“For the sake of the European periphery, I am concerned,” he said at the conference. “We’re seeing the re-emergence of pressure in Europe as a result of the normalization of interest rates by the Fed.”
The only hope for the worst-off European economies, which have fallen into deep recessions with unemployment rates as high as 27 percent as a result of the Continent’s sovereign debt crisis, is that the European Central Bank will step in and take extraordinary measures such as those used successfully by the Fed, said Julian Callow, chief international economist at Barclays Bank.
Chinese growth in question
Perhaps the biggest danger is the let-down for China as it struggles to cope with the European recession and higher global interest rates. That could be the most troubling for the world economy, Mr. Callow said, because it was robust growth in China that buoyed global economies in the aftermath of the 2008 crisis.
“Nearly half the growth in the world economy in the last five years came from China,” and in particular was spawned by a frenetic Chinese building binge on skyscrapers, factories, roads, bridges, airports and all other manner of infrastructure that required massive imports of basic materials such as copper, coal and iron, he said. China’s boom spurred an economic boom in commodity-producing nations from Australia and Canada to Peru and Brazil.
Those booms are over, and China could face a destructive real estate market collapse and financial shake-up after its overheated building boom that could reduce growth to paltry levels there and start to threaten global growth, Mr. Callow said.
Michael Drury, chief economist at McVean Trading & Investments, agreed that with growth averaging from 0 percent to 2 percent in the Eurozone and the U.S. for the foreseeable future, growth in the world economy hinges on a revival in China, and the prospects are not good.
He said growth already has fallen to between 5 percent and 6 percent in China and could go lower as the government’s efforts to stimulate the economy with more debt-financed spending on infrastructure are producing feeble results.
“The basic problem in China is they’re in a classic middle-income trap,” he said. Having attained a modest level of incomes between $4,000 and $5,000 per person through rapid industrialization, China’s fast-rising wages are impairing the country’s competitive edge, but its consumers still do not have enough purchasing power to keep the economy growing on their own.
On top of that, “they mishandled the stimulus. All they got was a massive inflation and an increase in wealth at the top,” he said. “I would strongly suggest that you don’t invest any money in the Chinese stock market. Even the Chinese are trying to get their money out of the country.”
Fed focuses on U.S. economy
Worries about growth in Europe, China and the rest of the world do not appear to be much on the minds of Fed officials as they debate how soon to taper off their purchases of bonds.
James Bullard, president of the St. Louis Federal Reserve Bank, said he is assuming and hoping that the recession in Europe will end soon while growth in China will remain between 7 percent and 8 percent.
“There’s some risk of a broad turndown” in global growth as a result of the Fed’s actions, he said. Mr. Bullard has urged caution at the Fed not because of weak global growth but because he thinks the Fed could be jumping the gun and assuming that growth is healthier in the U.S. than it actually is.