World Economy

A Two-Speed Global Economy, Led by China


As central banks in the eurozone and Britain edge closer this week to deciding that theirflagging economies need yet more monetary stimulus, they can beforgiven for casting an envious eye towards China.

The same goes for the United States. Because of deadlock inbudget talks, mandatory federal spending cuts are now beingphased. They will brake a recovery that, as Friday's jobs reportis likely to show, is already frustratingly weak.

China, the biggest contributor to global growth in recentyears, has plenty of headaches of its own, of course.

Over reliance on investment in heavy industry, a financialsystem rigged in favour of the state, and a failure to integratesome 140 million rural migrant workers into urban life top thelist of structural problems.

Louis Kuijs, an economist with Royal Bank of Scotland inHong Kong, adds rising inflation, a renewed climb in houseprices and a rapid expansion in 'shadow banking' to thegovernment's to-do list for 2013.

But Kuijs and other economists expect outgoing Premier WenJiabao to reaffirm a growth target of 7.5 percent for this yearwhen he delivers his last 'state of the nation' report to theannual meeting of parliament that opens on Tuesday.

China entered 2013 with solid growth momentum thanks tomeasured policy stimulus in the second half of last year. Thatimpetus is now fading somewhat after a strong fourth quarter, asfigures for January and February will probably suggest.

So, just as the West is looking to China to boost globaldemand, China is counting on a pick-up in the West as 2013unfolds to help exports and revive corporate investment, Kuijssaid.

"Looking at trade and industrial production indicators, weare all expecting a strengthening global picture, comingespecially from the United States and Europe, but it's still aforecast: it's not showing up yet in the hard data," he said.

Euro Zone Disappoints

Indeed, the European Commission is projecting that the eurozone economy will shrink in 2013 for the second straight year.And February's survey of purchasing managers was downright weak.

"This increases the chances of a rate cut, but it's stillnot our baseline assumption," said Petr Zemcik, director ofEuropean economics at Moody's Analytics in London. "The ECB hasdone all it can at this stage."

His comments were in line with a Reuters poll of economists,which saw a 90 percent chance that the ECB, the European CentralBank, would keep its main short-term interest rate unchanged at0.75 percent when it meets on Thursday.

However, a growing minority expects the ECB will cut ratesat some point. Doing so now, right after Italy's electionproduced a big protest vote against austerity, would invite thesuspicion that the bank was acting out of political panic.

But President Mario Draghi is sure to be quizzed aboutfurther easing and possible activation of the ECB's bond-buyingprogram for euro zone strugglers, especially if the banklowers its 2013 growth and inflation forecasts again.

Jeffrey Anderson with the Institute for InternationalEconomics in Washington, a financial-industry lobby group, saida rate cut would send a useful signal of the importance ofgrowth to voters weary of austerity.

The Italian economy has shrunk for six quarters in a row.Euro zone unemployment hit a record 11.9 percent in January.

At the same time, euro zone finance ministers, who meet onMonday, should excuse Italy from further fiscal tightening asits budget is close to structural balance, Anderson argued.

"Ways must still be found to prod Italy to move on overduelabor market liberalization. But action to boost near-termgrowth would help Europe to sustain the popular backingnecessary to advance the reforms needed for the longer term," hesaid in a note.

Bank of England Closer to Easing

In Britain, the government seems determined to stick tobudget austerity despite a sharp drop in manufacturing inFebruary and a stinging defeat for Prime Minister DavidCameron's Conservative party in a parliamentary by-election.

This keeps the onus on the Bank of England, three of whosenine policymakers have already voted to expand the centralbank's stock of asset purchases, now set at 375 billion pounds.

That could turn into a majority as soon as Thursday, whenthe BOE meets to set policy, if a survey two days earlier of theall-important services sector is weak, said Simon Hayes, aneconomist at Barclays Capital in London.

Further easing by the Federal Reserve is not on the cards.But job figures on Friday are likely to underscore that the U.S.central bank is in no hurry to withdraw its stimulus - themessage Chairman Ben Bernanke relayed to Congress last week.

According to a Reuters poll, firms probably added 160,000non-farm jobs last month, in line with January's 157,000 gain,while the unemployment rate held steady at 7.9 percent.

That is well above the Fed's goal of 6.5 percent. Moreover,federal spending cuts, if not reversed, will stiffen fiscalheadwinds and could lop 0.5 percent off growth over the rest ofthis year, many economists estimate.

Nevertheless, Jim O'Sullivan, chief U.S. economist with HighFrequency Economics in Valhalla, New York, is confident that itis just a matter of time before the Fed's ultra-easy policystarts to bear more fruit.

Job growth was already brisk enough to reduce theunemployment rate given a secular decline in the participationrate due to an ageing population, he argued.

"Based on what we're seeing in the labor market, in thebattle between monetary stimulus and fiscal drag, the Fed iswinning," O'Sullivan said.