China: A 10% GDP Growth Rate Recession

A recession cannot exist without two consecutive quarters of negative GDP growth. It is right there in every economics textbook.

China may be a bit different and may show that the definition of "recession" must be relative.

GDP growth fell to 10.1% in China last quarter. In a place like Germany, double digit GDP improvements would be the beginnings of a economic miracle not seen for decades.

But, China has a set of problems all its own. Last month, the inflation rate in the big Asian country was about 7%. But, for food commodities, the figure was closer to 20%. Fuel prices would be spiking, but the government underwrites those. There is some indication that aid on gas and diesel prices is beginning to ebb.

Much of the growth in China depends on the ability of its middle class to consumer goods and services from both their native country and overseas. The primary pressure on GDP now is slowing in export growth as the great economies of the West falter. Improving the wages of the Chinese middle class is tough when the export engine is losing capacity.

The net worth of the Chinese who have money to spend has almost certainly been dinged by the 50% plus drop of value of stocks traded on the Shanghai stock exchange. The Shanghai Composite is the worst performing index in the world for the first eight months of this year. For 2007, it was among the best.

Imagine what would happen to consumer purcahsing power in the US if the Nasdaq dropped 50%.

China exports are going to continue to fall. The market of overseas buyers is dissolving into one of the largest housing recession in half a century.

Recession may get a new definition in China. GDP growth may be OK, but it does not offset a living wage that cannot support basic consumer spending and losses from a collapsing stock market. When the middle class is broke, so is the economy.

Douglas A. McIntyre