By John Richardson
WHAT a week it’s been when, of course, politics has trumped everything else and has challenged the view of those who believe that demand will take care of itself.
Demand did take care of itself during the Supercycle, but that is now over for good.
China no longer has the comfort blanket of debt-fuelled Western demand for its goods, buoyed by favourable demographics. Thus, how its politicians respond to the need for reform, in order to create a healthy domestic economy is crucial, as we have discussed throughout this week. Hu Jintao made all the right noises about tackling corruption in his speech at the opening of the 18th Party Congress yesterday, but will or can this amount to more than just noise?
Barack Obama immediately faces the challenge of the “fiscal cliff”, as the reaction of the stock markets indicates, and numerous other difficulties.
We wish him, and China’s new leadership, every success.
But the point that needs re-emphasising is that this is no longer a game of just studying operating rates and new capacities anymore in the hope that “if we build it they will come”.
An analogy is of a car where the suspension has gone, thanks to the end of the Supercycle. As a result, we will feel every bump in the road, including the outcome of the policies of this current generation of politicians in the US, China and elsewhere.
As Sebastian Mallaby wrote in the Financial Times earlier this week ((from where the above charts were sourced), referring to political uncertainty: “The International Monetary Fund’s recent World Economic Outlook illustrates the point. The IMF dutifully produced a precise forecast: next year the world economy will grow by 3.6 per cent.
“But it warned its prediction was based on political assumptions: that US politicians would avoid the fiscal cliff; that European politicians would hold the eurozone together. The IMF might have added that its forecast was also hostage to China’s new leadership. Will China reconcile itself to growth at the new rate of 7-8 per cent, accepting that sustainable, domestically led expansion makes the 10 per cent growth rate of 1990-2011 unattainable? Or will it stimulate aggressively, as it did after the Lehman Brothers bust?