Tags: China | Europe | economies | contrasts

China and Europe Economies Offer a Study in Contrasts

Sunday, 03 March 2013 03:52 PM

As central banks in the eurozone and Britain edge closer this week to deciding that their flagging economies need yet more monetary stimulus, they can be forgiven for casting an envious eye towards China.

The same goes for the United States. Because of deadlock in budget talks, mandatory federal spending cuts are now being phased in. They will brake a recovery that, as Friday's jobs report is likely to show, is already frustratingly weak.

China, the biggest contributor to global growth in recent years, has plenty of headaches of its own, of course.

Over-reliance on investment in heavy industry, a financial system rigged in favor of the state, and a failure to integrate some 140 million rural migrant workers into urban life top the list of structural problems.

Louis Kuijs, an economist with Royal Bank of Scotland in Hong Kong, adds rising inflation, a renewed climb in house prices and a rapid expansion in 'shadow banking' to the government's to-do list for 2013.

But Kuijs and other economists expect outgoing Premier Wen Jiabao to reaffirm a growth target of 7.5 percent for this year when he delivers his last 'state of the nation' report to the annual meeting of parliament that opens on Tuesday.

China entered 2013 with solid growth momentum thanks to measured policy stimulus in the second half of last year. That impetus is now fading somewhat after a strong fourth quarter, as figures for January and February will probably suggest.

So, just as the West is looking to China to boost global demand, China is counting on a pick-up in the West as 2013 unfolds to help exports and revive corporate investment, Kuijs said.

"Looking at trade and industrial production indicators, we are all expecting a strengthening global picture, coming especially from the United States and Europe, but it's still a forecast: it's not showing up yet in the hard data," he said.



Indeed, the European Commission is projecting that the eurozone economy will shrink in 2013 for the second straight year. And February's survey of purchasing managers was downright weak.

"This increases the chances of a rate cut, but it's still not our baseline assumption," said Petr Zemcik, director of European economics at Moody's Analytics in London. "The ECB has done all it can at this stage."

His comments were in line with a Reuters poll of economists, which saw a 90 percent chance that the ECB, the European Central Bank, would keep its main short-term interest rate unchanged at 0.75 percent when it meets on Thursday.

However, a growing minority expects the ECB will cut rates at some point. Doing so now, right after Italy's election produced a big protest vote against austerity, would invite the suspicion that the bank was acting out of political panic.

But President Mario Draghi is sure to be quizzed about further easing and possible activation of the ECB's bond-buying program for eurozone strugglers, especially if the bank lowers its 2013 growth and inflation forecasts again.

Jeffrey Anderson with the Institute for International Economics in Washington, a financial-industry lobby group, said a rate cut would send a useful signal of the importance of growth to voters weary of austerity.

The Italian economy has shrunk for six quarters in a row. Euro zone unemployment hit a record 11.9 percent in January.

At the same time, eurozone finance ministers, who meet on Monday, should excuse Italy from further fiscal tightening as its budget is close to structural balance, Anderson argued.

"Ways must still be found to prod Italy to move on overdue labour market liberalisation. But action to boost near-term growth would help Europe to sustain the popular backing necessary to advance the reforms needed for the longer term," he said in a note.



In Britain, the government seems determined to stick to budget austerity despite a sharp drop in manufacturing in February and a stinging defeat for Prime Minister David Cameron's Conservative party in a parliamentary by-election.

This keeps the onus on the Bank of England, three of whose nine policymakers have already voted to expand the central bank's stock of asset purchases, now set at 375 billion pounds.

That could turn into a majority as soon as Thursday, when the BOE meets to set policy, if a survey two days earlier of the all-important services sector is weak, said Simon Hayes, an economist at Barclays Capital in London.

Further easing by the Federal Reserve is not on the cards. But job figures on Friday are likely to underscore that the U.S. central bank is in no hurry to withdraw its stimulus - the message Chairman Ben Bernanke relayed to Congress last week.

According to a Reuters poll, firms probably added 160,000 non-farm jobs last month, in line with January's 157,000 gain, while the unemployment rate held steady at 7.9 percent.

That is well above the Fed's goal of 6.5 percent. Moreover, federal spending cuts, if not reversed, will stiffen fiscal headwinds and could lop 0.5 percent off growth over the rest of this year, many economists estimate.

Nevertheless, Jim O'Sullivan, chief U.S. economist with High Frequency Economics in Valhalla, New York, is confident that it is just a matter of time before the Fed's ultra-easy policy starts to bear more fruit.

Job growth was already brisk enough to reduce the unemployment rate given a secular decline in the participation rate due to an ageing population, he argued.

"Based on what we're seeing in the labor market, in the battle between monetary stimulus and fiscal drag, the Fed is winning," O'Sullivan said.

© 2019 Thomson/Reuters. All rights reserved.

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As central banks in the eurozone and Britain edge closer this week to deciding that their flagging economies need yet more monetary stimulus, they can be forgiven for casting an envious eye towards China.
Sunday, 03 March 2013 03:52 PM
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