Waiting for a Chinese miracle

The latest global economic forecasts suggest concerns ahead, particularly for China. As 2012 draws to a close, a rebound for China in the coming year is looking less likely.

The downgrades to the global economic growth outlook are being rolled out. The IMF will be releasing its updated forecasts for the global economy later today and these are expected to indicate a significant downgrade to both 2012 and 2013 GDP projections. The revised IMF forecasts come hot on the heels of the World Bank report for Asia Pacific which somewhat disconcertingly outlined an 11-year low for Asia-Pacific economic growth, the relatively poor performance centering on the slowdown in China.

In one sense, there is nothing really new in these forecasts. Private sector forecasters, who have the luxury of high frequency revisions to their projections, have been downgrading China’s outlook and that of the world for many months.

The fact that these downgrades are being confirmed by the major agencies suggests concerns ahead.

The latest forecasts from the World Bank are for Asia-Pacific GDP growth to slip to an 11 year low of 7.2 per cent in 2012 before a mild pick up to 7.6 per cent growth in 2013. Each of these estimates has been trimmed by 0.4 percentage points from the previous forecasts released in May. But even this appears optimistic as the World Bank is estimating that Chinese GDP will rise 7.7 per cent in 2012, a rate above the latest consensus estimates.

It is not just Asia that is slowing. The World Bank recently cuts its 2012 GDP forecasts for Latin America to 3.0 per cent from the previous 3.5 to 4.0 per cent projection; it also lowered its growth outlook for Africa from 5.2 per cent down to 4.8 per cent.

The World Bank forecasts show how China’s faltering economic growth is having a dampening effect on the rest of Asia and there was a hint that there could be more downgrades to the outlook. World Bank chief economist, Bert Hofman, acknowledged these risks suggesting that "China is experiencing a double whammy – the growth slowdown is driven by weaker exports as well as domestic demand, in particular, investment growth”.

This less than rosy outlook for China and Asia more generally has sparked ongoing weakness in the Chinese stock market which fell a further 0.6 per cent yesterday. The Shanghai Composite Index is now more than 65 per cent below the peak level above 6,000 reached in late 2007 before the global economic and banking crisis kicked in.

The World Bank, like just about every other forecaster, is assuming that the Chinese economy is near the bottom of the cycle. It is forecasting GDP to pick up to 8.0 per cent in 2013 even though the policy stimulus measures from China have, to date, been underwhelming given the ongoing fears from authorities of a the property bubble.

It is safe to say that the China 2013 rebound scenario is looking less credible as 2012 draws to a close given reluctance for more policy easing and the fact the protracted recession in Europe is hurting China’s export markets.

The more fragile outlook for China and the global economy more generally is showing up in softer commodity prices.

The broadly based Thomson Reuters/Jefferies CRB index of commodity prices has fallen 5 per cent in the last few weeks, having been given a boost previously by the bond buying from the ECB and the additional quantitative easing from the US Federal Reserve. Over the course of the last year, the index is flat which masks some significant underlying weakness given that some agricultural prices are significantly higher due to the severe drought that is damaging US agricultural output.

The price of many industrial commodities is weak. The oil price (West Texas crude) is under US$90 a barrel, the iron ore price is still 35 per cent below its recent peak while copper prices are little changed from a year ago, even with a slight pick up in recent weeks.

Either way, commodity prices are still well below the peak levels of a couple of years ago.

It is this commodity price softness that is probably the best gauge of the strength or otherwise of the global economy, and China in particular. If the world economy is soft, demand for goods is also soft which means commodity prices will be skewed lower. The opposite is true - if we were to see a sustained pick up in commodity prices, this would no doubt reflect an acceleration in global growth.

For now, it seems, the focus will be on downgrades to the global growth outlook from the IMF and World Bank which are largely well known. What will be important for those looking for a Chinese and global pick up in 2013 will be a turn higher in commodity prices. So far, the evidence supporting a strong outlook is unconvincing.


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