Up until last year, China had been growing at double-digit rates for several decades. But last Thursday, China’s National Bureau of Statistics announced that its economy expanded by only 6.8% in the fourth quarter and 9% for all of 2008. Chinese growth was cut in half from the same quarter in 2007, when China’s GDP was growing at a 13% annual pace. Rising unemployment and a series of labor protests have now raised governmental concerns about social stability.
China remains the fastest-growing major economy, but the recent slowdown has shocked most economists. Ironically, this slowdown came in the wake of collapsing commodity prices. In the past, the surge in commodity prices constrained China’s GDP growth and led to shortages of fuel and electricity. Now that commodity prices have declined sharply, economists had hoped that China’s GDP growth would pick up, but the opposite happened, with China’s growth contracting.
Frankly, I think the slowdown in U.S. consumer spending best explains China’s slowdown. Until consumer spending perks up here, the U.S. economy and worldwide economic growth will likely stall. Unfortunately, GDP growth is now declining for most other global economies, too:
The Bank of Japan recently issued a dire forecast that the Japanese economy will slip back into deflation for the next two fiscal years as their economy contracts. The consumer price index in Japan is now officially forecasted to decline 1.1% in fiscal 2010 and 0.4% in fiscal 2011, while GDP is forecasted to decline 1.8% in fiscal 2009 and fall another 2% fiscal 2010. Bank Governor Masaaki Shirakawa said the central bank’s focus has shifted to supporting long-term corporate fund raising, which is an indication that the bank may be examining ways to lower long-term rates, which would help to weaken the Japanese yen and make their exports more competitive.
A strong Japanese yen is hurting many companies, such as Sony, which announced plant closures and layoffs last week. Japanese exports fell by a whopping 35% in December, the biggest monthly decline on record. The industrial decline in Japan is so severe that the industrial consumption of electricity fell 13% in December from the same month a year earlier – the biggest decline since comparable records were first compiled in October 1976. Barclay’s Capital said Japan’s economy is likely to shrink at an annual rate of 10.3% for the fourth quarter.
The Bank of Korea announced that South Korea’s GDP fell 5.6% in the fourth quarter vs. the third quarter – the sharpest drop since the East Asian crisis of 1997-1998. The most shocking statistic is that South Korea’s manufacturing sector fell 12% in the fourth quarter vs. the third quarter, mainly due to declines in major industries such as semiconductors, steel and automobile manufacturing. The construction sector shrank 2.9%, while services fell 1.2%. South Korea’s exports of goods fell 11.9%, while its imports declined by 13% in the fourth quarter.
The worldwide trend in GDP growth erosion is nearly as bad in Europe. On Friday, Britain announced that its GDP contracted by 1.5% in the fourth quarter, following a 0.6% quarterly contraction in the third quarter. Last quarter represents the steepest quarterly drop since 1980. This year could mark Britain’s worst post-World War II slowdown. Not surprisingly, the once mighty British pound, which Europeans call the “European dollar,” has been in a freefall lately.