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Pessimism overrules logic on our macroeconomic future & this imperils us all

I posted this on FaceBook on 27th August, 2015 but current events in world equity markets invite a repost and some further comments. Quote:

“There is hysteria over the alleged “China slowdown”. 7% growth in an economy that has been growing at 8-10% for a decade is substantial growth.

Do the arithmetic.

Incomes of 100 units 10 years ago in China were generating growth in demand of 10 annually. Those incomes are, as a result of compound growth, now worth at least 200 units and 7% growth adds to demand at least 14 which is an increased absolute growth. The difficulty for countries like Australia is that much of this growth is not resource-based. Services in China have grown strongly particularly in recent years and that is where Australia’s export drive needs to focus. Australia’s recent FTA with China helps”.

My own view is that current pessimism regarding the world economy is grossly overdone. The US economy is recovering well and Europe is beginning to move. China may not hit the 7% figure portrayed in the numerical example above but should grow at 6.6%+ in the immediate future until it converges with developed country growth rates around 2050. The basic point remains that China is contributing more to growth in global demand than it was 10 years ago. If course if enough people are pessimistic because of the current wave of pessimism – however poorly based – the expectations will become self-fulfilling and our economic future will be imperilled.  But on balance I think this is likely to be unrealistic – it might drive a temporary slowdown in equity markets but the economic fundamentals are sound.  There are economic incentives for third rate economists to make repeated pessimistic forecasts in the hope that they will eventually have a higher perceived market value.  There are also incentives for large investors to talk down markets in order to generate buying opportunities.

Australians particularly are unduly pessimistic about their economic future.  Our growth is forecast by Treasury to be a respectable 2.75% over the next few years rather than 3% as assessed earlier mainly because population is growing slower and people are working less. Yes we have a rather important minerals sector that gets buffeted by Cobweb Cycle imbalances between demand and supply – currently excess supply. We have seen it all before repeatedly.   The minerals sector will recover – perhaps on the basis of new strong demands from India and eventually Africa – and and optimists will take over and start to talk again of new never-ending booms,. Remember that the China Boom was forecast to last for a century! Foolish exaggerated views take hold in the community and among CEOs of firms.

Have a cup of tea, a BEX and a good lie down.

 

2 comments to Pessimism overrules logic on our macroeconomic future & this imperils us all

  • Henry Haszler

    Good points on the issue of absolute growth which is what shifts out the demand curve. The rate just tells us how fast.

    I’ve been rather curious for a very long time about the near hysteria — well it seems near that for some — about China. The message from business and government has been all about China and Asia and seems to have overlooked the absolute size of the European and North American markets. Surely some of the costs of selling into those markets are less than doing business in Asia — you don’t have to learn Chinese and worry about Chinese law, work your way through corruption, etc, etc. I’m a bit worried that all this business about the Asian Century will cause some business people to again lose sight of established relatively easy to do business with markets. Of course look to Asia but don’t forget your old friends would be my motto.

    Of course Ross Garnaut has done more than his share of pushing the China bubble.

  • I’m not very certain that Chinese growth currently is anywhere near as fast as the government claims. Trade with Hong Kong is apparently down sharply, for example.

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