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?
Trade union action has been a feature of the British labour market over the past few years, as discussed in this first and second blog. With the government’s austerity measures still in place and ongoing issues over pension provision, there are many explosive issues that will undoubtedly be discussed at this year’s TUC Conference in Brighton.
We have already heard from numerous unions that strike action over the coming year is ‘inevitable’. With rising prices, static or even falling wages, reduced pension provision and increased contributions, the cost of living has become increasingly unaffordable for many members of the trade unions. Dave Prentis, the General Secretary of Unison said:
‘I think people have been pushed into a corner. They are moving into poverty … The threat is that if we can’t move forward in negotiations to find a way through it then we will move to industrial action. There is no doubt whatsoever that we can create disputes throughout next year.’
Although few would argue against the notion that the government’s finances are in a dire state and spending cuts together with tax rises are needed, the controversy seems to lie in exactly when these cuts should take place and how severe they should be. For many, cutting government spending and raising taxes whilst the economy is still in recession is asking for trouble. For others, it’s the right thing to do and everyone should play a part in helping to return government finances to a semblance of balance. The Labour government has traditionally supported trade unions, but even their leadership backed the government’s plan for pay restraint for public sector workers. This, together with the continuing debates over public sector pensions has clearly angered many public sector workers, thus creating this ‘inevitable’ industrial action over the coming year.
Unison and GMB have said that they will be working together in order to try to better pay and conditions for its members, by co-ordinating public-sector strikes around Spring next year. Co-ordinated strikes across a variety of sectors could create havoc for the economy. Not just disruption for the everyday person, but losses for businesses and the economy. A general strike has not taken place since 1926, but it is thought that TUC delegates will be voting on whether or not one should be planned. So, when faced with these inevitable strikes, should the government back down and cut back on austerity or stand up to them and suffer the disruption of a strike, whilst continuing on with bringing its budget back on track? The following articles look at the TUC Congress and the proposed strike action.
Public sector unions plan Spring strikes Guardian, Dan Milmo (9/9/12)
Trade union warns of further strikes Financial Times, Brian Groom (7/9/12)
Trade union officials gather for TUC Congress in Brighton BBC News, John Moylan (9/9/12)
Unite union leader warns of wave of public sector strikes Guardian, Dan Milmo (7/9/12)
Unison and GMB unions planning co-ordinated strikes over pay BBC News, Justin Parkinson (9/9/12)
TUC Conference 2012: a mixture of new and old Channel 4 News (9/9/12)
Government must stand up to these TUC bully tactics Express, Leo McKinstry (9/9/12)
Questions
- What is the purpose of a trade union?
- What is the difference between individual and collective bargaining? Why is collective bargaining likely to be more successful in achieving certain aims?
- If there is co-ordinated strike action, what are the likely costs for (a) the workers on strike (b) the non-striking workers (c) businesses and (d) the economy?
- What are the main issues being debated between unions and the government?
- Explain the economic reasoning behind Dave Prentis’ statement that people are being moved into poverty.
- Do you agree with strike action? Do you think it has any effect?
- When do you think is the right time to implement austerity measures? Has the government got it right? As always, make sure you explain your answer!!
Australia was one of the few economies that seemed to be somewhat insulated from the 2008/09 recession and credit crunch. However, with the UK now back in recession and global economic conditions worsening in much of Europe, Australia has now joined the list of countries that are experiencing economic conditions that are ‘weaker than forecast’.
Today’s world involves economies that are increasingly interdependent, hence the spread of the world economic slowdown. As such, with weak global demand, Australia has started to feel the effects, with demand for its goods and raw materials falling. This has led Australia’s central bank – the Reserve Bank of Australia – to cut its key interest rate (the ‘cash rate’) by more than expected. The rate had been at 4.25% and it was widely believed that a 0.25 percentage point cut would occur. However, the central bank cut the cash rate rate to 3.75% to counter the weakening conditions. The Reserve Bank said:
“This decision is based on information received over the past few months that suggests that economic conditions have been somewhat weaker than expected, while inflation has moderated …Growth in the world economy slowed in the second half of 2011, and is likely to continue at a below-trend pace this year.”
Banks’ interest rates have been falling in Australia for the past few months and this latest cut will do much to help financially squeezed households. Data show that Australian house sales have fallen, as have house prices, and retail sales have fared little better.
Lower interest rates are often a tool used to steer inflation and the Australian central bank may not have been as willing to cut rates had the inflation rate not come down in recent months. Keeping consumer prices under control remains a top priority for the central bank and so it will be interesting to see the impact that these rate cuts will have on the Australian economy.
