The US economy is struggling, while China booms — as predicted here in late 2007.
“After riding a wave of improvement since the spring, the economy stumbled in September, according to the latest figures,” reports The Economist.
Non-farm employment fell by 260,000, which was 62,000 more than in August and ahead of general expectations. Car sales tumbled as the federal “cash-for-clunkers” program expired. Manufacturing activity cooled a bit.
The venerable mag says “this is probably an air pocket; overall economic output almost certainly began to rise in the third quarter of the year and employment will eventually follow”.
Sharemarkets have risen, some say too far, too soon, meaning there is a correction still to come. This alone could produce the feared double-dip recession.
President Obama said recently: “We will need to grind out this recovery step by step.”
Meanwhile, in China, the question is whether there is a bubble economy.
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The argument of the “foam spotters” is simple: to support demand, China’s government has created huge quantities of credit. That lending is leading to unsustainable asset-price inflation, while wasteful investment is producing oodles of excess capacity. As a result, China’s stimulus will inevitably be followed by a bust down the road (see article).
“Few things matter more for the global economy than whether this argument is right. With America and other economies in the English-speaking world weakened by their own asset busts, the pace of global growth over the next couple of years will depend heavily on China. A painful asset slump or banking collapse there would further slow the pace of global growth. No one doubts that credit has been growing dramatically in the Middle Kingdom. Lending grew by 34% in the year to August, about four times faster than nominal GDP.”
Read on here to see why The Economist is not (yet) too concerned.
As we have previously reported, China applied the brakes after pressing the credit accelerator in the first half of 2009.
As we said then, the worry is that the world economy may become unstable with stop-start fiscal policy and, in China’s case, on-off bank lending policy.
So far this does not seem to be the case, but the massive global easing of monetary and fiscal policy will need to be reversed before long. This will provide the test.