Chinese Economic Slowdown Could Be First Economic Upset in 20 Years

july-24-03Over the last month, statistics have been emerging that indicate growing fears of a downturn in Chinese economic output. The first, a surprising 3.1 percent decline in imports that was released in early July, sparked a debate about the potential for the world’s fastest-growing economy to experience a severe economic slowdown.

Despite the fears, however, growth in China is still relatively strong. Economists think that the country, which has been the world’s fastest-growing major economy for the past decade, will experience 7.5 percent growth in the second quarter. The primary driver of China’s economy is manufacturing, which has declined as many of China’s key international export markets face their own financial concerns.

The fears, however, need to be put in the context of China’s growth. China has not experienced a recession in over 20 years, with constant growth in manufacturing pushing the East Asian economic giant into a dominant position. The ‘crisis’, as it’s being reported, is merely a decline in China’s already incredible growth rate.

The downturn in growth has some serious potential consequences for China, with faith in the ruling Communist Party likely to decrease as economic opportunities become less plentiful. The government has recently taken steps to transition the economy, which is largely export-driven, into a more sustainable model.

Economists have also raised concerns about China’s long-term prospects given the downturn in demand from its top export nations. Some believe that consumers in China, which has long valued exports over domestic consumption, may not have a buying power great enough to sustain the country’s economy.

The decline in Chinese growth, however severe it may be, will certainly be a major headline for the coming months. Once the world’s most inspiring growth story, an extended period of decline in Chinese output could make it a mixed tale of caution and optimism.

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Federal Reserve May Delay Changes Due to Slow Economic Progress

june-27-01The Federal Reserve’s plan to taper off quantitative easing may take slightly longer than expected as United States economic growth was revised to be lower than most analysts expected. The US economy grew by approximately 1.8 percent per year in recent figures reported by the United States Department of Commerce.

The 1.8 figure came as a surprise to many in the economic community, who had held tightly to the previous Commerce Department prediction of 2.4 percent growth. The downward shift has been attributed to decreased consumer spending as a growing number of American households deal with reduced income and spending power.

Despite being significantly below the Commerce Department’s previous figure, the 1.8 percent growth isn’t been seen as a major let-down. Factors such as the removal of a two percent tax break for workers on payroll taxes and a reduction in spending amongst government departments are seen as leading cases for the slow growth.

The poor economic growth rate may affect the Federal Reserve’s plan to reduce its involvement in the United States economy. The Fed, as it’s known, has engaged in a large-scale quantitative easing program known as QE3 to revive the United States’ economy after one of the worst recessions in recent history.

Federal Reserve policies have been built around the possibility of renewed growth in the United States fuelled by consumer spending. Low wage growth and the large downturn in Chinese economic growth are seen as major threats to the strength of the United States economy, and a possible cause of delay to the end of QE3.

Despite the slow economic growth figures, the United States economy hasn’t fared poorly over the past year. The housing market, which was devastated following the 2008 economic crisis, is recovering, with homebuilding at the highest rate in recent years and prices increasing across the country.

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Although the Queen’s Diamond Jubilee brought a small burst of activity in the retail sector, house prices continue to fall. This appears to be indicative of the fact that the UK is still deeply mired in the double dip recession which many forecast to ongoing for at least this year.

According to RICS, the Royal Institute of Chartered Surveyors, fewer homes are being put on the market and, in fact, the housing market remains fragile. Since there is still a great deal of consternation over the debt crisis in the EU, the market will probably continue to be sluggish. As well, since the stamp duty holiday ended a few months back fewer people have been looking for homes.

The chief economist for RICS has been quoted as saying that the market didn’t turn around in the previous month and activity has remained slow. Approximately 66% of the surveyors stated that prices are not picking up and about one-fifth of surveyors reported that prices are actually dropping instead of rising.

Surveyors are also not optimistic for the coming year. During the month of May, 8pc of surveyors questioned felt that there would be a drop in prices over the next year but when questioned in June, 19pc responded that prices will continue to fall.

At the moment it is hoped that something will be done for first-time buyers to make purchasing a home easier to accomplish. Until the economy picks up again, it will probably take some form of incentive to boost sales of homes.

The news isn’t totally bad however as retail sales have picked up a bit due to the Jubilee and with the upcoming Olympic Games. The next few months should also see a wider profit margin as well. Even so, this rise in retail will most likely not be enough to lift the UK out of recession.

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After July’s meeting on Thursday, the BoE announced historically low interest rates would be held at just 0.5% and that they would be injecting another £50 billion into a struggling economy. This comes at a time when the UK is already in a double dip recession and fears are growing that the recession will continue for yet another quarter or perhaps be upgraded to a full-blown recession in the months to come.

The Monetary Policy Committee acted after the Bank’s Governor, Sir Mervyn King, stated in previous days that he was in shock over the state of financial affairs in Britain and how they had degenerated continually within the past half year. This was revealed during the twice-yearly Financial Stability Report which had been made public the previous week.

According to economists, the UK economy is continuing to shrink and perhaps in the best case scenario, remains flat as of the second quarter of 2012. This would mean that the final quarter of last year as well as the first two of the current year have been mired in recession and does not bode well for prospects in the near future. Although there is no actual way to define a ‘depression’ which can be agreed upon within the UK or in other countries, it is generally labeled as such when a country sustains a recession for at least two years in a row.

Even so, this new round of QE is not expected to provide great yields but may boost confidence a bit. The Deputy Director General of CBI states that the UK should also consider alternatives such as investing in “high grade corporate paper and bank bonds.” He further contends that although this isn’t the final solution, it will give a boost to some businesses during this difficult time.

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This week David Miles, one of the members of the Monetary Policy Committee, addressed the Society of Business Economists stating that this recession is the worst of any within the past century. He contends that the current recession was caused by a banking crisis said to be the worst in history. In fact, the current recession is indeed 9% lower than the 1973 recession.

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In new figures being released by the ONS the recession is deeper than previously thought due to a weak construction sector. Previously it had been reported that the economy was down by 0.2pc but it has been revised downward even further to 0.3pc for the first quarter of 2012.

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The latest data released by the ONS shows that earlier predictions were a bit over-optimistic. Output prices were higher than had been forecast for last month, higher than the 0.7 percent predicted in March.

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As political tensions in France, the Czech Republic and the Netherlands escalated, the FTSE 100 fell by 2% which is causing renewed fears over the stability of the eurozone and the single currency. Mark Rutte, the prime minister of the Netherlands handed in his resignation which further added to market woes as the sense of instability increased.

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Christmas spirit lacking in retail sales

This time of year is usually bustling with activity as shoppers prepare for the Christmas holiday yet this year fears of an impending recession have kept shoppers subdued. According to the most recent survey compiled by the British Retail Consortium, BRC, shoppers are reluctant to part with their money. Although sales were up in November by 0.7% above the same month of last year, they are down by 1.6% overall in the year in like-for-like sales.

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UK manufacturing is the only sector showing slight rise

After four months of falling output in the manufacturing sector September finally saw a rise, even if slight. Over the previous four months, Britain’s manufacturing output had been down by 0.3% but with a .2% increase for the month of September there is some small amount of hope.

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