The Western concept of recession is flawed. Two quarters of negative GDP growth and there it is. That notion is based on economies that have a normal state of growth of about 3%. Anything above that it a genuine boom.
China, and India for the matter, are economies where the status quo is GDP improvement of 10%. For these nations a 3% growth rate is a disaster.
China’s industrial sector improvement hit its worst patch since 2001. According to Bloomberg, "Output rose 12.8 percent in August from a year earlier." Analysts expected a number closer to 15%.
The causes for the problem are well-known. Big consuming nations like the US are not importing what they used to from China because of slowing growth. The overall opportunity for rapid GDP improvement in the world’s most populous country is being undermined by troubles in the US and EU.
Auto sales in China dropped in July. No one expected that. The nation’s middle class is obviously feeling pinched and that could be the start of a long-term trend.
Economic assumptions have been that rising exports and improving GDP would swell the ranks of the middle classes in China and India. Farmers would become factory workers. The standard of living for an increasing number of people would skyrocket. That, in turn, would cause the rise of a consumer-driven economy which would replace one based on government spending.
The formula has stopped working and it may not start again. If growth in the Chinese economy moderates and remain mediocre for several years, there may be little if any swelling of the middle classes. The people who can afford new cars may peak. The same holds true for the number of citizens who can buy stocks, have savings accounts, or buy real estate.
China may be on its way to becoming normal, at least as that is defined by economists in the West.
Douglas A. McIntyre
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