The forecast for growth in the Chinese economy has been
lowered from 8.2% to 7.7% for the current fiscal year. This is serious news and
bad for Canada, the US and Europe. Strong growth in China drives global demand
for goods and services: any weakening of this growth reduces demand and deepens
the recessionary forces at play in the developed world.
While many initially saw the problems of the US and Europe
in terms of excessive public borrowing and government debt, the real culprit
for the economic woes we face is the lack of demand and the resultant lack of
growth. Until we can stimulate demand, unemployment will remain high and firms
will struggle with their strategic position in complex and shrinking markets.
China and India are major demand drivers in the global
economy. In the last ten years these two economies have risen by an annual average
of 10% and 9% respectively - massive growth. To fuel this growth they have
increased demand for natural resources, technological resources and materials
needed for infrastructure and advanced manufacturing. When demand slows, firms
lay off staff and stop buying the goods and services they each need and these
decisions ripple through the economy.
Higher unemployment places demands on public services,
including social services and health, and at the same time reduces revenues for
governments. This in turn leads them to both spend more and borrow more. When
growth is strong, revenues are strong and demands for services are generally
lower.
So now we see the perfect storm: high unemployment,
especially in Europe and the US, which is likely to worsen as demand falls; low
rates of growth and demand, slowing the growth of firms and inducing a
risk-averse view of capital - its better to sit on it then use it; and
increased demands on public services while taxation and other revenues fall.
What is needed is less of a focus on austerity and more of a
focus on growth and development. Governments may need to consider economic
stimulus, even if it means increasing debt and borrowing. The specter of large
numbers of young (18-24 year old) unemployed and near retirement seniors caught
in the unemployment-poverty cycle is a more compelling policy driver than the
relentless pursuit of austerity.
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