Key Trends in the World Economy

The weakness in world trade - pre-crisis trade levels only regained in Asia and Latin America

Europe’s economy is probably entering a double-dip recession. The indications from world trade, as analysed previously, are so far that the world economy as a whole is facing slowdown but not renewed recession. However a detailed breakdown shows extreme unevenness in the trade recovery - with only Asia and Latin America surpassing pre-financial crisis levels. Regional trends for imports and exports, using a three month moving average to smooth short term fluctuations, are shown in Figures 1 and 2.

Considering trends in detail, pre-crisis world trade peaked in April 2008. In the latest month for which data is available, September 2011, world trade was 2.3 per cent above its pre-crisis maximum on individual month comparisons and 3.6 per cent above on a three monthly moving average.

Table 1 shows a detailed breakdown of trade since the financial crisis by region. This data shows that only in developing Asia and Latin America are both exports and imports clearly above pre-financial crisis levels. Taking three monthly moving averages, imports are up from pre-crisis levels by 16.7 per cent in developing Asia and 9.4 per cent in Latin America, with exports up 17.0 per cent in developing Asia and 6.9 per cent in Latin America. In the US exports are slightly above pre-crisis levels but imports are significantly below. In all other regions – the Euro area, Africa and the Middle East, Central and Eastern Europe, and Japan – both exports and imports remain below pre-crisis levels.

The recovery of world trade to above pre-crisis levels is therefore due to the situation in two developing regions. The weakness of trade in the Euro area is worse than most regions, particularly in terms of imports, but not really exceptional. Trade in most areas of the world economy remains significantly below pre-crisis levels.

Table 1

 

Trade with China

Among the largest economies the chief beneficiary of this pattern of world trade is China - although it is likely the pattern itself is in significant part a result of the dynamics of China's trade.

In the period between China's peak pre-crisis level of exports and imports, in July 2008, and September 2011 China's exports to Asian developing economies rose by 22.9 per cent and its imports from these economies rose 31.4 per cent. China's exports to Latin America rose by 53.0 per cent and its imports by 59.9 per cent. These are clearly exceptional growth rates. China is the main trade partner for most developing Asian economies as well as for a significant number of Latin American economies including Brazil.

The patterns of world trade since the financial crisis therefore indicate the consolidation of a dynamic trading interaction between China, developing Asia and Latin America. China's economy and trade is not yet sufficiently large to offset a global scale recession in the EU and/or US, but there is clear evidence that China's economy is sufficient to produce the most dynamic of post-crisis world trade interactions centred on Asia and Latin America.

Figure 1

Figure 2

New world trade data indicates slowdown but not recession in the global economy

How much will Europe’s debt crisis and probable recession hit the US, developing countries and the global economy in general? To gauge this it should be noted that International trade is a particularly sensitive indicator of global economic trends, tending to turn down more than GDP during recessions and to grow more during expansions. Data which may be calculated from the new statistics in the invaluable World Trade Monitor of the Netherlands Bureau for Economic Policy therefore helps gives an indicator of the overall state of the global economy.

The latest published data, up to September, is shown in Figure 1. This shows clearly the downturn in the volume of world trade in the recession commencing in 2000 and the far bigger one following 2008. It also shows that in the recent period world trade has ceased growing significantly but has not declined.

Figure 1

 

In order to indicate recent trends in greater detail, and to smooth out purely short term fluctuations, Figure 2 charts world trade in the period since 2000 as a three month moving average. It shows that world trade ceased growing rapidly in February 2011 and then relatively stagnated. Arguably there was a small upturn in the most recent period, with world trade 3.3 per cent above its pre-financial crisis maximum in May and 3.8 per cent above in September, but this shift is too small and recent to be considered a definitive indicator of an upturn. It does indicate clearly however that in the most recent period for which data was available there was no tendency to a decline in world trade.

Figure 2

 

The situation may have deteriorated in October-November, due to the impact of the worsening of the Eurozone debt crisis, but going into this period the trade data is consistent with a slowdown in the international economy but not with a recession.

