 28th, the American government’s Bureau of Economic Analysis released early estimates for second quarter GDP. After sizzling first quarter growth of 5.6% (annualised), economists had expected to see the economy grow by at least 3% in the second. The actual figure, however, was only 2.5%, though growth over the 12 months to the second quarter was a more respectable 3.5% (see chart).
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Consumer spending has remained astonishingly high recently but only because Americans are increasingly willing to borrow, largely on their now-more-valuable homes. Personal-savings rates have been negative since the second quarter of last year. The share of household incomes devoted to servicing debt is at an all-time high.

This is not sustainable and several factors suggest that it will soon have to end. Inflation is rising, thanks largely to high energy costs. This not only cuts into the amount Americans can spend on French cheese and cheap Chinese textiles but also forces the central bank to raise interest rates higher than it otherwise would. This is proving painful for America’s heavily indebted consumers, particularly amid signs that the housing market is weakening.

Interest rates could rise again if the international lenders who have been pouring capital into America decide to put their money elsewhere—which they may do if the dollar continues, as expected, to fall. And even if American consumers extricate themselves from their financial difficulties, a falling dollar will dampen the demand for imports that many economies depend on.

And just as more cracks appear in the engine, the boiler seems to be in danger of burning itself out. Figures released this month show that China’s economy grew by 11.3% compared with the year before in the second quarter. After three years of 10% annual growth, this news is less welcome than one might think. On Wednesday Wen Jibao, China’s prime minister, called for “forceful measures” to stop the economy overheating. Chinese officials—and many analysts—are worried that the boom could be out of control. If not carefully managed, the current frantic pace of investment and expansion could spark inflation and asset bubbles. The hangover could leave industry with unused capacity, banks burdened with bad loans and the government threatened by enormous levels of unemployment.
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China has tried to bolster its weak macroeconomic controls with microeconomic interventions, placing administrative restrictions on investment in specific industries it considers to be growing too fast. China’s economy may now be too big for such policies to do much good but the government is fearful of choking off export-led growth when so many Chinese are desperate for jobs. And the relatively primitive state of China’s financial system makes it hard to fine-tune either micro or macroeconomic policies—particularly since so much investment is driven by political considerations at all levels of government.