Friday, July 23, 2004

Time for the bear to rear it's head.

A marked slowdown for the US in the second half of 2004 looks to be a sure bet. Japan's robust recovery still looks highly dependent on exports, both to the slowing US and, as Stephen Roach tells us today, overheating China.
The China slowdown has barely begun. Yet the latest spin is that a soft landing may now be close at hand. Nothing could be further from the truth. Chinese economic activity is still expanding at a torrid and unsustainable pace. The nation�s authorities cannot afford to ease off on their campaign of policy restraint. If they do, an overheated Chinese economy runs the serious risk of a destabilizing hard landing.

. . . Industrial output growth held at 16.2% in June -- down only marginally from peak comparisons of 19.4% in the first two months of this year and well above the 10% trend-line increases of the past 10 years. At the same time, the growth in energy generation barely moderated from 16.6% in May to 14.3% in June -- although it may well be that this �slowing� was more an outgrowth of the widespread power shortages of an overheated economy. In my view, the industrial output comparison needs to move into the 8% to 10% zone -- and then stay there for at least six months -- before a legitimate soft landing can be declared. From that point of view, China�s slowdown is, at best, only about 25% complete.

. . . there has been little let-up in China�s impact on economic activity elsewhere in the world -- yet another corroboration of the limited slowdown in the Chinese economy. In large part, that�s because Chinese import growth -- a good proxy for this nation�s impact on the rest of the world -- continues to power ahead. China�s purchases of foreign-made products accelerated sharply in June, surging at a 50.5% Y-o-Y rate -- well above the 40% gains recorded in 2003. . . . When Chinese industrial activity turns more decisively to the downside, as I continue to believe it will, the impacts on the global economy could be quite significant.
All this being said, Roach thinks China will not overheat and crash. He's more concerned that financial markets will price in a hard landing that isn't coming. So how's that for Roach -- he gives you a peek of optimistm only to snatch it away from you at the end.

1 Comments:

At 2:07 AM, Anonymous Anonymous said...

I don't give much to the "trend line" argument. Things can change, and what you did the past 10 years certainly does have a bearing on what you will do tomorrow, but it is limited. There are linear (or fixed-rate exponential) trends, but technology develops not as simply as that.

Which is not meant to dispute the central thesis of the article.

 

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