During the last four years the EU's economy has grown by -0.3%, the US by 0.6%, and China by 42.2%

The full scale of the difference in economic performance of China compared to the US, Europe and Japan during the international financial crisis is shown in Figure 1. It is summarised in the following figures:

• In the four years to the latest available data, for the 3rd quarter of 2011, China’s GDP expanded by 42.2%
• In the four years to the latest available data, also for the 3rd quarter of 2011, US GDP increased by 0.6%.
• In the four years to the latest available data, for the 2nd quarter of 2011, European Union (EU) GDP shrank by 0.3%.
• In the four years to the latest available data, for the 2nd quarter of 2011, Japan’s GDP contracted by 5.2%.

Figure 1

 

 

These are evidently extraordinary statistics. During this four year period China’s economy expanded 70 times as fast as the US.

Such data also clearly refutes the current attempt to claim that in China there is an economic ‘crisis’ in some sense equivalent to that in the US or Europe. Such arguments are intellectually sloppy (at best) attempts to undermine rational thought by destroying any serious quantitative comparisons.  

To give examples of such claims, a recent article by Nouriel Roubini and Ian Bremmer in the Wall Street Journal is introduced: ‘With Europe, China and the U.S. in crisis, the real question is which of them will stumble first.’ Similarly Will Hutton in the UK’s Observer claims: ‘Nobody would start from here – an ill-designed single currency interacting with an insupportable burden of private debt created by oversized, undercapitalised banks. And it's as much a problem in the US and China as in Europe.’

The data given above shows such claims are false. GDP growth of 42.2% in China, an annualised 9.8%, is not remotely comparable to the US’s annualised 0.2%, or the EU’s annualised minus 0.1%.

Naturally it is impossible to have an annual 9.8% growth rate for almost four years and have no problems at all – in fact no economy ever has no problems! China has had consumer price inflation, primarily due to international commodity price increases, which reached 6.5% before falling and it has had excessively high house price increases – which are also now falling. But none of this constitutes a ‘crisis’ on anything quantitative scale remotely approaching that of the US and Europe.

Nor, to take Hutton’s point, does the EU financial crisis have anything like the same impact in China, or even the US, as in the EU. The effect of the decline in imports from the EU on China’s exports is noticeable but only in the sense that it reduces China’s overall export growth from a very high to a high rate of growth – 15.8% last month, in a factual situation in which none which China’s GDP growth in the last four years has come from net trade. Indeed reduction of China’s trade surplus means that net trade has been a subtraction from China’s GDP growth during that period. The exposure of China’s banks to Europe’s debt crisis is also minimal. While the financial exposure of the US to the Eurozone is certainly higher than China’s there is also no indication that the actual scale of crisis or defaults in Europe is pushing the US into recession – whereas a double dip recession in Europe itself is extremely possible.

Hutton, in short, is engaging in inflated rhetoric to attempt to create a relative equals sign between the situation in China (and the US) and that in Europe when none exists. Inflated rhetoric is merely a form of destroying the quantitative scale of comparison which is a precondition for rational thought.

The GDP data for China, US and Europe GDP data should also end attempts by Kate Mackenzie the Financial Times and Nouriel Roubini to present the US’s Michael Pettis, and similar analysts, as having had a correct analysis of China. Michael Pettis runs an objectively moderated blog on China but his analysis of China has been factually shown to be quite erroneous – claiming that: 'the US would be the first major economy out of the crisis and China one of the last.’ Evidently a situation where China has grown by 42.2% and the US has grown by 0.6% shows the reverse has been the case. Claims that it is too early to judge whether China or the US has been more successful in coming through the financial crisis are just attempts to avoid the test of facts that has taken place. Even if, against the evidence, China’s economy were now to slow significantly the scale of growth it has already achieved demonstrates that has come through the financial crisis far more successfully than the US or Europe.

The basis of any serious analysis or theory is facts. Those who refuse to refer to the data of the relative performance of China, the US or Europe during the last four years do so only because their analyses will not stand the test of examination by these facts.

China globalizes - Chinese companies recent progress in global branding and R&D

The following is an article, slightly expanded for a non-Chinese audience, which originally appeared in Global Times.

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The recent period has seen important progress by some of China’s leading companies in globalization and enhancing their brands. Haier has now become the world’s largest producer of domestic ‘white goods’ goods such as refrigerators. Huawei has become the world’s second largest telecommunications equipment producer after Ericsson and is on course to become number one next year. ZTE has entered the world’s top five mobile phone manufacturers. Lenovo has overtaken Dell and Acer to become the world’s second largest personal computer manufacturer.

