Over the last few weeks, global financial markets have once again demonstrated their predilection for over-reacting to ephemeral news. For their part, the media are always happy to pad out the 24-hour news cycle with a breaking crisis. If it's transient, so much the better: you can report a fresh crisis tomorrow. Together, the drama-queens of the markets and the media might confuse us about the prospect of the global economy.
And recently China has been hogging the headlines. As Leon Berkelmans noted, we should keep calm and wait to see what develops. It's certainly true that China now has such heft in the global economy (both through the size of its GDP and its importance in international trade, particularly commodities) that its prospects matter to the rest of us. But the recent news has focused on two rather minor short-term issues: a reversal of the unsustainable equity euphoria and a minor adjustment to the exchange rate. The important underlying issues are much the same as they were a month or a year ago:
- The economy's rate of expansion. Is China still growing at somewhere around 7%? Scepticism about official data is an old story among China watchers, and in the past the sceptics have been confounded. Will this time be different? Maybe, but some of the best commentators remain to be convinced that China is far off its normal growth track.
- Can China make a smooth transition from investment-led growth to consumption-led? This path is tricky and probably not without some bumps, but the same data which gives rise to growth concerns also suggest that this transition is underway. The recent rapid growth of the service sector (larger than manufacturing and construction taken together) suggests a shift to consumption. Services expansion doesn't require big capital expenditures, but it does employ a lot of people, so this fits apparent anomalies in the current data.
- The 2010 stimulus not only boosted GDP growth, it also boosted debt levels. Thus, China's growth of debt remains a concern. It's an established norm that countries going through financial deregulation routinely suffer a financial crisis. Again, expect bumps along the path, but there is not much new to add to these old stories.
- Did the Chinese market intervention demonstrate that policymakers have lost their sure touch or that their policy approach is no longer appropriate? Not really. They are, by nature, policy activists. Free-market commentators will disparage such intervention, but the ongoing consequences of this misstep are minor. It says little about underlying policy competence.
So much for China. But closer to home, commentators can't resist drawing parallels between current events in Southeast Asia and the 1997 Asian financial crisis. [fold]
Most egregious of these stretched comparisons is the observations that the Indonesian rupiah is now not far from its disastrous nadir during the worst days of 1998, with the implication that a repeat of the crisis is imminent.
True, the exchange rate is now 14,000 rupiah to the US dollar, compared with 16,000 on several occasions in 1998. But in 1998 this represented a drop of 80% within a few months. Those who had a loan denominated in dollars suddenly found their debt had gone up seven-fold in terms of rupiah. The current rate is down less than 10% so far this year and is around 25% below the average of recent years. This is not much different from the fall of the Australian dollar against the US dollar. The exchange rate of the rupiah against the Aussie remains around 10,000 – where it has been for the past few years. This is an unhappy outcome if you happened to have borrowed in US dollars, but it is not a national disaster.
It might even stir the authorities to focus more on economic policy, where there is much that could be done to demonstrate to financial markets that this is a routine commodity cycle, not a crisis.
What about the other emerging economies? The importance of these in global economic growth is illustrated in the chart below: it's not just China that has kept the world economy growing over the past decade, other emerging economies were important as well.
Here the news is rather mixed, as usual. Brazil has flopped back into its traditional disappointing under-performance. On the other hand, India might grow as fast as China. Around the rest of Asia, China's reduced import demand will be a dampener on growth, but once again this is a matter of degree, not crisis.
The IMF's latest forecast was made in July, before the China excitement. In any case, bureaucratic constraints prevent the Fund from ever forecasting a crisis. That said, the Fund's outlook is for 'business as usual'. As I have noted before, the Fund's commentary over the past three years has emphasised slowing economic growth, but its figures – actual and forecast – have shown a steady expansion (measured in terms of purchasing power parity) over the long-term average: around 3.5% globally, with emerging economies growing around 4.5%.
It's hard to fill the headlines with routine news. It's hard to make profits from financial trading if the markets are stable. So expect more of this confected panic from the professional doomsayers.