China economy predicted to grow 7 per cent in 2012
Everywhere you look there are opportunities for anxiety – and increasingly they’re popping up around the one remaining economic powerhouse: China.
Economists love to worry. Their penchant for taking any random point of data and whipping it into a crisis has earned them the title as The Dismal Scientists. And in 2012, the fountain of worry springs eternal.
The reasons for worry are not imaginary. Over the past decade, China has seen real GDP growth of between 8 and 10 per cent. But in 2012 that growth appears to be stalling – at least if you call growth of 7 per cent a stall. Inflation is tame and most indicators such as industrial output and investment in new construction are all much softer than they were a year ago.
As a result, some economists are predicting the worst for The Middle Kingdom. Some are even suggesting that China is doomed to some Japanese-style collapse, and that the global economy will lose its one remaining leg on the stool.
But instead, let’s harness the sentiment of Bobby McFerrin’s number one pop hit from 1988, Don’t Worry, Be Happy. And there are three reasons why.
First, China’s economy is much more driven by its own consumers these days, what economists call “internal demand.” A decade ago the country’s economy was more dependent on export markets in North America and Europe, whose consumers were snapping up toys, clothes, and electronics they could purchase inexpensively from China. China’s economy thundered ahead.
But over those 10 years, roughly 300 million Chinese households (about a quarter of its population) have been brought into the consumer class with disposable income. And while the Chinese are extremely good savers, they can also spend. China is less dependent on foreign consumers today than it was 10 years ago and that is good news for China’s economy.
Second, if one national government in the global economy has any fire power remaining for stimulus, it is China’s. And, in fact, it’s been using it. Last year, the Chinese government was taking measures to cool the economy and tame inflation, but things have reversed in 2012. Now measures are being taken to stimulate demand and investment. Other governments around the world have tried – desperately – to do the same thing. From Washington to Athens, London to Madrid, world political leaders have stepped on the fiscal gas petal to rev-up their economies, using tax dollars (well, actually borrowed money) to do it. Results have been underwhelming.
But China’s government is flush with cash and it has plenty of room left for spending and stimulus if, indeed, their economy slows too much.
Third, the People’s Bank of China (PBC) – the country’s central bank – still has plenty of monetary policy instruments to use if necessary. And, in fact, over the past few months it has been putting them into action. On July 6, the PBC lowered the one-year benchmark deposit and loan rates by 0.25 and 0.31 percentage points respectively. And it still has room for further cuts to interest rates. Compare that to the U.S. Federal Reserve, where the benchmark Fed rate is essentially at zero. Further rate cuts in China would help stimulate demand and spending and we can anticipate more cuts to prop up their economy.
This isn’t to say that China doesn’t have problems. As always, one needs to be cautiously suspicious of the “official” statistics coming out of China. The sceptics would want to believe that growth in China has already fallen off the cliff and the official forecast of around 7.5 per cent growth is one big fantasy. But even while some scepticism may be healthy, we do know precisely how much China has been importing from abroad. Imports have indeed declined, consistent with their slowing economy. But sales to China have not collapsed – suggesting that neither has its economy.
Alberta has a lot at stake with China’s continued economic growth. Even though it export very little to China (it accounts for only 3.1 per cent of its total exports), China’s economy is supporting global commodity prices. From crude oil to wheat, and lumber to canola, many of these commodities owe their relatively strong prices to demand in China. Oil prices, for example, have been wobbling over the past several months on fears that China’s economy is stalling. And if it does stall, all bets are off for how quickly oil prices will tumble.
But, for now, China should not cause any undue panic. A soft landing in that country could actually be a benefit to the global situation as inflation would be kept in check. China’s growth is likely to continue, commodity prices will stabilize and the global economy will keep its Asian economic powerhouse – albeit revving at a somewhat slower speed.
Troy Media columnist Todd Hirsch is Senior Economist with ATB Financial.