China has been one of the success stories of the past 20 years, with rapid growth in domestic and export demand. This has created the second largest economy in the world. From 1992 to 2007 annual GDP growth averaged 10.7% and annual export growth averaged 18.9% (see chart).
However, with the credit crunch and ensuing recession, growth rates in China have fallen somewhat. Annual GDP growth has averaged 9.6% and annual export growth has averaged 7.4%. Such growth rates may not seem bad, given that many Western economies have been struggling to achieve any growth, but they have been causing concern for this booming economy.
In its May Outlook, the World Bank forecast China’s growth for the year at 8.2%, but it has since been reduced to 7.8%. A key part of China’s success story has been its export market, but it has been this market that has caused concerns for the mainland economy. In August of this year, its year-on-year export growth was at only 2.7%, but exports last month grew by more than expected, at approximately 7.4%. China has had a consistent trade surplus and according to government figures, this has widened to $27.67 billion in September from $26.66 billion in the previous month.
Recovery in this market will be crucial for the continued success of the economy, as a means of alleviating the fears of a slowdown. This higher growth of exports may be a misleading indicator, perhaps influenced by seasonal factors and thus may not be a sign of what’s to come. Indeed, many analysts have said that they are not convinced that these healthier trade figures will remain. Alistair Thornton, from IHS Global Economics said:
“It’s safe to say we are overshooting the trend here and we expect (the data) to come back in line in the months ahead.”
Citigroup economist, Ding Shaung also confirmed these sentiments:
”The trade data is a positive sign for the Chinese economy … But it remains to be seen whether import and export growth can remain at these levels.”
Part of this pessimism is due to the uncertainty surrounding the growth prospects of its biggest two trading partners – the US and the European Union. Exports to the former have remained relatively high, but exports to the European Union have suffered, falling by over 5.6%. It is likely that weaknesses in the global economy have held back China’s growth prospects in both exports and national output. The Chinese government was aiming for growth of 7.6% in 2012. Not a bad rate you may say, but when compared with growth rates for 2011 (9.3%) and 2010 (10.4%), it does represent a significant fall. The future of the Chinese economy is crucial for the recovery of the world economy, in part as it represents a big demand for imports from other countries, such as the US and Europe. The following articles consider the trade and growth prospects of the world’s second largest economy.
Chinese exports grow faster than expected in September BBC News (14/10/12)
Chinese exports grow faster than expected Financial Times, Patti Waldmeir (14/10/12)
China exports jump, but weaknesses seen ahead The Korea Herald (14/10/12)
China exports rise, hinting at a glimmer of revival New York Times, Keith Bradsher (13/10/12)
China’s trade surplus widens Wall Street Journal, William Kazer (13/10/12)
Chinese surplus widens as exports surge CNN, Paavan Mathemas (13/10/12)
China’s economic slow-down BBC Today Programme, Linda Yueh (18/10/12)
Questions
- What is a trade surplus?
- Which factors have influenced Chinese exports and imports?
- Why is China’s growth rate such an important variable for the UK and other Western economies?
- Why has export growth in China fallen recently? Can you use the same explanation for its lower growth in national output?
- Explain why analysts remain pessimistic about the sustainability of these improved trade figures.
- Using a diagram, illustrate the effect that higher Chinese growth rates will have on GDP in a country such as the UK. Could there be a multiplier effect?
With droughts and poor harvests in both North America and in Russia and the Ukraine, there are worries that food prices are likely to see sharp rises in the coming months. This is clearly bad news for consumers, especially the poor for whom food accounts for a large proportion of expenditure.
But it’s also bad news more generally, as higher food prices are likely to have a dampening effect on the global economy, struggling to recover from five years of low or negative growth. And it’s not just food prices. Oil prices are rising again. Since mid June, they have risen by nearly 25%. This too is likely to have a dampening effect.
Another contributing factor to rising food prices is a response, in part, to rising oil prices. This is the diversion of land from growing food to growing crops for biofuels.
G20 countries held a conference call on 28 August to discuss food prices. Although representatives decided against an emergency meeting, they agreed to reassess the situation in a few weeks when the size of the US harvest would be clearer. If the situation proved as bad as feared, then the G20 would call an emergency meeting of the Rapid Response Forum, to consider what could be done.
But is the sole cause of rising food prices a lack of production? Are there other problems on the supply side, such as poor distribution systems and waste? And what about the role of demand? How is this contributing to long-term increases in food prices? The articles consider these various factors and what can be done to dampen food prices.
Articles
G20 points to ‘worrying’ food prices Financial Times, Javier Blas (28/8/12)
US food prices to surge on drought Gulf News(30/8/12)
Best to get used to high food and energy prices – they’re here to stay The Telegraph, Jeremy Warner (29/8/12)
Feeling a drought The Economist (14/8/12)
Q&A: World food and fuel prices BBC News (14/8/12)
G20 considers global meeting as food prices rise BBC News (28/8/12)
Biofuels and Food Prices (direct link) BBC ‘In the Balance’ programme (25/8/12)
U.N. body urges G20 action on food prices, waste Reuters, Patrick Lannin (27/8/12)
Ethanol industry hits back over food price claims EurActiv (28/8/12)
The era of cheap food may be over Guardian, Larry Elliott (2/9/12)
Data
Food Price Index Index Mundi
Questions
- Why have food prices been rising in recent weeks?
