India and China's latest output data confirms rapid economic growth and relative global 'decoupling'

The publication by both India and China of their latest industrial production data confirms very rapid economic growth in both countries. This is not only important in itself but is against the view put forward, for example, by Stephen Roach of Morgan Stanley, Bill Emmott the former editor of The Economist, and others, that the major Asian developing economies were incapable of economically 'decoupling' from the US.

Taking first India's data, January's industrial production rose 16.7% year on year. Manufacturing output increased by by 17.9%. The output increase was heavily concentrated in the investment production sector - output of capital goods rose by 56.2%, intermediate goods by 21.3%, and consumer goods by 4.2%. The overall industrial output increase represented only a marginal slowing compared to the revised year on year increase of 17.6% in December - that figure was a revision upwards from the 16.8% initially announced. Overall the figures confirm extremely rapid Indian economic growth.

For China, February's monthly figures cannot be used for meaningful year on year calculations as the long Chinese New Year holiday fell in February this year and in January in 2009 - artificially distorting simple year on year comparisons. The appropriate measure is to compare January and February 2010 with January and February 2009. Taking this China's industrial production was up 20.7% year on year. Light industrial production was up 14.5% and heavy industrial production up 23.7%. Particularly notable advances were in production of transport equipment, up 43.7%, and telecommunications, computers and other electronic equipment - up 26.4%. The rapid increase  of production is evident - this blog has previously analysed the successful shift of China into growth driven by expansion of domestic demand and this is confirmed by the continued trend of China's falling trade surplus.

In addition to the inherent importance of the growth data for both India and China these figures throw clear light on the issue of 'decoupling' - that is whether rapidly growing Asian economies would be able to continue to grow at a fast pace under conditions of recession or economic slowdown in the US. The idea that 'decoupling' could take place was strongly argued against, for example, by Stephen Roach of Morgan Stanley and Bill Emmott  - former editor of The Economist and a long term analyst of the Asian economies.

Stephen Roach in The Next Asia argued: 'The hopes and dreams of decoupling - an overly optimistic scenario that envisaged emerging market economies have the wherewithal to stand on their own in an otherwise weakening world - are in tatters.' (p66) This represented a continuation of his argument, presented a year earlier, that: ''Dreams of decoupling danced in the air on this first official day of meeting at Davos [in January 2008].... I didn't offer much support for this view... My case is relatively simple. Developing Asia - where the growth dynamic is the strongest and the hopes of resilience are the deepest - remains very much an externally dependent economy.' (p30)

Roach argued that China was particularly vulnerable to external economic slowdowns: 'There is a second factor at work that is likely to challenge the view that hyper growth is here to stay in Asia - the region's persistent reliance on external demand as a major driver of economic growth. A slowdown in the United States - the main engine of the demand side of the global economy - can't help but work its way through the export channel and reduce externally dependent Asian growth.... China is at the top of the external vulnerability chain... As the United States economy now slows, the biggest piece of China's out-size export dynamic is at risk... the Asian growth dynamic remains highly vulnerable to an external shock.' (p302)

In the case of Stephen Roach's earlier articles no reversal of his view was expressed when they were collected together and published, after June 2009, in The Next Asia.

Bill Emmott, in his book The Rivals, similarly argued: 'The onset of a global economic slowdown, an unsurprising consequence of the financial crisis in America and Western Europe, was initially expected to leave China and India fairly unaffected... The view that Asia could "decouple" itself from the rest of the world soon proved too sanguine. It could never truly have done so, given the trading links between East and West. But even more than that, the sudden slowdown in both China and India... exposed the economic weaknesses that were already present... A property boom turned to bust in China and, combined with falling exports, produced the possibility that China's growth rate could halve during 2009 from 2007's 13%, raising the prospects of social unrest. A difficulty in overcoming inflation in India, plus the drying up of the global liquidity on which big Indian companies had depended, made that country too look vulnerable, perhaps returning it to the 4-6% annual growth rates common in the 1990s.' (pxxi)

It is possible Stephen Roach and Bill Emmott, or supporters of their analysis, may argue that the current rapid growth in India and China reflects the fact that the world economy as a whole is no longer moving downwards. But the chronology does not confirm such a view. China's economic recovery began in the second quarter of 2009, at the worst point of the dip in international financial markets and as advanced economies were continuing to contract. It did so on the basis of stimulus package that raised both domestic investment and domestic consumption. A decline in China's net imports continued through the whole latter part of 2009 but its economic growth rate accelerated. While it is correct that the US trade deficit began to expand after July 2009, China's trade surplus continued to fall - that is the increased demand sustaining economic growth was not externally driven. India's economic growth was similarly driven by internal economic stimulus. In short China and India both showed themselves capable of 'decoupling'.

Naturally such a process of 'decoupling' cannot be absolute in the sense that China and India will be unaffected by developments in the US economy. But the emphasis of Roach's and Emmott's arguments, which stressed the limits of India and China's relative autonomy rather than its possibilities, and suggested that their growth would slow dramatically under the impact of a recession in the US, has been shown not to be correct.

StephenRoach has a justified reputation as one of the world's most most systematic economists -  I read every word of his I can get hold of. Emmott's The Rivals is similarly a highly interesting book - as are his other writings. But on the 'decoupling' their arguments have been shown to be wrong.

Comments

[janviere]

what are the main impacts on the world economy of the rapid growth of the chinese and indian economies over the last two decades

[Dr A Willis]

How much of the growth is due to the stimulus in China? If its withdrawn what would the effect be? Can we estimate this from the data?