Thursday, October 18, 2012

The Thing About China..

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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