- Use a demand and supply diagram to demonstrate what has been happening to food prices.
- What determines the price elasticity of demand for wheat? What might this elasticity vary over time?
- What is the role of speculation in determining food prices?
- Illustrate on an aggregate demand and supply diagram the effect of a commodity price shock. What is likely to be the policy response from central banks?
- What determines the price elasticity of supply of food in (a) the short term and (b) the long term?
- What determines the cross price elasticity of supply of food to the price of oil? Is the cross price elasticity of supply positive or negative?
- What can governments do to reduce food prices, or at least reduce food price inflation?
- What benefits may come from higher food and fuel prices over the longer term?
Youth unemployment has been one of the main headlines for some months, with data showing a record number of young people out of work.
As part of the government’s £1bn Youth Contract that aims to help young people back into work and help those unable to find employment, Nick Clegg has announced wage subsidies to firms hiring 18-24 year olds will be paid earlier.
Some of the costs of unemployment are obvious. For the individual who is unemployed, it means a lack of income and hence inability to buy goods and services. This then has wider implications for the economy. If people are unable to purchase goods and services, this contributes to a lower level of aggregate demand, which in times of recession, is hardly ideal.
Unemployment also means an inefficient use of resources, meaning the economy is operating below full capacity. Fewer people in work also implies lower tax revenues for the government, at the same time as higher unemployment benefit payments, contributing towards a growing budget deficit. This point is of particular concern, when it is young workers claiming benefits, as it could mean a life of dependency.
There are also some longer-term consequences, in particular for those who have been out of work for some time. They lose their skills, making it harder to find a job and this can pose costs to employers and further costs to the government through re-training. As such, government initiatives to tackle youth unemployment have never been more important.
The wage subsidies that were announced back in November will now be paid when young people have been out of work for six months, instead of nine. This initiative aims to help reduce youth unemployment in areas where it is at its worst. Twenty local authorities have been identified as priorities for the government and will benefit from this scheme. As Nick Clegg said to CBI summit:
“Three months can make all the difference. When you feel like your banging your head against a brick wall, when you live in an area where opportunities are already few and far between, another 12 weeks of rejection letters, of being cut off, of sitting at home waiting, worrying, that can seriously knock the stuffing out of you, making it extremely difficult to pick yourself up …
So jobcentres will be able to make use of the subsidy before people are referred to the Work Programme, capitalising on their links with local employers, and they’ll also intensify support, so more training, more regular coaching, spending more time with young people to knock a CV into shape or prep ahead of an interview.”
There are critics of the scheme, who argue that it is too little, too late and that it will simply displace older workers, thereby creating worse unemployment for another group. Until the economy begins to grow and confidence returns to the markets, unemployment is likely to remain a frequent headline. The following articles consider the wage subsidy and the state of unemployment in the UK.
Wage subsidy could mean more jobs Independent Online, Business Report, Pierre Heistein (14/6/12)
Wage subsidies scheme moved forward The Press Association (27/6/12)
Wage subsidy plan for young workers brought forward BBC News (27/6/12)
Wage subsidies scheme moved forward Independent, Alan Jones (27/6/12)
Nick Clegg announces extra help for jobless in 20 troublespots Guardian, Juliette Jowit (27/6/12)
Young people’s prospects have ‘nose-dived’ says report BBC News, Judith Burns (25/6/12)
Economic gap between young and old significantly worse since 2008 – study Guardian, James Ball and Helene Mulholland (25/6/12)
Questions
- Why is unemployment such a big concern for the UK economy? What is so important about youth unemployment?
- Which factors have contributed towards such high youth unemployment?
- How will the wage subsidy encourage firms to take on more young people? Think about how a rational firm behaves when choosing between 2 workers.
- Why does the wage subsidy cause concern for organisations supporting the employment of older workers?
- To what extent do you agree with the Guardian article that says that young people have borne the brunt of the recession and subsequent government cuts?
- What other things have been undertaken in a bid to reduce unemployment and stimulate the economy?
- Think about the costs of unemployment. Categorise them into costs to (a) the individual, (b) friends and family, (c) the government and (d) the economy.
In the second part of this blog, we look at an interview with the Guardian given by Robert Chote, Chair of the UK’s Office of Budget Responsibility. Like Mervyn King’s, that we looked at in Part 1, Robert Chote’s predictions are also gloomy.
In particular, he argues that if Greece leaves the euro, the effects on the UK economy could be significant, not just in the short term, but in the long term too.
The concern is that you end up with an outcome in the eurozone that creates the same sort of structural difficulties in the financial system and in the economy that we saw in the past recession, and that that has consequences both for hitting economic activity in the economy, but also its underlying potential. And it’s the latter which has particular difficulties for the fiscal position, because it means not just that the economy weakens and then strengthens again – ie, it goes into a hole and comes out – but that you go down and you never quite get back up to where you started. And that has more lingering, long-term consequences for the public finances.
