Asia and Pacific

World economy seeking new leader to spur growth

Friday August 28, 2015 Hugh Dixon

In the 1990s it was America spurring world economic growth, in the 21st Century it has been China fuelling the world’s economic growth.  With China showing more and more signs of a faltering economy, will the US be able to pick up the mantle, will a new country or region pick up the pieces, or will the world’s economy simply limp along waiting for China to kick start its economy? 

 

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China’s faltering economic growth has been highlighted in August, with the Chinese government surprising global markets by devaluing the Yuan by 1.9 percent. Also, weaker than expected factory activity being reported due to declining domestic and export demand for manufactured goods. This faltering has also been reflected this week by the Shanghai Composite Stock Exchange (SSE) falling by 8.5 percent on Monday 24th August 2015, the worse single day for the stock exchange in eight years, and given the daily limits on individual stock falls, it is close to the biggest possible daily price decline.  Chinese newspapers have dubbed it “Black Monday”.

 

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As a result of these events global stock markets have fallen heavily.  Since the 11th August 2015, global stock markets have seen US$5 trillion wiped off stock values.  With the fall in the SSE on Monday, the US stock markets (Dow Jones, Nasdaq and S&P500), were all down around 3 percent, while stock markets in Europe, Asia, Australia and New Zealand also fell heavily.

 

The United States has seen fairly consistent growth over the last five years, since it went into recession during the Global Financial Crisis (GFC) in 2009, but this growth had been aided by a large money printing program run by the Federal Reserve to help the economy grow and very low interest rates.  Only within the last year has the Federal Reserve stopped this program and it is yet to increase its official cash rate from its super low rate of 0.25 percent.  With the Federal Reserve likely to delay a planned interest rate hike in September to December due to the latest news out of China and its worry that this would cause a drop in US economic growth, it is unlikely that the US will be able to spur the world economic growth anytime in the next few years. Europe is also still struggling to get Government debt under control and the regions’ economies growing again.

 

So it is more likely that the world economy will simply have to hold its collective breath and see if Chinese authorities are able to keep China economic growth going at least 7 percent, while they continue to rebalance the Chinese economy, from an export driven economy to a more domestic demand driven economy. 

 

In the last few days the Chinese government has announced it will cut its one-year benchmark lending and deposit rates by 25 basis points, as well as reducing reserve requirements by 50 basis points for most of its larger banks.  This may allow the world’s economy to breathe a little easier.