Last week, China released its third quarter gross domestic product (GDP) growth report, as did the UK. China’s real growth rate was reported at 8.9% and year-to-date GDP growth was reported to be 7.7%, up from 7.1% in the first half of the year. There are no expenditure breakdowns. So, it is hard to pinpoint the growth drivers. Predictably, analysts have raised their growth estimates for 2009 and 2010. It is hard to understand the basis.
Net exports have not been a strong driver of growth this year, given the collapse in exports. Imports have reportedly surged because of China’s commodity purchases. It is not clear if all of them have been used up in the production process. The evidence is unpersuasive. Some of them were meant to use up the US dollar reserves and some of them are intended for speculation. Even private investors appear to have accumulated inventories of industrial metals. For instance, inventories of most base metals have doubled in 2009 and copper inventories alone are up 500% (go to mpettis.com/2009/10/china%e2%80%99s-september-data-suggest-that-the-long-term-overcapacity-problem-is-only-intensifying/). In other words, China’s diminished reliance on net exports is not a consequence of rebalancing of growth drivers towards demand but more due to import and accumulation of resources. On balance, there was not much in the report to warrant renewed optimism on growth in 2010.
The UK reported disappointing growth figures. Real GDP contracted 0.4% in Q3 on top of the contraction of 0.6% in Q2. Nominal GDP contracted for the fourth consecutive quarter. The number of hours worked by UK workers continues to contract. From the peak in February 2008, hours worked in the UK have dropped by 4.6%. Unfortunately, the cash for clunkers programme was either missing in the UK or it was not successful. Industrial production declined sequentially in the third quarter. Hence, there was no productivity growth to talk about. Output per worker has dropped, on an annual basis, for four consecutive quarters.
It is no surprise that the Bank of England is determined to get the pound to weaken to the point where it makes sense for the UK to revive its manufacturing. Given the collapse in financial services there, it might take a lot longer for growth to revive. The economy had become overwhelmingly dependent on financial alchemy in recent years. This makes any revival in London property prices wholly premature and unjustified.
Now, we turn to the US where the preliminary estimate of the third quarter GDP is due for release this week. Growth should be strong, given that hours worked had shrunk by 3.2% (annualized) in the quarter and yet industrial production has surged 5.1% (annualized) in the third quarter (comparing the average level of the index of industrial production in Q3 over Q2). Hence, it appears likely that the third quarter growth number tops the Bloomberg consensus forecast of 3.2% (annualized). However, all of this is due to the cash for clunkers (exchange of old cars for new cars with a government cash rebate) programme that lifted automobile production massively in the third quarter.
To put some perspective, in the third quarter, production of motor vehicles rose an annualized 76%. However, there was hardly any flutter in the rest of the manufacturing sector. Production of durable manufactured goods (it includes motor vehicles) rose by “only” 12% (annualized) in the third quarter and growth in production of all manufactured goods (durable and non-durable) was “only” 7.6% (annualized). It must be obvious to the reader that, excluding motor vehicles, industrial production remains rather weak. Therefore, all that the programme has done is to borrow growth from the future. Indeed, the stronger the third quarter number, the more pronounced would be the weakness in the coming quarter. Automobile sales in September—sharply lower from August after the end of the cash for clunkers programme—already gave us an inkling of the shape of things to come.
This shows both the fallacy and eventual futility of excessive government intervention in an economic downturn. The government should assist weak, oppressed and marginalized segments of society to weather the downturn. Beyond that, the downturn should be allowed to run its course. It weeds out uncompetitive industries while it brings down costs and bestows a higher degree of competitiveness to the survivors.
To the extent that the US puts economic growth on a pedestal, there will be no end to its excessive stimulus—whether of the monetary or the fiscal variety. Other countries in the world (mostly China and other East Asian nations) that operate on a US dollar standard would thus be importing the US policy setting that is wholly inappropriate to their growth pattern.
No wonder Gillian Tett wrote in the Financial Times (Click here to read) that all of these sounded rather familiar even as she hoped her sense of foreboding was wrong. Her reasoning is more solid.
V. Anantha Nageswaran is chief investment officer for an international wealth manager. These are his personal views. Your comments are welcome at firstname.lastname@example.org