Jeremy Warner: Don't count on China to act as the locomotive
Friday 17 April 2009
Outlook As expected, the big emerging- market economies of Asia are proving more resilient to the global recession than the advanced, industrialised economies of the West and Japan. But can that resilience lift the rest of the world out of its funk? This seems rather less likely.
China's first-quarter growth, announced yesterday, was the weakest on record, but at 6.1 per cent, with the pace of growth apparently picking up sharply in March, it was a good deal better than might be expected given the collapse in trade that the period encompassed.
The pronounced fiscal stimulus announced by China in response to the global slowdown seems to be working. China has also encouraged its banks, which have remained largely immune to the crisis that has engulfed their Western counterparts, to go on a massive lending spree. As a result, money supply has been growing like topsy.
The bamboo shoots seem to be sprouting afresh, but don't expect them to have too much of an impact back here in Europe. Combined, the Chinese and Indian economies account for no more than 20 per cent of global output, and even that may be an overestimate. The data is far from trustworthy. What's more, neither of them are big consumers of other countries' goods. Subsistence agriculture still accounts for a fair old chunk of both these economies.
The impact of any uptick in growth on Western nations is therefore likely to be limited. That's not to say there aren't a few green shoots poking their way through the frozen soil back here in the West, but to the extent that they are, it has very little to do with what's happening in China and India. Rather, it is to do with all the policy action taken closer to home.
Plenty of evidence has emerged in recent weeks to support the view that the pace of the downturn is at least now slowing. But any hope of a swift bounce back can be quickly dismissed. Research by Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard University shows that the average of the downturn resulting from each of the big banking crises of the postwar period was 2 per cent. Typically, it would take two years for the economies affected to return to trend growth.
But in the five most serious cases, the average peak-to-trough contraction was more like 5 per cent, with growth still well below normal even after three years. The present banking crisis is plainly in a league all of its own, so, if past experience is anything to go by, you would expect the fallout to be worse. We are not even a year into the downturn yet. Nor in Britain have we yet seen a 5 per cent contraction. Precedent suggests we've still got a way to go.
A former Tory chancellor, Norman Lamont, was universally ridiculed when he claimed to have detected the "green shoots of economic recovery" in the midst of the recession of the early 1990s. At the time, his comments seemed ridiculous, even though he did qualify them by saying they were not bushes that he was seeing. As it later transpired, Mr Lamont was broadly right. Subsequent data confirmed that the economy was indeed growing afresh when he made his remarks.
Yet today the expression "green shoots" is thrown around like confetti, though its use is almost certainly even more premature than when Mr Lamont coined the term. What people seem to mean by it is less that the economy is about to start growing again than that the contraction is slowing. In any case, the British economy is unlikely to show any resumption of growth until the end of this year at the earliest, and even then it may not be pronounced.
The V-shaped recovery that everyone hopes for shouldn't altogether be discounted. The "bounce-back" school of thought has a big and growing following. But after the worst banking crisis since the Great Depression, with a major workout of burgeoning public debt still to come, it doesn't look the way to bet. A slow and gradual recovery seems more likely.
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