China in face of the West’s ‘Great Stagnation’
As G20 leaders met in Cannes, they faced an economic situation in the developed economies best summed up by Goldman Sachs, the company which invented the term ‘BRIC’, as the ‘Great Stagnation’. Until recently developments following the financial crash of 2008 had been accurately termed the ‘Great Recession’ - describing the greatest economic downturn since the 1930s. But the bottom of the downturn has passed in most economies. Instead the chief feature of the situation has become the extremely slow economic recovery in advanced economies - hence the Great Stagnation.
To put numbers on this, the newly published US 3rd quarter 2011 GDP figure show that for the first time US economic output has regained its level at the peak of the previous business cycle at the end 2007. But taking the nearly four year period since total US annual growth was only 0.1 percent. Furthermore annualized US growth in the 3rd quarter of 2011, 2.6 percent, is far from the type of rapid expansion you would expect during the ‘recovery’ period of a US economic cycle. To give a comparison, the third quarter of 2011 is the 15th quarter after the peak of the previous US business cycle.
During the previous slowest recovery in US post-war history, following the recession of 1980, by the 15th quarter of the business cycle annualized US economic growth was 8.3 percent - the present US recovery is less than a third as fast.
The situation in Europe and Japan is worse. Data is not yet available for the 3rd quarter of 2011 for these economic centers, but the parameters are already clear. In neither has output regained its pre-crisis peak three and a half years after the economic downturn began. In the 2nd quarter of 2011, the latest available data, EU GDP was still 1.9 percent below its pre-crisis level and in Japan it was 6.1 percent below - this latter figure being worsened by the earthquake and tsunami.
Turning to trade, imports by the developed economies during the last year have almost stopped growing. They were 6.4 percent below their pre-crisis peak in June 2010 and 6.1 percent below in the August 2011, the latest available data. Imports into the EU were shrinking - 7.8 percent below their pre-crisis peak in June 2010 and 9.6 percent down in August 2011.
Given extremely slow growth in the developed economies, and that examination of underlying macro-economic factors such as savings and investment indicates no reason to expect a substantial growth acceleration, this places China in a new international economic situation. For almost the entire period since China launched its economic reforms in 1978, it has been growing more rapidly than other economies but in an international context where the developed economies were growing significantly. The only serious previous recession in the advanced economies during China’s reform period was right at its beginning, in 1980-81, when China was scarcely integrated in the international economy. The international slowdowns in 1990 and 2000 were brief and mild and while the 1998 South East Asian financial crisis impacted China significantly, it did not originate in the developed economies.
Almost uninterrupted growth in the developed economies during the period of China’s economic reform undoubtedly created overestimation within China as to their stability - Chinese analysis might have been very different if its reform period had overlapped significantly with the international economic crisis of 1973 and 1979. Recently, for example, it was astonishing to read articles in the Chinese press of a single report by the Boston Consulting Group, predicting US industrial revival, as though this had actually already happened when currently US industrial production is still 6.6 percent below its pre-crisis peak.
In economics and business there is no virtue in either optimism or pessimism, there is only a virtue in realism. Given current trends, China has to base itself on a perspective that for several years there will be slow growth of the developed economies and therefore slow growth of their imports. Developing economies, while growing more rapidly than developed ones, will not in the very short term be able to fully compensate China’s exports for stagnation in developed economies.
The international framework for China’s economy is therefore clear. It is important to understand that what is faced is a ‘Great Stagnation’ not a new ‘Great Recession’ - that is there is no reason to anticipate major international economic downturn of the 2008 type. China therefore does not need a new huge stimulus program of the type it launched in 2008 - which would lead to severe economic overheating. But the international economic situation requires adjustments in emphasis.
First, even more than previously, China has to rely on developing domestic demand. Greater analytical clarity on this is important as at present domestic demand is frequently confused with domestic consumption - the two are not the same.
Second, while developing economies will not immediately be able to fully make up for the negative pressure on China’s exports from the ‘Great Stagnation’, they provide an important addition to China’s domestic demand - in the last fifteen years the percentage of China’s exports going to developing economies have risen from 35 percent to 50 percent. All developing economies face the Great Stagnation, therefore all face constriction on exports to developed countries, while China’s imports are continuing to expand. This will produce greater integration of developing economies with China in both exports and imports.
Within developing economies many of China’s top companies, such as Huawei, Haier, and Lenovo already have high brand values and the present situation therefore creates opportunities to further enhance the positions of China’s international brands.
Finally political discontent in the developed countries is growing due to the Great Stagnation - political turmoil in Greece and the rise of the ‘Occupy Wall Street’ movement, in different ways, symbolize this. Many countries realize that win-win economic cooperation with China is the best way to confront the Great Stagnation, but some unscrupulous politicians are attempting to divert attention from the real problems confronting their economies by ‘China bashing’. China’s policy makers therefore are doubtless following both the political and economic aspects flowing from the Great Stagnation.
This article was originally published in China.org.cn. Republished with permission.
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