The interview looked not just at the effects of the current crisis in the eurozone on the eurozone, British and world economies, but also at a number of other issues, including: the reliability of forecasts and those of the OBR in particular; relations between the OBR and the Treasury; allowing the OBR to cost opposition policies; the economic effect of cutting the 50p top rate of income tax; the sustainability of public-sector pensions; and tax increases or spending cuts in the long term.
In Part 3 we look at attempts by the G8 countries to find a solution to the mounting crisis.
Articles
Robert Chote interview: ‘I would not say in the past there’s been rigging’ Guardian, Andrew Sparrow (18/5/12)
UK ‘may never fully recover’ if Greece exits euro Guardian, Andrew Sparrow, Helena Smith and Larry Elliott (18/5/12)
British economy may ‘never quite recover’ from a severe Euro collapse The Telegraph, Rowena Mason (18/5/12)
OBR report
Economic and fiscal outlook Office for Budget Responsibility (March 2012)
Questions
- Why is it very difficult to forecast the effects of a Greek withdrawal from the euro?
- Why may Greek withdrawal have an effect on long-term potential output in the UK and the rest of Europe?
- Why are economic forecasts in general so unreliable? Does this mean that we should abandon economic forecasting?
- Why are public finances “likely to come under pressure over the longer term”?
- Why might the cut in the top rate of income tax from 50% to 45% have little impact on economic growth? Distinguish between income and substitution effects of the tax cut.
This has been a week of gloomy prognostications. On Wednesday 16 May, the Bank of England published its quarterly Inflation Report – and it makes worrying reading.
The forecast of UK economic growth for 2012 has been reduced from 1.2% in the previous report to 0.8%. But the rate of inflation is forecast to remain above the 2% target well into next year. However, at the two-year horizon, inflation is now forecast to be 1.6% – below the target, thus giving the MPC scope for further quantitative easing.
In the introduction to the report, the Governor, Mervyn King, writes:
Over the past year or so, two factors have hampered the recovery and rebalancing by more than expected. First, higher-than-expected world commodity and energy prices have squeezed real take-home pay, dampening consumption growth. Second, credit conditions, far from easing, have in some cases become tighter. The direct and indirect exposures of UK banks to the euro-area periphery have affected funding costs as the challenges of tackling the indebtedness and lack of competitiveness in those countries have intensified.
And at the news conference launching the report, he said:
We have been through a big global financial crisis, the biggest downturn in world output since the 1930s, the biggest banking crisis in this country’s history, the biggest fiscal deficit in our peace time history and our biggest trading partner – the euro area – is tearing itself apart without any obvious solution.
The idea that we could reasonably hope to sail serenely through this with growth close to the long run average and inflation at 2% strikes me as wholly unrealistic. We’re bound to be buffeted by this and affected by it.
The following articles look at the Bank of England’s predictions and at the challenges facing the UK economy as the crisis in the eurozone deepens and as inflation in the UK remains stubbornly above target. They also look at the issue of the extent to which capacity has been lost as a result of the continuing weakness of the UK economy. As The Economist article states:
Business surveys suggest only a small proportion of firms are operating below capacity. That finding looks odd given the economy’s output is still 4% below its level at the start of 2008, and is much farther below the level it would have reached if GDP growth had continued at its long-term rate. The picture painted by surveys could be right if a chunk of the economy’s potential has been written off for good. But Sir Mervyn King, the bank’s governor, doubts this. There is “no obvious reason” why the economy could not rejoin its pre-crisis path, though it might take a decade or two to get there, he said on May 16th.
We look in more detail at the question of lost capacity in Part 2.
Articles
Bank of England cuts growth forecasts: Sir Mervyn King’s speech in full The Telegraph (16/5/12)
Bank of England sees inflation up and growth falling Independent, Ben Chu (17/5/12)
Hard going The Economist (19/5/12)
Bank of England optimism dented again Financial Times, Chris Giles (16/5/12)
Eurozone is ‘tearing itself apart’, says Mervyn King. True, but the UK’s problems are as intractable as ever The Telegraph, Philip Aldrick (16/5/12)
Inflation Report
Inflation Report: portal page Bank of England
Inflation Report: May 2012 Bank of England (16/5/12)
Additional Data
Statistical annex to European Economy. Spring 2012 European Commission, Economic and Financial AffairsAnnual macro-economic database European Commission, Economic and Financial Affairs (11/5/12) (see particularly section 6.5)
Forecasts for the UK economy HM Treasury
Questions
- What explanations are given for the rate of CPI inflation remaining persistently above the 2% target?
- Why have the prospects for economic growth worsened since the publication of the February Inflation Report?
- How might it be possible to have a narrowing (negative) output gap and yet a stagnant economy?
- Why may capacity have been lost since the financial crisis of 2008?
- Why has M4 declined despite the programme of quantitative easing? (See M4 in record fall despite QE.)
- What scope is there for monetary policy in achieving faster economic growth without pushing inflation above the 2% target?