These advances are not simply in scale. The Financial Times, a publication with a clearly ‘upmarket’ audience in mind, recently reviewed new notebook computers from Apple, Lenovo and Acer. It concluded Lenovo was the best engineered and number two in design to Apple – both ranking clearly ahead of Taiwanese Acer.

Such companies are significant because of their technological level. These are medium and high technology industries, far removed from the textiles and similar products with which Chinese companies entered the world market at the beginning of its economic reform.

Naturally there should be no exaggeration. China’s government rightly stresses that despite being the world’s second largest economy, China is still a developing and not a developed country. China’s GDP per capita is less than 10 per cent of that of the US. Given this disparity it is unsurprising that in the latest list of the world’s 100 most valuable brands, produced by leading brand consultancy BrandZ, China has only 12 such companies compared to 43 for the US. But the upward momentum of China’s brands, as shown by this recent progress by its top companies, is palpable.

Such development destroys factually the argument that used to be deployed against China’s companies that they were incapable of producing global ‘brands’. This argument was always invalid as it took no account of China’s relative stage of economic development. In terms of percentage comparison to the US’s current per capita GDP, China’s level of development is still only equivalent to Japan before 1960 or South Korea in 1976. Neither Japan before 1960, nor South Korea in 1976, had a significant number of famous international brands either!

Instead the development of high brand values by Japanese and South Korean companies, such as Toyota or Samsung, came from the 1970s in Japan and the 1990s in South Korea. That level is where, on present growth trends, China will be in the next 10-20 years’ time. In terms of recent brand successes China is probably slightly ahead of where you would expect it to be given its stage of economic development.

Taking another key indicator, expenditure on R&D, China’s current progress and stage of development is also clear. Analysis of the US, the world’s most advanced economy, confirms that innovation is a result of the application of resources and money. It thoroughly confirms Thomas Edison’s famous observation that his own greatest invention was not the microphone, the light bulb, the gramophone, or electric power transmission but ‘the ideas factory’, that is the industrial research laboratory.

Zoltan Acs classic Innovation and the Growth of Cities, found that almost nine tenths of the difference between US states in their number of commercial innovations was accounted for by the amount of research spending in the state. Furthermore it was the quantity of research spending, not the type of institution which carried it out, that was crucial. The difference was that US states with high proportions of R&D spending by companies tended to have more innovations by large companies, whereas states with high proportions of R&D spending by universities tended to have a higher proportion of innovations by small companies.

This itself carries important lessons for China. The majority of R&D spending by a highly developed economy such as the US is carried out by large companies. But small company innovation, including the famous ‘start ups’, do not spring out of nowhere but from association with very large well-funded research institutions. The most famous example is California’s Silicon Valley and its relation to Stanford University - out of which emerged dominant US technology companies such as Google, HP, Cisco etc.

It is therefore instructive to compare current R&D spending in China and the US. China has made great strides in increasing the percentage of R&D spending in GDP. The OECD’s international comparisons show the percentage of China’s R&D spending in GDP has tripled since 1995. But China’s spending on R&D in 2011 will only be 1.4 per cent of GDP, $154 billion, compared to 2.7 per cent of GDP, $405 billion, for the US. That is, China’s R&D spending will only be 37.9 per cent of the US.

This is why recent international attempts to denigrate China for ‘not having a Steve Jobs’ were completely unintelligent. Apple, that is Steve Jobs, is the world’s most valuable company because it is based in the country with the world’s highest research spending not only in technology but in design. Apple is the US’s greatest commercial success to date in this field. As people in China and the US are equally intelligent no one who thought about the matter seriously would find it surprising that China’s companies cannot yet compete with the highest product of the world’s most advanced research based economy while China’s R&D spending is still less than half that of the US! For the same reasons not only China but also South Korea does ‘not have a Steve Jobs’, Germany ‘does not have a Steve Jobs’, France ‘does not have a Steve Jobs’, India ‘does not have a Steve Jobs’ etc. The reality is that the present rapid progress being made by China’s brands shows that as China moves towards the same levels of economic development and research spending as the US it is developing brands and innovations just as you would expect.

