Latest GDP Numbers: Time to Freak Out? (Updated)

Bloomberg columnist Willie Pesek writes that we should ignore China’s latest GDP growth figure, which slowed to 7.5% in the second quarter, because things “are much worse than they appear:”

Even if we take the 7.5 percent April-June growth rate at face value, its components suggest a more ominous scenario. Industrial production, for example, rose just 8.9 percent in June compared with May’s 9.2 percent gain. For an export-addicted, developing economy, those are anemic increases. It doesn’t take a vivid imagination to see how that will crimp consumption and income growth in the second half of 2013.

But what’s really at issue here is an unhealthy obsession with GDP numbers that tell us very little. What difference does it make if Beijing says it’s growing 7.7 percent or 7.5 percent or 7 percent? China’s level of output at the moment is certainly lower than any of these numbers. Just ask the factory-floor workers, steel-mill managers or electricity providers who are coping with the realities of fast-slowing Chinese demand.

[…] What markets should be focusing on is the herculean task Premier Li Keqiang faces in improving the quality of growth and weaning China off its addictions to exports and overinvestment. Investors should be concerned by the bad-debt crisis festering out in the provinces, and the risks of social instability as growth wanes. [Source]

Pesek’s pessimism reflects the outlook of a number of China hands who have long been skeptical of official Chinese economic statistics. Marketplace’s Rob Schmitz looked at what some have called the “Li Keqiang index” – electricity consumption, rail cargo volume, and bank lending numbers – and suggests that the actual GDP growth rate is “at least a percentage point lower than what the government says it is.” And The Wall Street Journal published an illustrated guide to China’s slowing economy, which is on pace for its lowest growth rate since 1990:

Another worrying sign for Beijing: China’s economy shows signs of tipping further off balance. The government wants consumption to play a bigger part in driving growth, taking over from overdone investment and exhausted exports. But so far in 2013, the reverse is happening.

The share of consumption in growth has fallen to 45.2%, down from 60.4% in the first half of 2012. The share of investment has risen to 53.9% from 51.2% over the same period. Exports make up the balance, shifting from a drag on growth in the first half of 2012 to a small positive contribution so far this year.

That’s reflected in lackluster growth in retail sales, which ticked up to 13.3% in June from 12.9% in May, but year-to-date have registered a decidedly downbeat 12.7% increase, compared to 14.3% in the first half of 2012. [Source]

Still, as Josh Noble of The Financial Times points out, some optimists see an “alternative China miracle in the works.” The Washington Post’s Max Fisher writes that there are “two very different ways to read what’s happening,” and summarizes the cases for and against freaking out:

The case for optimism: Beijing is in control

The collapse in the U.S. banking system and real estate market was uncontrolled: We didn’t prepare for them and were taken by surprise. But Chinese leaders are popping their country’s banking bubble deliberately, trying to do gently what would otherwise happen not-so-gently. They’re also deliberately trying to slow down the country’s overheated growth; this quarter’s GDP slowdown is actually well within official projections. It’s not a stall, it’s a careful slowdown made to avoid a stall.

What we’re seeing now might actually be the process of China forcing through some changes that will be painful in the short term so that it can both avert an unwanted crisis and make necessary long-term changes. China, economists agree, needs to stop growing its economy by exporting cheap products abroad while it builds vast housing developments and unnecessary infrastructure projects at home; stories of remote towns with two airports are way too common. The country has to make a very difficult, very important shift to an American-style economy, in which it focuses on selling stuff to Chinese consumers. For all sorts of reasons, this is easier if China’s economy slows down a bit. [Source]

Update: In an interview with The Washington Post’s Brad Plumer, former Tsinghua professor Patrick Chovanec offers a clear explanation of China’s current economic predicament, from its export-led boom over the past 30 years to the “creative destruction” ahead.

BP: What’s a best-case scenario for China?

PC: The good news is that if the Chinese economy goes through this process of adjustment, and if the economy is no longer diverting resources to unproductive purposes… if that happens, then there are real areas for potential productivity gains in the Chinese economy.

[…] The other piece of good news is that China has accumulated $3.4 trillion in foreign exchange reserves. […] That means that if China was willing, it could see a sharp slowdown in GDP as part of its adjustment but still sustain its standards of living. […]

So there are options, but they require very different thinking about the direction of the Chinese economy. And it’s human nature to do what works until it stops working. That was the problem Japan ran into when it faced an adjustment in the 1980s. The country resisted moving away from its successful export-led growth model.

BP: What’s the worst-case scenario for China?

PC: They continue to try squeeze every bit of growth from their existing growth model. Continue to create overcapacity. And they end up with an economy that either drifts like Japan’s did in the early 1990s, where they keep the economy from collapsing by over-investing. Or worse, they can’t keep that up and serious financial instability results, in the form of bank failures. I’m not predicting that, but that’s a possibility.

[…] The way I’d put it is this. China is facing a process of creative destruction right now. The creativity potential is real. But the destruction is real too. And you can put emphasis on whichever you want. [Source]


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