It’s easy to get a bit self-absorbed during a recession.
After all, when you’re reading headlines about how the EC thinks Britain will suffer a worse recession than all the major European countries – thanks Mr Brown – it’s hard to bring yourself to care about what’s happening elsewhere.
But the grim reality is that this recession is far bigger than just the UK. In fact, Capital Economics reckons we’re facing the first global recession since the second World War. The group expects world GDP to grow by just 1.5% in 2009 (because developing economies grow so quickly, a global recession is typically defined as growth of less than 3.0%, apparently).
And at the heart of it all is the failing engine of the global economy – the American consumer…
How US consumers are affecting China
This recession will take no prisoners. Even China – the global superpower of the future – is suffering. According to CLSA’s purchasing managers’ index, the Chinese manufacturing sector shrunk at a record rate in October. The index gave a reading of 45.2, which is the lowest since the survey began in 2004. A reading below 50 means the sector is shrinking. Meanwhile, profits at state-owned companies fell in September for the second month in a row.
It shouldn’t come as a surprise. As my colleague Tim Bennett pointed out in a recent cover story (see: Is China’s miracle economy heading for a fall?), China is still very export-dependent. US consumers – the most important consumers in the world – are cutting back on their spending. Lower demand for cheap imported goods means fewer jobs for China’s factory workers. According to Richard Spencer in The Telegraph: “economists are warning that three million migrant workers may be laid off as factories continue to close in the east coast’s manufacturing heartlands.”
And if the Chinese aren’t making as much stuff, then they don’t need to import the same quantity of raw materials. Commodity prices have taken a dive this year, and it seems there’s no reason to expect them to recover any time soon. Tom Albanese, the head of mining giant Rio Tinto, warned that China’s economic growth is “decelerating more quickly in the fourth quarter than we saw in the third quarter,” although as you might expect, he remains upbeat on the long-term outlook for commodities demand.
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Certainly, longer term, the Chinese story still looks good. Recessions end eventually, and assuming we don’t get some kind of utterly cataclysmic social upheaval, people still want to improve their standard of living. Accountant PricewaterhouseCoopers for example, says that it is still going ahead with plans to recruit 2,000 graduates in China as part of a “major expansion.” You can read more about prospects for the Asian markets in my colleague Cris Sholto Heaton’s free weekly email, MoneyWeek Asia.
But for the moment, China is facing a bigger slowdown than most people expect and that’s going to be a very unpleasant surprise for a population used to double-digit GDP growth.
The next US President faces an uphill struggle
So what are China’s leaders planning to do? Pretty much the same as our leaders – encourage slacker lending standards to prop up consumer spending, and a weaker currency to prop up exports. But the problem is, it’s not Chinese consumers that the Communist Party has to worry about – it’s US consumers. And they can’t have much impact on what they do.
To be fair, the behaviour of US consumers is pretty much out of the hands of the incoming President too. Americans are doing their best to maintain their spending, but they are flagging, and using up what little is left of their credit lines to do so.
I read some quite incredible statistics on US credit card spending last night. John Mauldin, in his Thoughts from the Frontline newsletter, notes that lending on plastic in the 10 months from September 2007 to July 2008 rose by $29.1bn. Yet in the 10 weeks from August to mid-October this year, it rose by $32.3bn.
“In other words,” says Greg Weldon of weldononline.com, “commercial banks’ ‘exposure’ via [such loans] outstanding has risen more in the last ten weeks, than it did in the previous ten months combined!”
US consumers, unable to borrow more money against their homes, are increasingly turning to their plastic to make ends meet. But those debts are going bad at ever-increasing rates. For example, American Express reported that delinquencies on payments rose to 4.1% of all outstanding debt in the third quarter, from 2.5% at the same time last year.
As Mauldin puts it, this kind of growth “has never been sustained at such a level, and is unlikely to be this time either.” So not only is consumer spending set to collapse, but all those bad debts will be yet another worry for the US banking system. That means that anyone expecting a short, sweet recession followed by a tremendous bounce is going to be disappointed.
We’ll have more on what sort of US economy the next President will inherit in this week’s cover story (if you’re not already a subscriber, subscribe to MoneyWeek magazine). But suffice to say, whoever loses this US election should perhaps be thanking their lucky stars.
What does that mean for the rest of us? Well, with the world’s consumer of last resort focused on building up their savings rather than spending, everything from global trade to financial paper shuffling – Britain’s speciality – will continue to come under pressure. As Capital Economics puts it, “the unwinding of the massive economic and financial imbalances built up over the last decade requires a long and painful hangover.”
In all likelihood, that means more disappointments for markets across the world in the year ahead. We’re still a long way from the bottom.
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