Stagflation would probably have to be measured differently in China than it is in the US. GDP in the big Asia company grows 10% a year. In the US, economists get excited by 3% improvements
Stagflation in the US would probably be created by negative growth and inflation of 3% or 4%.
Last month, inflation rose 8.7% in China, the highest rate in eleven years. Pork prices soared 63 percent from a year earlier, vegetables climbed 46 percent, and edible oil rose 41 percent according to Bloomberg. Coupled with that exports were up only 6.5%, the lowest rate in six years.
Economies in the US and Europe looks like they are in the grips of a recession, perhaps the worst one in three decades. That means that the rate of exports out of China could fall below 5%. Consumer consumption in the critical markets which import goods from China is already at a standstill.
If China’s inflation rate stay above 7% or 8% and exports drop from current levels, the government may not be able to use the nation’s growth rate to underwrite gas and diesel supplies. That would put upward pressure on all transportation costs. Stock markets in Shanghai and Hong Kong has already sold off of their highs of last year. The middle class has derived much of its wealth from stocks.
Stagflation is coming to China in the form of 8% inflation and a GDP growth rate of well below 5%.
The Beijing Olympics may not be so fun after all.
Douglas A. McIntyre
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