FOR the past year or two, the big economies have experienced a “multi-speed” recovery, as the IMF calls it. The recovery has resembled third-world traffic, where juggernauts and rickshaws, cars and cycles ply the same lanes at different speeds, often gettingin each other’s way.
But for the past month or two, this traffic has slowed in unison. The deceleration is evident in the prices of commodities, which have fallen by 8.6% since mid-February, according to The Economist’s commodity-price index. It is also reflected in American manufacturing. New orders for durable goods, such as engines and cars, fell by 3.6% in April (albeit after a strong rise the month before). Factory output is still growing modestly, according to the Philadelphia Fed’s latest survey, but has lost more momentum since March than in any two months since November 2008.
America’s recovery relied for longer than most on fiscal injections. But by early August the federal government will bang up against a debt limit imposed by Congress. Any deal to raise the limit would almost certainly require spending reductions, and failure to strike a deal at all would require drastic cuts as the government stops selling debt. Even if the government is allowed to keep selling debt, the Federal Reserve will soon stop buying it, as it reaches the end of its latest round of “quantitative easing”, a programme to buy longer-dated paper with freshly printed money.
The euro zone’s prospects of growing its way out of trouble are receding, according to surveys of purchasing managers by HSBC and Markit, an information provider. Their “flash” (ie, preliminary) index for the euro-area economy fell sharply from 57.8 in April to 55.4 in May, a drop not seen since late 2008. In services the pessimism expressed about the coming year was reminiscent of mid-2009, before the recovery had picked up any speed at all.
The “flash” causing the biggest splash this week was, however, not in Europe but in China. HSBC’s preliminary estimate for Chinese manufacturing fell to 51.1 (see chart), well below the long-term average of 52.3, confirming a slowdown evident in April’s industrial-production figures. The release hurt stockmarkets worldwide. In a single day the Shanghai Composite index gave up its gains for the year.
This strong reaction was curious. In China, unlike the euro area or America, a slowdown is overdue. Its growth in the past two quarters was too fast to sustain, resulting in a worrisome rise in inflation. The government has been trying to slow the economy, by reining in runaway lending. The industrial slowdown is welcome evidence that these measures are working.
A PMI reading above 50 indicates rising output; one of 51.1 is consistent with GDP growth of 9%, says HSBC. But the figure immediately raised fears of a much harder landing. Observers may worry that inflation has already got out of hand, forcing the government to hammer the economy to bring prices back under control. At the end of 1994, for example, China faced inflation of over 25%. In the next two years, tight macroeconomic controls knocked 4.6 percentage points off its growth rate.
But inflation in China is now only 5.3%. Vegetable prices have fallen, and non-food inflation may be easing. China’s inflation has proved more stubborn than expected. But growth will not have to slow by four points to quell it.
Some observers worry that the economy will run out of steam because coal is increasingly costly and electricity in short supply. In recent months Chinese industry has suffered power cuts reminiscent of 2004. But China had outages then because its power stations could not make enough power, points out Mark Williams of Capital Economics. It suffers cuts now because they cannot make enough money. The government has not allowed electricity tariffs to rise in step with coal prices, forcing producers to operate at a loss. Raising tariffs is the solution, even if it adds temporarily to the inflation figures.
The final reason to worry is also the most grave. Many fear that China’s overstretched property market will collapse, leaving insupportable debts in its wake. The government’s curbs on mortgage borrowing and speculative homebuying are having some effect on sales (down by 10% in the year to April) but not yet on “starts”, or new homebuilding, points out Tao Wang of UBS Securities. Perhaps the government’s drive to build more affordable housing is offsetting a slowdown in unaffordable housing.
If the bubble were to burst, developers would suffer horribly. Recent homebuyers would also find themselves out of pocket. But in China, unlike America, housing is a vehicle for saving, not for borrowing. Householders are not up to their necks in mortgage debt, although it has risen quickly to about knee height: over a third of disposable income last year, compared with less than a quarter two years before. If prices fell heavily, the damage to households’ wealth might dampen spending. But they would not be submerged in debt.
Banks also say their exposure to property is manageable, at about 20% of loans. Their indirect exposure might go much deeper. But if their ratios of non-performing loans (NPLs) ever rose too high, the government would step in. As Stephen Green of Standard Chartered puts it, “small NPLs are a bank’s problem; big NPLs are the government’s problem.”
Given the improbability of a hard landing in China, the swings of sentiment towards its economy are difficult to understand. Ms Wang suggests one explanation: “Outside China most people’s exposure to the country is through the commodities market,” she says. “In that market, things tend to get accentuated…[they] are either great or they are a disaster.” It is like the little-known tale of Goldilocks and the Two Pandas. The Chinese economy is either too hot or too cold, but never just right.