As I predicted over three years ago, global economic growth remains anemic,
and this trend will probably continue for most of this decade.
Recently, the IMF and The Conference Board
confirmed my prognostication. The IMF indicated it had overstated world growth by an average of 0.6 percentage points each year for the past 4 years. Both organizations are not optimistic about global economic growth for the rest of the decade.
As a result, over the past month, global stock markets plummeted 8 percent on average, including 8 percent in China, 12 percent in the emerging markets, and about 7 percent in the U.S, according to the Morgan Stanley Capital International index (MCSI).
My projection was based on the trend-line for the Chinese economy in 2011: its growth rate was poised to decline, and it contributed a large portion to global economic growth. At that time, it was growing at a rate of nearly 10 percent and represented approximately 40 percent of annual world growth.
Why was China’s economy poised for decline?
For three decades, China stimulated its economy by increasing the money supply, discouraging investment abroad, and devaluing its currency. Investment relative to GDP rose to more than 40 percent, especially in property development, creating greater employment and income.
Larger incomes and capital controls caused land prices to skyrocket, where an average home was nearly 9 times the average annual income. This ratio far exceeded that in the U.S. at the time of the Great Recession of 5.
This excessive investment created an oversupply of underutilized capacity. Less future building would imply slower growth. In addition, constrictive monetary policy was implemented to reduce investment and consumption demand to keep a lid on spiraling prices.
In addition, short-term interest rates exceeded long-term rates for at least 6 months. This yield inversion
indicated the near-term economic environment was more risky than the long-term, implying an impending economic slowdown.
These dynamics are a recipe for an economic slowdown.
Since the start of 2010, China contributed more than one-third of all global economic growth, 40 percent came from the rest of the emerging countries, and 12.5 percent from the U.S., according to the IMF and the Economist. Moreover, China is the number one global exporter and the number two importer, with approximately $2 trillion for each annually. Its $4 trillion of annual trading represents more than 11 percent of the world total of $37 trillion, according to the CIA Factbook.
China’s contraction seems to have had ripple effects on the emerging markets, as their average annual growth rate fell from 7 percent in 2010 to 4 percent today, says Morgan Stanley. Lower resource demand by China has impacted the world. The growth rate in China’s demand for oil fell to nearly zero, a principal reason for the 20 percent slide in prices since the summer peaks. Demand for other commodities like steel and iron ore have also fallen, causing commodity economies like Brazil and Russia to tumble.
Further complicating matters is the high level of debt relative to GDP for China and the emerging countries. China’s total debt as a share of GDP rose to 216 percent in 2012, including 113.5 percent for corporations, 53.5 percent for government, 31.1 percent for households, and 17.6 percent for financial firms, according to the Chinese Academy of Social Sciences. Other emerging economies are also near or above the 200 percent level.
These ratios have grown quite rapidly since the Great Recession of 2008. They are too high for developing countries with less asset inventories to facilitate sustainable debt service payments. Lowering this ratio will tend to dampen economic growth.
Following the inception of the 2008 recession, I believed our economic recovery would probably take a decade or more. I still believe this.
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