All those people who still believe Australia won’t dip into recession in 2009, as the IMF, OECD, Federal Treasury and Reserve Bank, should think again.
China, whose ‘solid’ demand for our resources was supposed to help keep us out of recession in 2009, is getting worried.
So worried that it slashed interest rates Wednesday night by the biggest margin in 11 years, once again it proving that it pays to watch what central banks do, not what they say.
Bloomberg reported yesterday that a senior Chinese economic official had warned that "Some economic indicators in China showed a “faster decline” in November, the nation’s top economic planner said, underlining the urgency of government measures to support growth and employment."
“Some economic indicators weakened further in November, showing a faster decline,” Zhang Ping, chairman of the National Development and Reform Commission, told a briefing in Beijing.
“Employment is being impacted by factory closures and many migrant workers are returning to their home towns.”
China’s State Information Centre lowered its growth forecast to 8% for this quarter from 9% last quarter, a significant decline from the double digit growth of 2007’s 11.9%.
"The global financial crisis has not bottomed out yet," Zhang Ping said.
Just as the bank of England dropped rates by 1.5% at the start of this month, and our central bank has cut rates by 2% in almost three months, with a 1% surprise slash in October, China’s central bank got out the axe and rolled four of its normal 0.27% trims into one big hack of 1.08%.
China’s economy is slowing, slowing much faster than thought. The World Bank this week picked up on it and was mostly ignored by the media.
The World Bank reckons China’s economy will grow at 7.5% next year, the lowest rate in around 19 years, the IMF says 8.5%, the OECD, 8%.
The cut by the People’s Bank of China of 1.08% shows the central government is far more concerned about the level of slowing growth in the economy, than even the most pessimistic commentator.
It was the 4th rate cut in just over three months: rates have now been cut a total of 1.89% in an easing almost unprecedented in China in recent years.
The key one year lending rate falls to 5.58% and the deposit rate will fall by the same amount to 2.52% percent. The changes are effective from yesterday.
The latest cut is designed to support the 4 trillion Yuan ($US586 billion) spending plan announced two weeks ago, just after the previous rate cut.
The central bank also cut the reserve requirement for the biggest banks to 16% from 17%, effective a week from today.
That’s an equally significant change: the central bank had been tightening that requirement for over two years now, interspersed with the odd rate rise.
There are reports China’s banking regulators also want banks to boost their capital levels by year’s end:
Doing that and lending more to business don’t sit easily: something will have to give. The plunge in the property sector is said to be behind the directive to banks to put aside more capital.
The reserve asset requirement for smaller banks will fall to 14% from 16%, but again they are exposed to property loans in smaller towns and cities. .
The central bank said in a statement the rate and reserve cuts were aimed "at ensuring sufficient liquidity in the banking system, and to promote steady loan growth so that monetary policy can play an active role in supporting economic growth.
While China’s economy grew 9% in the third quarter, it was the slowest pace in five years and marked the fourth quarter in a row that growth had eased. Just over 15 months ago growth was more than 12%; it averaged 11.9% in 2007.
Exports remained OK in October, as did retail sales and domestic investment, but a slowdown in orders, rising company failures, and more importantly, a plunging real estate market, are eroding the drive in the economy.
More worrying was the sharp fall in industrial production in October to a seven year low. Thousands of people are being laid off as factories close. Riots and protests are being reported from industrial cities on the coast and in the south, a pointer to the Government’s campaign to tell everyone how bad things are becoming.
Property prices and sales are falling in major cities and construction contracted in September by the most since the 1990s, according to some commentators, a point acknowledged by the World Bank in its latest forecasts
"Weakness in the real estate market, partly reflecting an earlier tightening in macroeconomic policies, is now feeding through to several “upstream” industries such as cement and steel.
“Looking ahead, private sector investment is likely to be weighed down by the unfavorable external prospects and continued weakness in real estate," the World Bank said.
"Private consumption growth is likely to soften in 2009, but will receive some support from fiscal policy."
Meanwhile the situation in Japan seems to worsening with political instability starting to interfere with economic policy, which if it continues could see the economy of our biggest trading partner slide further into recession.
The Japanese government this week said it was putting off legislation required to finance a promised stimulus package until next year, just as the country’s central bank lowered its assessment of the economy.
Prime Minister Taro Aso said the supplementary budget needed to pay for a stimulus package unveiled in October would only be put to a parliamentary session starting in January, rat
