In the shadow of the US fiscal cliff, it’s difficult to focus on the few promising signs of recovery. But green shoots are sprouting in the world’s two biggest economies – the US and China.
Stanlib chief economist Kevin Lings says the US housing market is systematically recovering. “Housing prices have picked up in recent months. By August this year, house prices [as measured by the Case-Shiller index] were up 8.3 percent from their trough in March, but still down 30 percent from the peak in June 2006.”
Another sign that growth in the US could be gaining traction came on Thursday, when data showed applications for jobless benefits fell by 8 000 to 355 000 in the preceding week.
Cheering news also came from China, where annual growth has slowed from double digits this year.
Nedbank Capital said lower consumer inflation, 1.7 percent last month from 1.9 percent in September, had opened the way for further monetary easing.
Industrial output growth accelerated more than expected to 9.6 percent year on year last month. Retail sales were up 14.5 percent. And fixed asset investment, which “remained key to economic growth”, rose 20.7 percent in the first 10 months of 2012, above the same period last year. This was ahead of expectations of growth of 20.6 percent, Nedbank said.
In the US, the re-election of President Barack Obama may pave the way for bipartisan agreement on how to address the fiscal cliff and resolve the issue of the debt ceiling. Spoiling tactics used by the Republicans in August last year, which saw Standard & Poor’s strip the country of its triple A debt rating, may seem less fun this year. As Republican stalwart John McCain warned at the time, obstructionist moves could count against the Republicans in the eyes of the electorate.
More important, there are good omens for the longer term.
In China, a change of leadership is likely to be accompanied by a new approach to the economy. China’s economic achievements over the last three-and-a-half decades were built on industrialisation and exports. But this seemingly unstoppable force has run its course.
While most governments stimulate their economies by pumping money into consumers’ pockets, China spent on capital projects. An increase in a country’s production capacity has longer lasting benefits than a consumer bubble – or so the theory goes. But the south-east Asian crisis of 1997/98 proved that investment splurges are as destructive as their consumer counterparts.
More recently, the evaporation of buying power in the western world has illustrated the importance of healthy domestic consumption in China.
In a recent issue, The Economist magazine said household consumption in China as a percentage of gross domestic product (GDP) fell for 10 years in a row from 2001. “By the end of that decade it amounted to only 34 percent of GDP, about 19 points below Japan’s lowest post-war ratio. America’s consumption did not dip far below 50 percent of GDP even during the second world war”.
Too much consumption creates credit bubbles, like the one that broke over the world in 2008.
But too little consumption also has its dangers, which China has acknowledged. This sets the scene for a change in China’s policy. At the same time, the US has learnt the hazards of too much consumption.
A rebalancing between the two great economic powers could create a more stable global economy.