The one word that has been used again and again to describe the global economic rebound is “fragile.” The G-20 featured it prominently in final declaration issued after its June Toronto summit. And recently, more and more signs have emerged that the recovery is even more fragile than many had anticipated just weeks ago. Stephen Gandel already warned on Friday about the worrisome jobs situation in the U.S. That followed reports on the continued struggles of the housing market and the downward revision of first quarter U.S. GDP. Bad news also continues stream out of Europe. The persistent self-destructive cuts in fiscal spending pursued by some European governments will almost definitely drag on an already weak recovery, while unemployment in the Eurozone barely budged in May and stands at an awful 10%.
Now it looks like Asia, the guiding light of the post-recession world, is hitting speed bumps as well. What does that mean for the world economy? It’s just more evidence that the entire global recovery may be running out of steam.
Even mighty China isn’t immune from the gloom. June’s purchasing managers index (or PMI) – a key indicator of the health and direction of the manufacturing sector – dropped more than expected, which means that industrial output is likely to slow in coming months. On top of that, Beijing’s efforts to rein in the ridiculous expansion of credit, including direct government controls on bank lending, appear to be having some dampening effect on the economy as well. Goldman Sachs last week downgraded its forecast for China’s GDP growth in 2010 to 10.1% from 11.4% previously. Though that’s still blistering by world standards, it is a significant drop in absolute terms, and means, Goldman says, that growth in the second and third quarters will likely be 8% or lower. While the rest of the world is trying to figure out when to start curtailing loose monetary policies, Goldman, believe it or not, is already predicting that China’s government will reverse its tightening policies due to the slowdown, perhaps later in the year. Here are Goldman’s Yu Song and Helen Qiao:
If the current policy stance is kept for too long possibly because of the different views on the state of the economy and importance of different policy goals, growth can trend down even further than we are forecasting. On the other hand, actual policy making over the past year or so has demonstrated significant flexibility and a policy stance change may come earlier than we are forecasting.
China isn’t alone. PMIs weakened across Asia in June, pointing to slower industrial output and exports across the board. How worrying is this trend? Frederic Neumann, co-head of Asian economic research at HSBC, says “don’t panic:”
After soaring over the first five months of the year, activity in Asia has started to level off. To be sure, the slowdown isn’t reflected yet in real activity data…But, the PMI’s are clearly pointing south and Asia’s lead indicators have turned the wrong way as well. Shame. Still, this is not a double dip: it’s only that restocking is fading and the fiscal stimulus is wearing off. As growth rotates to private demand in Asia, expect a couple of months of less stellar data.
Simon Hayes, an economist at Barclays Capital, echoes Neumann’s sentiments, saying a slowdown in Asia was inevitable and isn’t a disaster:
We view the recent (emerging) Asian data as consistent with the effects of policy tightening in those countries that exited most quickly from the recession…The June PMIs in China point to a moderation in growth, but we judge this to be a necessary, policy-induced slowdown… We would emphasize, however, that our above-consensus global growth forecast already factors in a pronounced slowing in (emerging) Asia activity. Having hit 10.5% q/q saar in Q1, we forecast GDP growth to moderate to 9% in Q2 and to about 7.5% in H2. Partly, this reflects the reduced fiscal impulse that provided a significant support to the region’s growth in 2008 and 2009. However, it also reflects our view that the recent blistering pace of growth (in Asia) could not be sustained without economies overheating and that growth will be reined in by tighter monetary conditions.
So should we be alarmed? It was of course almost a certainty that Asia wouldn’t be able to fully maintain its dramatic surge out of the Great Recession if the rest of the world was mired in a pathetic recovery. Asia has many more sources of growth within the region than it had in previous global downturns, but the consumers of the West are still too important to the region’s overall growth story for Asia to be completely protected from what’s happening in the rest of the world. My feeling at this stage though is that Asia won’t see a “double-dip” recession. Economic activity may moderate, but I think the rebound has been strong enough to carry Asia through (unless the West falls into another serious crisis).
However, Asia has been one of the primary engines of the worldwide rebound. If that engine cools down, even a bit, that will act as yet another drag on what is already an uninspiring global recovery. Add in the impact of misguided austerity measures and continued high unemployment, and this fragile recovery may not look like much of a recovery at all.