Let me give you seven numbers in a series: 9.8; 9.7; 9.5; 9.1; 8.9; 8.1; and 7.6. Do you know what these are? The answer is that these are the official figures issued by the government of China for the growth rate of the Chinese economy over the last seven quarters. Now many people do not believe the official Chinese statistics; the experts mostly believe that the government of China bumps up the numbers to make things look better than the really are. Nevertheless, even ignoring the possibility that these numbers are inflated, they are not good. The Chinese growth rate has been declining for seven straight quarters. Also, because of the way that China calculates its growth (which is different from the method used in the USA), the numbers are actually worse than they seem. Here is how Calculated Risk describes this phenomenon:
China publishes its quarterly GDP figure on a year over year basis, differently from the U.S. and most other countries that publish their GDP growth figure on a quarter on quarter annualized seasonally adjusted (SAAR) basis. When growth is slowing down sharply the Chinese way to measure GDP is highly misleading as quarter on quarter growth may be negative while the year over year figure is positive and high because of the momentum of the previous quarters’ positive growth.
The current numbers do not yet indicate a negative growth rate in China, but the 7.6% reported is much higher than the actual rate for the last quarter.
A decline in China is terrible news for the world economy. Right now, Europe is in recession. While this may, in part, be the reason why China has slowed, it means that Europe is not going to lead the world back to growth. The USA is stagnant at best and the Obama policies are pushing us back towards recession. Again, the USA will not lead the World to growth. Japan has gotten a boost as a result of having to repair the damage from the earthquake and tsunami, but that is coming to an end. The Japanese economy remains "tired" and it will not lead the world back to growth. That leaves China, Brazil, India and the rest of the world as sources of economic growth. Of these, only China has the economic power to affect much of the rest of the world. But China is slowing dramatically. It too will not lead the world back to growth. The other countries are more likely to get bogged down as a result of the slowing world economy than to lead that economy back to faster growth.
Right now, the world economy is between the proverbial rock and a hard place. Something dramatic is needed to pull things back towards growth. One possibility would be a massive drop in energy prices due to new discoveries or new extraction techniques. That may happen, but it may not happen quickly enough. If there is a problem with oil flow through the Straits of Hormuz because of the Iranian program to obtain nuclear weapons, we could see just the opposite. There could be a dramatic rise in oil prices which would decimate the economies of both East and West.
The point is that now is not the time for adding risk.
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