The Great Debate UK

Britain’s economy should learn to speak a little Chinese

- John Ross is visiting professor at Shanghai’s Jiao Tong University where he writes a blog on globalisation. The views expressed are his own. -

The success of China’s economic stimulus package has attracted increasing attention in Britain and internationally for two reasons. The first is simply its importance for the world economy. Second whether there are general lessons to be learned.

The impact of China’s economic programme can be seen in that it is likely the whole of world economic growth this year in net terms will be accounted for by China.

The sceptics on China’s stimulus package have been disproved by the facts. China’s GDP growth this year will be eight percent or slightly above. China’s GDP grew by 7.9 percent year-on-year in the second quarter and was accelerating –- the best private sector estimates are China’s economy grew at an annualised 13-15 percent in the second quarter. Urban investment increased 34 percent and as producer prices were dropping the real increase was probably around 40 percent. Retail sales increased 15 percent.

This is a stellar performance in conditions where most major world economies will shrink this year. Compared to these results talk of possible “green shoots” in other economies relates to minor improvements.

China’s economy is not large enough that its growth is able by itself to turn round the world economy. But it is sufficient to having a stabilising effect in East Asia with beneficial knock on consequences. Those wanting further detail on the scale of contribution of China’s growth to the world economy should read Professor Danny Quah, of the London School of Economics’, excellent recent paper on Asian growth.

But if the significance of the scale of the international impact of China’s economic performance is evident are there policy lessons which can be drawn by Britain?

from The Great Debate:

First exit for the Fed

-- Agnes T. Crane is a Reuters columnist. The views expressed are her own --

Call it a battle for beginnings and endings, and the Federal Reserve is smack in the middle.

As Fed policymakers convene for a two-day meeting starting on Tuesday, the lines are growing more defined between those who want the Fed to do more to stimulate a still fragile economy, and those who are calling for a defined exit strategy to prevent the global economy from going into an inflation-inducing overdrive.

There's a way to placate both camps, at least in the near-term, and that's for Ben Bernanke and his colleagues to retire some of the temporary short-term lending facilities put in place at the height of the financial meltdown last year.

It would show good faith that the U.S. is serious about exiting some of those emergency facilities, and it would give the central bank breathing room to keep its ultra-easy monetary policy in place until it's ready to call the all clear.

Bernanke, as a scholar of the Depression, is all too aware of what can happen should the central bank move too quickly and forcefully in removing stimulus.

One program in particular is a ripe candidate - the Commercial Paper Funding Facility.

Issues in monetary normalisation

– John Kemp is a Reuters columnist. The views expressed are his own –

Investors like simple narratives, which is why markets swing erratically and illogically between extremes of hope and fear. Reality is more complex. As F. Scott Fitzgerald remarked “the true test of a first-rate mind is the ability to hold two contradictory ideas at the same time”.

The bond market is currently struggling to reconcile contradictory fears about inflation and recession, not always successfully.

The medium-term outlook for the U.S. economy is dominated by the risk of inflation as massive injections of liquidity eventually fuel a rebound in economic activity accompanied by widespread price increases, starting with oil and other commodities and spreading to the rest of the manufacturing system. In effect, this would be a destabilising repetition of conditions that characterised the period between 2004 and 2008.

But in the short term, risks are concentrated on the downside. Households and businesses scarred by recession and burdened by a legacy of excessive debt from the boom years are unlikely to boost spending and investment significantly in the next year or two. So in its early stages, the recovery is likely to be halting and tepid, requiring significant support from monetary and fiscal stimulus.

The challenge for both markets and policymakers is to respond to a scenario in which monetary policy will remain ultra-loose for an extended period (to entrench the recovery) and then need to be tightened fairly rapidly (to prevent an inflationary breakout).

Past experience suggests the Federal Reserve and other central banks will find the first part easier than the second.

China economic forecasts: go herbal or Western?

(Wei Gu is a Reuters columnist. The opinions expressed are her own)

Which would you believe when it comes to diagnosing the health of China’s economy — the pulse-taking of the herbal doctor or the lab tests of Western medicine?

Beijing’s leaders are like the herbal doctors, using creative metrics such as power output and shipping indexes that can give a relatively accurate snapshot of manufacturing activity.

Private-sector economists, by comparison, believe in more mainstream data such as money supply and fixed asset investment even though they might not be completely useful in measuring a transitioning economy such as China.

Going by the latest economic indicators, the pulse shows the body is still listless, while the lab test is showing signs of a recovery to health. The last time this happened to China was in 2001, when the world was about to emerge from a brief recession.

It turns out that — like the debate over Western versus Eastern medicine — both methods have their pros and cons. And their relative advantages may be shifting as China itself changes.

SPECIAL INSIGHT Although very few Chinese leaders have an economics background, they still have a special insight into China’s economy. So, when Premier Wen Jiabao said that a key economic gauge is power consumption, people took notice.

from The Great Debate:

The recovery will feel familiar: lousy

-- James Saft is a Reuters columnist. The opinions expressed are his own --

The good news that the United States cannot keep contracting the way it has been is not to be confused with a return to robust expansion, a point financial markets eventually will grasp.

Consumers, the mainspring of the U.S. economy, will see the cash from government stimulus slip through their fingers but will still face very ugly personal balance sheets and a brutal job market. Their party is not going to get started again for some time.

And falling interest rates will have a hard time sparking investment by businesses until they become convinced that a recovery in manufacturing will do more than just take inventories from nearly empty to barely stocked.

The basic hope for the U.S. economy, that inventories are being run down so swiftly that a turn in the cycle must come, has been more or less confirmed by recent data.

The ISM manufacturing index advanced to 40.1 in April from 36.3, and especially encouraging is a sustained rebound in new orders, a leading indicator of forward demand, which having been more or less moribund in the early months of the year, now is in a sustained uptrend.

Inventories are still being cut, but this, optimists argue, is setting the stage for a recovery when managers see that their depleted stocks represent the threat of losing out on business.