China replaces US as steadying economic force

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Larry Elliott in Washington
Thursday October 18, 2007
The Guardian

The changing balance of power in the world economy has seen China replace a faltering United States as the biggest contributor to global growth in an "uncertain and potentially difficult period", the International Monetary Fund said yesterday.

Unveiling its half-yearly forecasts, the IMF said the world was increasingly dependent on the strong performance of the three leading developing countries - China, India and Russia - at a time when the west was struggling to cope with financial market turmoil. The IMF's world economic outlook said that growth rates of more than 11% in China, 9% in India and almost 8% in Russia meant the three nations "alone accounted for one half of global growth over the past year".

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Rapid growth in emerging economies helped offset the sluggish performance of the United States, Japan and the euro area, the IMF said. It stressed, however, that the leading developing countries faced challenges of their own, noting that there were concerns about over-investment in China and rising inflation in India.

Forecasting a further 5% fall in US house prices over the next year, the IMF sharply cut its forecast for American growth next year to 1.9% - 0.9 points lower than it had pencilled in at the time of the last World Economic Outlook report in April.

The IMF added that the impact of the housing market crash and credit crunch was so serious that the Federal Reserve, the US central bank, would need to cut interest rates by a further 0.5 percentage points by the end of this year to meet the lower growth forecast. A steeper fall in US house prices was possible, it said.

"Growth in the US is expected to remain subdued. Problems in the housing sector are more intense than previously expected and the disruption of credit is likely to have further impact," said Simon Johnson, the IMF's economic counsellor and director of research.

"Like a forest that has not seen a fire in many years, a benign financial environment had built up a sizeable 'underbrush' of risky loans, relaxed lending standards and high leverage in certain areas. When problems ignited in the US sub-prime mortgage market, the fire 'jumped' in somewhat surprising ways to other areas."

Despite the strong performance of the developing world, the IMF said it now expected the global economy to grow by 4.8% next year - a 0.4 point reduction on its spring forecast. In its baseline forecast for the global economy, the IMF said there would be a temporary shock to the global economy lasting for two quarters.

An additional 10% fall in US house prices, a 10% drop in equity prices and a further 50 point widening in credit spreads would mean the US economy would experience two years of negative growth.

The IMF said fresh cuts in interest rates in the US were justified by the housing crisis, and that the European Central Bank and the Bank of England had been right to put the cost of borrowing on hold during the period of financial turmoil
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stuff you won't see on cnn or any other american newspages.

The US dollar fell to a new low against the euro after the latest piece of US economic data.

Labour department figures showed the number of people seeking unemployment benefit had leapt by the largest amount since February.

The data boosted expectations that US interest rates could be cut further before the end of the year.

The euro hit a high of $1.4305 on Thursday, before settling at 1.4293 in late US trade.

It broke the previous record, set on 1 October, when one euro bought $1.4282.

Expectation that the US will lower borrowing costs - while intended to boost the economy - can also make the currency less attractive.

The move can act as a brake on investments in the dollar, as investors seek to place their money where deposits can lead to better returns.

Export implications

The labour department figures, which showed an extra 28,000 claims for benefit, came a day after data showing the construction of new homes and apartments in the US had plunged to a 14-year low in September.

The dollar has been sliding since the Federal Reserve cut rates from 5.25% to 4.75% in September to help rejuvenate confidence in the world's largest economy.

This followed a summer of turmoil in the world's credit markets, sparked by record loan defaults in the US sub-prime mortgage sector.

Since then, a raft of mostly disappointing economic news and soft inflation figures has prompted anticipation of further rate cuts.

While analysts expect the US Federal Reserve to cut interest rates, the European Central Bank is tipped to raise rates within coming months.

There are fears in Europe that a strong euro relative to the dollar could harm exports to the US and China.
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you know, the gold standard is starting to sound pretty good right now.

The United States golden age is coming to an end.....quickly.
It's only a matter of time until we bust....and we'll bust horribly.

Inflation's going up by 2.5%/year, but peoples' wages are staying stagnant. Healthcare, education, gasoline, food and everything else is getting more expensive, so we're having less money to buy more expensive things. It gets worse year by year. More people are slipping below the poverty line. My life savings is becoming more worthless, because my interest is less than inflation!

Also, since the Fed recently cut interest rates by a s**t ton, people are borrowing more money. This won't be good when inflation catches up with them and they can't make their loan payments. Banks will shut down, people will lose their savings. Oh, hey! A brand new Depression!

