The Chinese economy is in descent, not quite free fall but close enough.
AUSTRALIAN mining companies and the federal Treasury face fresh pressure as China’s already sluggish economy heads for a further slowdown.
The latest surveys of China’s manufacturing industry showed that activity has continued to ease as the world’s second-largest economy faces a seventh consecutive quarter of slowing growth.
China’s biggest problem remains the continuing malaise in the critical export sector where growth has slowed dramatically due to poor economic conditions in its largest market, Europe, as well as the US, as wages and other costs in China continue to climb.
The closely watched official purchasing managers index (PMI), which covers large businesses, remained in negative territory at 49.8, up from 49.2 in August — its second month in negative territory. Any result below 50 shows activity decreasing.
A parallel HSBC survey of small and medium businesses saw the 11th contraction in a row with a result of 47.9.
Both results were lower than market expectations, and HSBC’s export sub-index hit a 42-month low.
You never hear Keynes mentioned any more, except maybe by me. Wherever we had these Keynesian stimuli, the result has been abysmal. The Australian economy, tied as its success was to Chinese growth, is also melting. The laughable attempt to bring the budget into surplus – highly destructive as well since it will be mostly attempted on the tax revenue side – is now matched by a desperate desire to see interest rates come down. We have a low official unemployment rate but that’s because so much of it is driven by public spending unsupported by value adding economic activity. It can’t last. As the front page article in The Australian points out:
Although the jobless rate is low, domestic pressures are building. The employer lobby Australian Industry Group’s latest business survey, released yesterday, shows that for the seventh consecutive month, a majority of manufacturing firms are contracting.
Contracting industry and they are rushing to balance the budget! Shame this never occurred to them in 2008.
Radio Australian Interview: I’ve just done a Radio Australia interview on Ross Garnaut’s comments last night where he said that Australia’s salad days had gone and our dog days have begun. His comment, from last night’s Lateline:
I said now we’re living in the salad days. In the salad days, ordinary economic policy looks good and good economic policies look stellar. But it won’t be very many years when the salad days turn into the dog days, when good economic policy looks terrible and ordinary economic policy looks in the dogs. . . .
Certainly the rhetoric from the Government about restraint in government expenditure is consistent with what’s required, and in fact in the last couple of years we’ve run very tight budgets by long historical standards.
But this has to be maintained now for quite a long period of time and I think lots of Australians haven’t assimilated that. We’ve got elements of the Australian community thinking that economic reform now is what gives more money to them.
And who’s his example for those who don’t appreciate the need for restraint, the Business Council. Wandering around the main town squares in Athens and Madrid ought to provide a better idea of who wants governments to keep spending money they no longer have.
Wayne Swan exploits the grief of the PM and her family in attempt to cover up his mis-management:
Token
2 Oct 12 at 9:05 am
Hi Steve.
Perhaps the general public don’t talk about J. M. Keynes specifically, if they ever did so, but make no mistake: most regrettably, Keynesian ideas are alive and well.
Catching a glimpse of European “business commentary” on television whilst at MPS a few weeks ago, replete with bankers, economists and journalists urging governments to “stimulate” the economy, proved to me that Keynesian ideas are definitely not in retreat.
Also, whenever I tend to speak to members of the general public (aka a “DIY economist”) about economic policy issues most tend to reflexively swallow the Rudd-Gillard-Swan line that $80 billion in “fiscal stimulus” saved the Australian economy from recession (when that actually isn’t the case).
Keynesianism isn’t quite dead yet, and we have difficult intellectual exertions in front of us if we are to slay this beast.
Julie Novak
2 Oct 12 at 9:20 am
Let this be a cautionary note to those hoping that CAGW is dying. Both Keynes and CAGW provide access to a lot of ‘funny money’. They will be with us until all of that money runs out, if it ever will when you look at Zimbabwe.
Biota
2 Oct 12 at 9:38 am
Steve – you have just proved why the ALP must balance the budget. If they renege on that promise all bets will be off and the deficit will go interstellar. Given the promises from Ms Gillard lately it may go interstellar anyway, but they MUST have some discipline over spending. Don’t give them an excuse to go full-on Keynesian. Please!
I should add that the asperation of mining companies (in my experience) is to be break-even at the bottom of the cycle. That is what a balanced budget is. Government should do likewise. When the business cycle improves you can spend the surplus as capital investment.
Bruce
2 Oct 12 at 10:41 am
Ross Garnaut? Sorry Mr Kates, thats bad company, the man is a pimp for the Air Sellers and demonstrably a hypocritical liar.
If you want to develop an argument why quote, whether true or not, from somebody who has no integrity and is a mercenary for the green loons?
Jannie
2 Oct 12 at 11:01 am
Steve asks “why doesn’t anybody mention Keynes any more?”.
He lives in a sheltered world. Krugman and many more still base their own work on Keynes, and nearer home, John Quiggin (with whom I agree on nothing else) has a splendid article on Keynes’ “Golden Age” paper, see JQ’s Blog 1st October.
Steve ends: “Wandering around the main town squares in Athens and Madrid ought to provide a better idea of who wants governments to keep spending money they no longer have”. Sure, and it also provides a great example of supply creating demand on every corner.
Tim Curtin
2 Oct 12 at 12:29 pm
Keynes may yet slip, but the public still believes the word ‘stimulus’ whenever a politician hears it. The word ‘stimulus’ has magic qualities – you hear it thrown around everywhere, politicians walking around with ammo belts full of magic bullets.
Until it can be patiently explained that everyone who used the word ‘stimulus’ was a charlatan, Keynes will be lording over the world for some time yet.
brc
2 Oct 12 at 1:04 pm
“Certainly the rhetoric from the Government about restraint in government expenditure is consistent with what’s required, and in fact in the last couple of years we’ve run very tight budgets by long historical standards.”