To follow China’s company developments in globalization and branding is therefore particularly illuminating while teaching in Antai College of Economics and Management, in Shanghai’s Jiao Tong University as this university contains not only one of China’s top business schools but also one of its top engineering departments. Teaching ‘globalization’ to Chinese and international students it is possible to see the sharp acceleration in progress being made in this field by China’s companies precisely in combining business, engineering and design. Particularly fascinating is to see how China’s top companies internalize international experience and fit it to their own strategies.

Three years ago China’s companies, in my experience, saw R&D too narrowly in terms of technology and insufficiently also in design terms. But many of the most iconic and commercially successful globalized companies with the highest brand values - Sony in the 1980s, Samsung from the 1990s, and Apple today - achieved that position through the integration of design with technology. In only a few years the shift in thinking by Chinese companies, such as Huawei or Lenovo, is clear as they pour large resources into international design departments linked to their growing engineering development.

But such globalization techniques are being integrated into specifically Chinese strategies. Lenovo provides is a classic case. In 2005 the company experienced problems after a misexecuted step in globalization – buying the PC division of IBM, which the latter sold because of its decline. Lenovo let its focus slip from China. Globally it was overtaken by Acer and internal crisis led to management and strategy changes. Lenovo refocused on China and greatly strengthened itself in developing markets – a strategy also followed by companies such as Huawei and which has been described in Mao Zedong’s famous formula as the economic equivalent of ‘using the countryside to surround the cities’. Lenovo then added a stronger focus on design. It has now emerged as the number two PC producer in the world with a realistic chance of becoming number one. Many individual international techniques were used by Lenovo but its overall strategy was wholly Chinese.

The latter development, indeed, may be taken as the ultimate expression of the new strengthening of China’s brand positioning. A brand is something which is unique – this distinguishes it from a low value copy. That China’s brands are visibly, in measurable fashion, beginning to strengthen their globalized positions is linked to the fact that China’s top companies are increasingly confident in integrating techniques which originated in international markets into their own approaches. Not only in branding but in company strategy China’s companies are therefore developing distinctive positions - the two developments being inextricably linked.

China in face of the West's 'Great Stagnation'

I have a new article at China.org.cn which analyses the impact of the present 'Great Stagnation' in the developed economies on the prospects for China's economy.

It concludes:'Given extremely slow growth in the developed economies, and that examination of underlying macro-economic factors such as savings and investment indicates no reason to expect a substantial growth acceleration, this places China in a new international economic situation. For almost the entire period since China launched its economic reforms in 1978, it has been growing more rapidly than other economies but in an international context where the developed economies were growing significantly. The only serious previous recession in the advanced economies during China's reform period was right at its beginning, in 1980-81, when China was scarcely integrated in the international economy. The international slowdowns in 1990 and 2000 were brief and mild and while the 1998 South East Asian financial crisis impacted China significantly, it did not originate in the developed economies...

'In economics and business there is no virtue in either optimism or pessimism, there is only a virtue in realism. Given current trends, China has to base itself on a perspective that for several years there will be slow growth of the developed economies and therefore slow growth of their imports. Developing economies, while growing more rapidly than developed ones, will not in the very short term be able to fully compensate China's exports for stagnation in developed economies.

'The international framework for China's economy is therefore clear. It is important to understand that what is faced is a 'Great Stagnation' not a new 'Great Recession' - that is there is no reason to anticipate major international economic downturn of the 2008 type. China therefore does not need a new huge stimulus program of the type it launched in 2008 - which would lead to severe economic overheating. But the international economic situation requires adjustments in emphasis.

'First, even more than previously, China has to rely on developing domestic demand. Greater analytical clarity on this is important as at present domestic demand is frequently confused with domestic consumption - the two are not the same.

'Second, while developing economies will not immediately be able to fully make up for the negative pressure on China's exports from the 'Great Stagnation', they provide an important addition to China's domestic demand - in the last fifteen years the percentage of China's exports going to developing economies have risen from 35 percent to 50 percent. All developing economies face the Great Stagnation, therefore all face constriction on exports to developed countries, while China's imports are continuing to expand. This will produce greater integration of developing economies with China in both exports and imports.

'Within developing economies many of China's top companies, such as Huawei, Haier, and Lenovo already have high brand values and the present situation therefore creates opportunities to further enhance the positions of China's international brands.'

The full article, including a brief comparative analysis of the 3rd quarter US GDP figures with previous US post-war business cycles, may be found here.