Will there be a post-Olympic flop? The Chinese economy has been lifted by huge spending on infrastructure, with the games costing something like $30bn (around £15bn), but also by a surge in current spending. Sure, some factories have been shut in the run-up to try to reduce pollution, and some non-games capital spending has been cut back, but there can be little doubt that hosting the Olympics has given a boost to an already-booming economy.
Just as the millennium signalled a turning point – a huge surge in activity beforehand and an economic hangover afterwards – might the Olympics do the same? Already, just ahead of the opening ceremony, commodity prices have started to decline, showing in July the sharpest monthly drop in 28 years. Since Chinese growth has been the principal driver of demand for raw materials, it is at least plausible that the markets are calling the end of the cycle. Are commodities to this cycle what dot-com shares were to the last one?
Well, not quite. The bursting of the dot-com bubble led to the most serious fall in share prices since the 1970s and triggered the early 2000s downturn, but any fall in commodity prices would help soften the present slowdown. It would reflect a fall in economic activity rather than provoke one. But while the parallel is superficial, it is worth looking at events in China because what happens there will have a profound influence on what happens here and elsewhere in the developed world.
The evidence is mixed. On the one hand consumer demand has been shooting ahead and is still doing so. While consumption is not as important to the Chinese economy as it would be in the developed world – some 40 per cent of GDP rather than a typical 65 per cent – the fact remains that Chinese consumers are currently adding more incremental demand to the world than the US and probably more than the US and Europe combined.
Goldman Sachs has done some calculations which suggest that the monthly increase in Chinese retail sales is running at about $30bn above the level at the start of last year, and there is no sign of that slackening. There has been a surge in inflation, worse actually in China than in the developed world, but the Goldman Sachs economics team notes that this is already falling and will fall further. You can see the numbers on the surge in retail sales and inflation in the graphs.
The basic point is that Chinese consumers have taken over from those in the US as the main drivers of additional demand in the world economy. Yes, there may be recession or near recession in the US, Europe and Japan, and the news on that front continues to be confused. But as a whole, the world economy keeps growing.
So why are commodity prices falling? It could just be that they went too high in the first place, moving beyond their long-term equilibrium. It could be that the reaction in the West is so dramatic that we are offsetting demand from China. But it could be because the markets sense that China's demand will slacken in the months ahead.
One indicator came out last week supporting this last view. It was the purchasing managers' index, out on Friday, which fell below the 50 per cent margin. This means that among the businesses questioned, more than half were experiencing or expected a fall in output. That may just be a freak result and I would not take it too seriously. Output at the moment is running up about 15 per cent year-on-year. But what I would say is that some slowing of Chinese growth is likely to occur in the next couple of years and we will notice the effects of it, just as we have noticed the effects of the long Chinese boom.
That leads to a more general point. All eyes will be on China over the next month. It will be the first time for most of us in the West that we will have to contemplate a world where China takes over from the US as the largest economy. That tipping point is probably still 25 years away, but long before that the shift of power will shape our perception of global economics. Some aspects of Chinese behaviour will be quite disturbing. Issues such as freedom of information and minority rights are already out in front. But the two big economic issues that will make us feel uncomfortable will be attitudes to the environment and to international investment.
On the environment the most obvious at the moment, pollution, will be the most pressing. Longer-term matters such as carbon intensity and climate change will grind away over the next couple of decades, but right now the issue is whether pollution and environmental degradation has already become a drag on economic performance. We cannot measure how serious it is because it is hard to gauge to what extent it is actually cutting the standard of living through higher-than-necessary food prices and damage to health.
Attitudes to international investment are already shifting, with large Western investors in China questioning their returns and conditions of operation. This is not like Russia, where people have to go into hiding, but I think there will be a lot more questions asked of companies about the wisdom of having too much reliance on China as a strategic business partner – tough questions such as, are we really making money out of this?
There is a paradox here. China is on show as never before. It matters as never before in macro-economic terms. The possibility of a post-Olympic slowdown makes that very evident. But the very act of being on show, and being so important, will make the West recalibrate our judgements about the way it organises its affairs and the way it interacts with us. Even those among us who recognise there is much to respect and admire in China's achievements will feel a little more uncomfortable after the razzmatazz than we did before. One of the things that will make us uncomfortable will be the growing awareness that what the West thinks is pretty irrelevant: we may have a little influence but not much.
And the chances of that sharp post-Olympic slowdown? I don't think it is helpful to make such a call. But we should be aware that in economics nothing is a straight line forever, not even Chinese growth at 10 per cent a year. Accordingly we should attend carefully to the economic signals that emerge and, if the amber lights start flashing, try and think through what it would mean for us should they go red.
Companies need the taps to be turned on
There will be a fairly glum bout of domestic economic stuff this week, so stand by. On Monday we will get the construction purchasing managers index (PMI), which will reflect what is happening in a sector that has taken a big hit. Then on Tuesday there is the service sector PMI, plus industrial production and manufacturing output, all of which will create adverse comment. On Wednesday comes the Nationwide consumer confidence figure, and I would be amazed were it at all upbeat. We will also get the Halifax house price numbers, which won't make happy reading either.
This background makes any change in the Bank of England's interest rates (on Thursday) most unlikely. There is no case for an increase but it is hard to make a case for a cut either, since past inflationary pressures still have to move through the system. But, and this is more encouraging, falling commodity prices could mean inflation figures start to look sufficiently better by the autumn. It is impossible to be precise, but I could start to see a cut in rates come October.
But when we do get lower rates, that will put the spotlight on something else: what matters increasingly is not the price of finance but the availability. We all know that the number of new mortgages has plunged; much less noticed is the incipient squeeze on companies, many of which are worried about rolling over their borrowings.
That leads to two further issues. One is what will companies do about this? Just in the past month, chief executives have started to talk in much more dramatic terms about business conditions. The UK economy is probably still growing, albeit slowly, and there have been few instances of panic action, but the shift in mood is worrying. The other issue is the extent to which central banks will take into account the availability of finance, as opposed to its price. Here in the UK, the Bank of England has a good feeling from its regional agents for what the companies are saying. It is not its job to nudge banks in commercial decisions about their lending policies, but the rise in company insolvencies announced on Friday was not good.
Bottom line? The slowdown is upon us. But I have yet to see a single forecast that predicts the economy will actually shrink next year. A trudge, not a collapse.