Articles
Australia cenbank surprises with aggressive half point rate cut Reuters, Wayne Cole (1/5/12)
Australia cuts rates by than forecast to 3.75% BBC News (1/5/12)
Banks unlikely to pass on full rate cut The Australian, Wall Street Journal, Peter Trute (1/5/12)
Australia cuts rate to support economy Financial Times, Neil Hume (1/5/12)
Australia slashes interest rates by 0.5pc to boost economy The Telegraph (1/5/12)
Australia cuts interest rates as economy slows Guardian, Phillip Inman (1/5/12)
Banks must pass on rate cut: businesses Sydney Morning Herald, Ehssan Veiszadeh (1/5/12)
Bond prices rally after rate cut Sydney Morning Herald (1/5/12)
Surplus remains appropriate: Swan Sydney Morning Herald, Colin Brinsden (1/5/12)
Webcasts
Reserve Bank of Australia Cuts Rates by 50 Basis Points to 3.75% CNBC video, Lauren Rosborough (1/5/12)
Further `Modest’ RBA Easing Possible, ANZ Says Bloomberg, Tony Morriss (1/5/12)
Australia’s central bank shifts focus to growth BBC News, Duncan Kennedy (1/5/12)
Questions
- Which factors will a central bank consider when setting interest rates?
- Explain the components of aggregate demand that will be affected by a lower rate of interest.
- Using diagrams to illustrate the process, explain both the interest-rate and the exchange-rate transmission mechanisms of the fall in interest rates.
- How are interest rates used to target inflation?
- How will lower rates of interest help the Australian economy recover from weakening global economic conditions?
- Why are Australia’s banks unlikely to pass on the full rate cut to consumers?
- Why did bond prices rise and the Australian dollar depreciate after the rate cut? Why does this suggest that a 0.5% cut was greater than anticpated by markets?
Between December 2007 and March 2009, the Bank of England reduced Bank Rate on several occasions in order to stimulate the economy and combat recession. By March 2009, the rate stood at a record low of 0.5%. Each month the Monetary Policy Committee meets to decide on interest rates and since March 2009, the members’ decision has consistently been that Bank Rate needs to remain at 0.5%.
Although the UK economy has been making tentative steps towards recovery, it is still in a very vulnerable state. Last month, the Bank of England extended its programme of quantitative easing to a total £325bn stimulus. This, together with the decision to keep interest rates down and with the shock fall in manufacturing output contributing towards first quarter growth of just 0.1%, is a key indication that the UK economy is still struggling, even though the central bank thinks it unlikely that the UK will re-enter recession this year.
Monetary policy in the UK has been very much geared towards stimulating economic growth, despite interest rates typically being the main tool to keep inflation on target at 2%. The problem facing the central bank is that economic growth and inflation are in something of a conflict. Low interest rates to stimulate economic growth also create a higher inflation environment and that is the trade-off the economy has faced. Inflation has been well above its target for some months (a high of 5.2% in September 2011), and the low interest rate environment has done little to deflate the figure. After all, low interest rates are a monetary instrument that can be used to boost aggregate demand, which can then create demand-pull inflation. However, inflation is now slowly beginning to fall, but this downward trend could be reversed with the sky high oil prices we are recently experiencing. If inflation does begin to creep back up, the Monetary Policy Committee will once again face a decision: keep Bank Rate low and continue with quantitative easing to stimulate the economy or increase Bank Rate to counter the higher rate of inflation.
The data over recent months has been truly inconsistent. Some indicators suggest improvements in the economy and the financial environment, whereas others indicate an economic situation that is moving very quickly in the wrong direction. A key factor is that the direction the UK economy takes is very much dependent on the world economy and, in particular, on how events in the eurozone unfold. The following articles consider some of the latest economic developments.
UK economy grew 0.1% to avoid recession, says NIESR Guardian, Katie Allen (5/4/12)
UK interest rates held at 0.5% BBC News (5/4/12)
UK just about avoided recession in Q1, NIESR says Telegraph, Angela Monaghan (5/4/12)
Bank of England keeps interest rates on hold at 0.5pc Telegraph (5/4/12)
UK economy ‘weak but showing signs of improvement’ BBC News (3/4/12)
Bank of England holds on quantitative easing and interest rates Guardian, Katie Allen (5/4/12)
Faith on Tories on economy hits new low Financial Times, Helen Warrell (6/4/12)
Questions
- Which factors will the Monetary Policy Committee consider when setting interest rates?
