It's not academic: how we can avoid catching a cold when China finally sneezes
'Why is it so?" asked the eccentric television physicist of the 1960s Professor Julius Sumner Miller. His catchcry, and his brilliantly simple experiments, inspired a generation of viewers to be curious about how the fundamentals of our natural world worked.
Who could forget him dropping a burning piece of paper into a milk bottle, placing a shelled boiled egg over the opening and watching it squeeze itself all the way into the bottle?
"Hence the word egghead?" asks Louise, our literary-minded resident intellectual. Well, it may not have been the smartest egg in the world, but we all saw quite clearly the powerful effects of a change in atmospheric pressure.
Last week we promised to explore the effects of a change in global economic pressure as China's growth is squeezed a bit.
"Why is it so?" Well, according to Charlie, our redoubtable economic forecaster, now that China represents 40 per cent or more of our exports, we may have a few too many eggs in one bottle.
Those of us in the advertising business will remember the professor's famous Cadbury advertisement about a glass-and-a-half of full-cream milk in every block. And that certainly has been the case for Sino/Australia trade over the past decade - we got the cream. But Charlie, who so cleverly picked the 2008 downturn early and another peak in 2010, says a slowdown in growth is inevitable for the Middle Kingdom.
China has grown strongly for the past 20 years with only one or two soft patches, most recently during the global financial crisis. But steep trends upwards are never forever.
The Chinese economy is in the process of transition to a more balanced and sustainable model with lower growth in investment and exports and higher levels of consumption. Ultimately, that means slower growth on average. China will still be vulnerable to events in the US, eurozone and Asian economies, especially as investment growth wanes.
Charlie reckons there is a hard landing of the Chinese economy just around the corner. This will be gross domestic product growth of less than 5 per cent as opposed to its near 8 per cent now. Still not too bad at all given we are on about 3 per cent.
"Why is it so?" Well, China faces many challenges and each one of them can soften the economy: appalling pollution requiring major and costly industrial reform, an ageing population, financial systems that aren't transparent, an accumulation of non-performing loans and over-investment in infrastructure creating asset "bubble" risks.
There is no doubt there will be a blip in the Chinese economy and we have to make sure we don't have all our eggs in that basket. If we do, we may get what's called the Dutch Disease, a term coined by The Economist in 1977 to describe the decline of the manufacturing sector in the Netherlands after the discovery of natural gas in 1959. The Dutch lived too well in the good times and didn't build enough of the infrastructure needed for what followed.
We're in the middle of such a cycle.
So what do we do? Well, according to Charlie, it's a good idea to cash up and diversify. Debt is cheap now but soon won't be. Plan for a downturn, as economist Ross Garnaut has been arguing this week. He even claims there may be a recession; possibly so, but we won't get caught if we move quickly in four areas:
Better education: the expansion of universities, not the contraction of them;
Better health: more hospitals where people need them;
Better food: high-quality production, particularly in the north;
Tourism: relaxed visas to make travel easy.
Do this and we will boom for years.
Our pioneer television scientist once said: "I knew my purpose well and clear: to show how nature behaves without cluttering its beauty with abstruse mathematics."
We need to have the same view about business. We need to show the value and beauty of prosperity, without getting bogged down in esoteric economics.
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