Last edited by Cyanide on 19 Oct 2007, 1:38 am, edited 1 time in total.

glad i'm not the only one seeing it coming.

It'll be interesting to see what kind of a propaganda spectacle China turns the 2008 olympics into. I feel for a time now, they've had the strength needed to take on a more active role in world politics, but so far they've kept a low profile even though establishing warm relations with countries like Iran and Venezuela. Much of the reason has probably been to be able to clear out the domestic turmoil first, not wanting any more Tianmen square incidents after taking on a more active role. Russia seems to almost have recovered as well now. Maybe in a few years, we'll have three superpowers acting on the global arena. I'm hoping this will lead to more justice in the middle east, with these new actors backing the palestinians in their struggle to get their still occupied land back.

I don't buy the 2.5% number. Food, energy, education, healthcare, insurance, etc. etc. are all going up more than 2.5%.

I got the 2.5% from the CIA World Factbook.

Oh, I don't think that we're in for a great depression again (in the USA). A downturn that could last a couple of years, certainly. But, we're not in TOO bad shape economically.

Things just have ways of cycling around, going through boom and bust cycles, and then correcting themselves in one way or another.

In the '90s, the stock market was booming, and we seemed poised to become a nation of millionaires. That came to an end at the turn of the century, when we had a strong downturn for three years, but it all came back.

Housing prices were just getting out of hand for a few years. Now, they're just getting back in line with reality.

During the '90s, the US dollar was reaching all time highs, and now we are at all time lows.

During the Clinton years, the federal government actually ran budget surpluses. President Bush has been following a Republican strategy of running extreme budget deficits.

Yes, the official statistics are that inflation is still low. I haven't looked into how they calculate the 'core' rate of inflation recently, but I am not convinced that it reflects real cost of living.

For example, I bought my house a decade ago, and its' price has almost tripled. Which means a new young person or couple that wants to buy their first house in my town will pay a lot more for their housing payment than I do. Is that included in the official rate of inflation? It doesn't affect me negatively, but it does affect my community. Those people will have a lot less to spend on other things. Ultimately, the increase in housing asset values leads to an increase in housing costs.

And if the price of housing and food and energy and education and health care are all going up at rates above the increase in inflation, what's left to spend money on? Sure, imported clothes and electronics are cheap. But the basket of goods and services that most of us need to survive have risen more than 2.5% a year.

If inflation were really only 2.5%, it would take around 28 years for prices to double. Energy has doubled in ~5 years. Food has roughly doubled in the last ten. Housing (depending on where you live) has doubled in the past 5 or 10 years. Education and medical care? I don't know, but way above 2.5%.

Inflation may be low, it just takes a lot more money to live today!

the greatest generation is, in fact, the greatest failures due to their poor parenting that developed the worst generation....the baby boomers.

and the baby boomers don't care and don't understand. i've even tried explaining to my parents how the decisions they make in how they vote and all effect me negatively but they think i'm just stupid.

Clinton only produced a budget surplus by gutting the military funding.

India's more likely than China to replace the US as the world's economic superpower, anyway - China's economy is tied to ours.

Of course, if someone in the US would make a law to end outsourcing, we wouldn't be in this mess. A big part of the reason things cost more is because people are buying less, which is because they're making less money, which is because there's fewer jobs to be had because they're all in China and India and Mexico.

If someone would promise to end outsourcing, I'd vote for him even if he was in favor of a complete withdrawl from Iraq.

Ummm......US will be at the top for like the next 100 years.

I don't really see any competition for the US besides Japan. And Europe is failing(As Usual, HAHA) so I don't really see any problems.

Better not drop the economy on a concrete floor.

I just don't think anything is going to beat the elitist superstructure that supposedly is all about the glory of the people and which calls itself "The United States of America."

Simply put- The USA is looked upon as the greatest nation in the world and as long as things stay that way I don't really see any great competition to challenge it.

The only threat I see is Japan....because they are 1337(No racial pun or remark intended, I like most Japanese people better than I like most American people....)

Inflation figures are, well... deflated. They deliberately dont include certain factors such as deprecation of goods sitting on store shelves.. an example would be a six monthj old computer. Cars on a car lot would be a different one.

dude, get out of the 80s. japan topped off in the mid 90s, the euro is worth $1.43 right now and that's rising. additionally, china and india both have shown more growth than us and have shown to be a more solid force in the economy.



so yeah....get out of the 80s and catch up to today.