- Using a diagram to help your answer, illustrate and explain the trade-off that the MPC faces when choosing to keep interest rates low or raise them.
- What is quantitative easing? How is it expected to boost economic growth in the UK?
- Which factors are likely to have contributed towards the low growth rate the UK economy experienced in the first quarter of 2012?
- Explain the trends that we have seen in UK inflation over the past year. What factors have caused the figure to increase to a high in September and then fall back down?
- What do you expect to happen to inflation over the next few months? To what extent is your answer dependent on the MPC’s interest rate decisions?
- Although the official figures suggest that the UK avoided a double-dip recession, do you agree with this assessment? Explain your answer.
In the third quarter of 2011, the UK economy grew by 0.6% – nothing to shout about, but at least it was positive. Since then there has been growing concern about the state of the recovery with many commentators widely expecting to see much lower growth in the final quarter of last year.
Today, those commentators were proved right, as official figures released show the UK economy shrank by 0.2%. It doesn’t mean we’re in a recession (that requires 2 successive quarters of negative growth), but if growth doesn’t pick up in quarter 1 of 2012, then ‘Double-Dip Recession’ headlines will fill the front page.
Despite the disappointment that the UK economy has shrunk, the figures were not wholly unexpected, especially given the data released a week or so before, which showed unemployment had risen. Furthermore, with the crisis in the eurozone and many other countries still struggling to mount an economic recovery, there have been few external stimuli for the UK.
Although the fall in growth was larger than expected (0.2% as opposed to the predicted 0.1%), the UK economy is expected to grow throughout 2012. However, the IMF has reduced its forecast annual growth rate from 1.6% to 0.6%. The economic climate for 2012 remains uncertain and much will depend on developments in the eurozone. Further problems could spell trouble, but if there is an improvement in the fortunes of Europe, confidence could return to the markets and economic recovery could be faster. Ian McCafferty, the Chief Economic Adviser of the CBI said:
While the acute fears seen at the end of last year over global demand may be subsiding, 2012 will prove to be a difficult year for UK manufacturing, as the crisis in the eurozone – our biggest export market – has yet to reach any definitive resolution.
Whether or not we do move into a double-dip recession is uncertain and following this latest data, many commentators say it is a 50:50 change; and even then it hinges on many factors. However, even if quarter 1 of 2012 sees negative growth and hence a return to recession for the UK, Chris Williamson from Markit said that ‘there are growing indications that any downturn is likely to be ‘mild and short-lived’. The following articles consider the state of the UK economy.
Unemployment to soar as UK heads back into recession The Telegraph, Philip Aldrick (25/1/12)
UK economy shrinks by 0.2% in last 3 months of 2011 BBC News (25/1/12)
UK GDP: what the economists say Guardian (25/1/12)
UK recession threat: can we dodge the double dip? Citywire, Chris Marshall (25/1/12)
Double-dip recession fears as UK economy shrinks 0.2 percent Independent, Peter Cripps (25/1/12)
PM says ‘no complacency’ on economy Financial Times, Norma Cohen and Elizabeth Rigby (25/1/12)
The UK economy is shrinking. Time to listen to gloom-mongers? Guardian, Phillip Inman (25/1/12)
UK economy shrinks in Q4, raising recession fears The Associated Press (25/1/12)
FTSE CLOSE: Stocks slide as 0.2% GDP fall sparks recession fears; banks among the biggest fallers This is Money (25/1/12)
Sorrell: ‘UK will avoid double-dip recession’ Sky News, Tom Rayner (25/1/12)
Recovery in rehab BBC News, Stephanie Flanders (25/1/12)
Questions
- How is a recession defined? What are the typical characteristics of a recession? (Think about the macroeconomic objectives).
- Which particular sectors of the UK economy were the most severely affected in Q4 of 2011?
- Examine the main causes of the UK’s decline in national output.
- Which of the causes identified in question 3 do you think is the key factor keeping UK national output from growing? Explain your answer.
- Why is there a growing presence of companies from emerging markets in the top 100?
- Why are many commentators suggesting that even if the UK goes into a recession, it is likely to be ‘mild and short-lived’?
- What has happened to stock markets following the release of this latest economic data?
- Evaluate the options open to the Coalition government in stimulating the UK economy. To what extent would your policy solution damage the Coalition’s aim of cutting the UK’s structural budget deficit?