Sorry? What??
“Very tight budgets” which have been in deficit in excess of $40Billion each?
“..very tight budgets..”?? Tight compared to where?? Greece? Spain?
Maws
2 Oct 12 at 1:41 pm
Quite so, Maws
Entropy
2 Oct 12 at 1:46 pm
This budget is stuffed. It is an old oxen that has fallen to its knees in exhaustion from carrying the load of red and green tape, and the PS hangers on.
Even a cattle prod stuck up its arse and set on “cremate” will not shift this wretched beast.
It is a dead oxen, and has no beautiful plumage any more.
It’s not pining for the fjords, it’s plucked…
Winston SMITH
2 Oct 12 at 2:36 pm
Is this the same Ross Garnaut who told us to waste an enormous amount of public money on a problem which does not exist? Why would any one pay the slightest attention to anything this man says? I’m with you Jannie. Shame on you Cats giving this man oxygen!
Grandma
2 Oct 12 at 4:32 pm
Keynes or no Keynes, after this afternoon’s rate cut more people seeking a reasonable return on the savings will be forced into the stockmarket. As night follows day there will be, in due course, a transfer of wealth away from these poor unfortunates.
The Night Storker
2 Oct 12 at 5:18 pm
Indeed, Maws, I missed those ‘tight’ budgets too. Just what history is Garnaut referring to? It certainly isn’t Australian history, that’s for sure…
Skuter
2 Oct 12 at 5:45 pm
No one talks about Keynes anymore because of three basic reasons. Firstly, unlike Jesus Moses
Simon
2 Oct 12 at 6:16 pm
… and co he didn’t reveal any promised land and path to enlightenment just some BS about perpetual self financing, It’s a lot like the philosophers stone was to alchemy, turning base metals into gold regardless of what rubbish you started with. Secondly he was just another academic who in an era when you either invented something useful or became a communist spy in the British civil service. Thirdly he makes the sad little lefties of today look like they should have gone to a better school, got a better education and had alot more class and style, ala Garnaut.
Simon
2 Oct 12 at 7:03 pm
I’ve been worried about China for years now.
The world’s second largest, fastest growing economy is as corrupt and inefficient as the most backwards third world dictatorship one can imagine. Somewhere between Zimbabwe and Iran. Still with GDP growth rates of 14% and investment returns of up to 40% per annum between 2000 and 2008, why worry?
But no one wants to be the last left holding the bag. That’s why it’s been past on to the most clueless jackass in the region… Wayne Swan.
Massive foreign capital investments over the last 20 years have created a ridiculous property and industrial bubble even as the rule of law and property rights remain about 150 years behind Europe and even further behind the US.
What we are watching today is a slow mo implosion. Something like the WTC towers smouldering after the 911 airliner impacts. The catastrophic failure phase is still ahead and when it comes we’ll all be soooo surprised. Hey, there will probably be “Chiners” who like the Truthers think it’s all an evil Zionist/Cheney conspiracy.
You know what they say about a fool and his money.
In many ways, China isn’t even a “nation”, but an empire of different languages and cultures held together by brutal totalitarianism combined with a fragile peace kept by ever increasing GDP. Very much like the old Soviet Union, if growth collapses, that’s it.
If (when) the bubble bursts, China’s minorities will revolt and the dictatorship will use nationalist demagoguery to focus world attention on “foreign aggression.” Nothing like a good war somewhere in south asia to divert attention from the domestic cleansing that Beijing’s despotic rulers will need to impose if the economy collapses.
The great tragedy for Australia is that we have tied, perhaps irrevocably, our fate to the Chinese economy without even the slightest consideration of an alternative plan should things go pair-shaped.
We have bet the farm on the mining boom and allowed productivity to collapse in all other sectors of our economy. Aye, we’ve forced productivity downward by electing idiot governments which regressively applied ‘reforms’ back to the future. We are no longer competitive in the global market.
The best and the brightest of Australians, unless they are mining engineers, have always had to flee overseas to seek their riches. Expect the brain drain to increase, while welfare-seeking immigration, legal or otherwise, increases. Keating’s banana republic might be our future after all.
Someone once said people get the government they deserve.
Ouch.
wes george
2 Oct 12 at 10:45 pm
70% of it’s economy is basically free market which is a lot more than one can say about Europe and increasingly- the US.
Wes, if you’ve been worried about it for years, you’ve really not had much to worry about seeing it’s being growing at leaps and bounds.
JC
2 Oct 12 at 10:48 pm
Sorry to say it JC, but you’re on drugs mate. The Chinese economy has a financial system that doles out credit according to political, rather than economic imperatives. Financial repression has been occurring for years and will end in tears, like it always does.
You don’t think the recent Chinese belligerence is due to a faltering economy? If growth falters, all the Chinese Communist Party can do is whip up a bit of nationalism.
I’m with Wes…
And we have the biggest fool in charge of the Treasury…FFS, he’s claiming that Alan Jones has macroeconomic effects and that he is responsible for low interest rates, not a weakening economy.
Skuter
2 Oct 12 at 11:07 pm
So does a cancer, JC.
Winston SMITH
3 Oct 12 at 9:48 am
Totalism – the idea that China is one massive thing which rises or falls together – promoted by Chinese themselves, then widely accepted by outsiders.
But Asia’s greatest strength is its small business enterprises. Industrious peasants are both a block to progress and a massive asset when understood. Millenia of experience make them fail-proof, in their own way. Just as our predecessors used to be, before they caught ‘modern government’ disease!
More specifically – isn’t China’s economy closely tied to the USA? So if USA falls, this phase of China’s economic development is certainly in danger. We need to be planning for a post-USA world.
one old bruce
3 Oct 12 at 3:22 pm