Forecasters have long eyed the health of established players on the world stage such as the United States, Germany and Japan for guidance on where the global economy is headed.
The world economy, however, is now increasingly driven, for better or worse, by the economic behemoth to the east: China. But China, now home to the world’s second largest economy, is slowing down.
That deceleration, according to Marci Rossell, a main platform speaker at the Million Dollar Round Table 2016 annual meeting in Vancouver, British Columbia, on Monday, can be expected to dampen global growth going forward.
“In recent years, the global economic narrative has been driven by China’s economy,” said Rossell, a former chief economist for CNBC and now “the economista” at Delphin Investments. “This China-fueled narrative will continue” at a relative plod.
Compared with the go-go years of the early 2000s, when gross domestic product was expanding at a 9 percent-plus annual clip, China’s GDP growth will likely not top 5 percent in the next few years, and perhaps cap out at 3 percent, said Rossell.
Why the slowdown? The causes, said Rossell, can be traced to 2001, when China gained entry into the World Trade Organization and effectively became the “world’s workshop.” Products that were designed and conceived in the United States, Europe and Japan were manufactured, assembled, packed and shipped in China because of the country’s low labor costs and huge investments in plants and equipment needed to achieve economies of scale.
The transition also entailed mass migration: Over a 10-year period, said Rossell, more than 270 million rural Chinese relocated to big cities — Beijing, Shanghai, Tianjin, Guangzhou, Shenzhen, Donguan — to work in new manufacturing facilities populating the urban landscape.
The movement of people (most of them farmers) on such a large scale made China a net importer of agricultural products it once grew domestically, most notably grains such as rice, wheat, corn and barley. U.S. agribusiness stepped in to fill the void, exporting to China fully a quarter of the $14 billion of agricultural output in 2014.
Effect of the Great Recession
Then, said Rossell, came the financial and credit crisis of 2007-2009. Responding to this downturn, which was the worst on record since the Great Depression of the 1930s, both the U.S. and Chinese governments instituted economic stimulus packages.
But relative to the size of its economy, China’s plan (at U.S. $586 billion) was the larger of the two.
The spending was successful in warding off a recession. Indeed, noted Rossell, China’s government spent more on cement in one year than the United States did over a 100-year period.
But the Chinese government splurge came with some big negatives. Among them: Vast and wasteful overbuilding of residential and office complexes that, to this day, remain unoccupied; and a huge increase in debt, particularly among local governments and state-owned enterprises.
“Many of the loans extended during this period became non-performing,” said Rossell. “This became an enormous drag on China’s economy. They went from real estate boom to real estate bust.”
If this story sounds familiar, it is. In the 1980s, said Rossell, Japan went through the same boom-and-bust cycle, and its economy is still reeling from the aftershocks. Japan is still the world’s third largest economy (after the United States and China), but it continues to suffer from low growth, stagnant productivity, and prices for consumer and commercial goods verging on deflation.
With a drop in energy prices, China’s consumers are expected to use the resulting extra money to stimulate the country’s economy by buying more. (Photo: iStock)
Winners and losers
What could set off a downward spiral now are low prices for oil and gas. China, previously a big importer of energy products needed to keep its mammoth factories humming, is now consuming less. The result is that oil prices have settled at about $50 per barrel, well down from the $100 per barrel level of only a few years ago.
Rossell expects oil prices to stay permanently low. That will create winners and losers.
“Among the obvious winners are U.S. consumers,” said Rossell. “Gas prices ranging between $2 and $2.50 per gallon amount to a big tax break (and) more disposable income that can be spent on other goods and services.”
Other winners, she added, include China’s consumers, who can now use additional yuan to help stimulate China’s economy “just when they need it”; and Indian consumers, who will help to propel the subcontinent’s fast-growing economy over the next several years.
Among the losers, said Rossell, are oil-producing nations that have failed to diversify their economies beyond the exploitation of natural resources. Among them: Iran, Nigeria, Russia, Saudi Arabia and Venezuela.
Rossell added that given the slowdown in China’s economy, central bankers (the Federal Reserve included) will be reluctant to raise short-term interest rates, as a ratcheting up could dampen growth. Even if they do, the increase “won’t have a big impact” on long-term rates, which are guided in large measure by macroeconomic factors not connected with monetary policy.
Rossell noted that Chinese consumers are likely to help keep rates low.
“When asset prices rise, China’s consumers tend to save less,” she said, noting that household wealth tied to illiquid assets — real estate, equities, commodities, etc. — can more than compensate for reduced personal savings.
“But if they think the economy is getting worse — as they believe now — China’s consumers will stash away more,” she added. “That additional savings will help to keep interest rates low for years to come.”
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