Like giants riding a seesaw, the world’s major economies can’t manage to be up at the same time
After 18 months of recession, the euro zone is finally growing — remember that? — again. That’s nice, but its 1.2 percent annualized growth in the second quarter of 2013 isn’t exactly sweet vindication for its austerity and tight money policies. Because, well, just look below.
Up until 2011, the recession and the recovery had mostly tracked each other on both sides of the Atlantic. But then the euro zone went full austerian. The European Central Bank (ECB) disastrously hiked interest rates twice in 2011 to fight off some, yes, transitory commodity price inflation — and, in the process, took the euro crisis from acute to existential. Of course, it didn’t help that the European Commission forced deep budget cuts on the euro’s crisis countries, and not quite as deep cuts on the rest. The common currency became an austerity suicide pact.
It turns out contractionary policy really is contractionary. And cutting back on contractionary policy is … less contractionary! Expansionary, even. The Mario Draghi-led ECB has been much more creative about throwing money at Europe’s problems, from long-term bank loans to promising to do “whatever it takes” to save the euro to rate cuts, and, now, some (admittedly ambiguous) promises to keep rates low for long. This pragmatism has been a bit contagious. The European Commission has also experimented with this bold, new strategy of not forcing the continent into deeper depression: it’s relaxed its deficit targets so countries don’t have to do even more austerity. It’s been enough to get France and Germany growing again, though it’s been uneven across the continent: Spain, Italy, and the Netherlands are still stuck in recession. (And the Eurocrats have, predictably, said that up is down here — they argue that growth is coming back because of austerity, not because there’s less austerity). In other words, Europe has stopped shooting itself in the foot for now — but it’s still a way off from walking.
But just as Europe is looking something approximating ambulatory, emerging markets are slowing from a brisk walk to, for them, a leisurely stroll. Indeed, as the Wall Street Journal points out, developed nations are now contributing more than developing ones for the first time since mid-2007. You can see some of that in the chart below from the Journal, which shows how industrial production has been falling in all of the big emerging markets the past year. (Note: Anything over 50 means production is expanding; anything below it means it’s slowing).
This is what the end of China’s mega-growth looks like. Roughly speaking, there had been two ways for a country to get rich: being the United States or selling things to the United States. But China is so big and so good at the latter that there’s been a new way to get rich — selling things to China. So when China slows down, which it very much is now, everyone else does too. Indeed, China’s year-over-year growth has fallen from a high of 14 percent in 2007 to “just” 7.5 percent today — and maybe less. Now, it’s inevitable that China’s catchup growth will stop once it’s caught up, but the question now is just how evitable this slowdown has been. In other words, is China slowing down because that’s what happens when you get rich, or is it slowing down before it gets rich because of something else?
China is stuck in between two models right now. Before 2008, it was getting rich selling things to the United States. But since 2008, it’s gotten rich building the things it needs to be rich. That hasn’t mattered much to the countries selling things to China, but it has mattered to China itself. Local governments and developers have taken on a ton of debt building infrastructure the past five years — some of it to nowhere (for now, at least). In other words, credit-fueled domestic demand has replaced export demand. And now the government is worried that there’s been too much credit. As The Economist pointed out last September, the new leadership seems more concerned about preempting a bubble than preempting a slowdown. And that’s probably why the central bank jacked up short-term interest rates back in June — it wanted to rein in its rapidly rising shadow banking system. Forcing lenders into bankruptcy is certainly one way of doing so, but it’s not so great for growth. In China and the rest of the emerging markets.
We just can’t coordinate this global recovery thing. It’s taken 20 years, but Japan has finally decided to do something about its deflation and subpar growth. Europe has finally figured out that it shouldn’t keep trying to make itself poorer, no matter how morally satisfying it may seem. But now China is worried how sustainable its debt-driven growth has been — which has made other developing nations’ growth less sustainable. Add it all up, and it mostly offsets. The global economy is growing about as much this year as it did last year.
It could be so much better if policymakers would just let it.