World economy slowing again as Eurozone crisis intensifies

Allister Heath
ONE should never read too much into any one set of numbers, but yesterday’s batch of global economic indicators was grim. America, China and Germany are all slowing sharply, suggesting that world growth is dipping again. For economies such as Britain’s, which are reliant on trade, this isn’t good news. It is also a corrective to some of the navel-gazing that has characterised the UK economic debate: we are not the only ones to be suffering from a weak economy.

While that isn’t an excuse, and George Osborne, the chancellor, needs to do more to boost this country’s competitiveness, the dire global situation will need to be borne in mind when tomorrow’s first quarter UK GDP statistics are released.

Yesterday’s figures tell us two things in particular.

First, China remains in a difficult place. In fact, it seems that growth rates may have permanently fallen, albeit still to extraordinarily elevated rates by everybody else’s standards. In some ways, the Chinese are more capitalist than the West – but in other ways they remain wedded to central planning, and Beijing’s monetary and housing policies have helped to create massive bubbles.

Despite all of the demand management of recent years, the HSBC purchasing managers’ index (PMI) fell to 50.5 in April from 51.6 in March and is back roughly to where it was in February. The new export orders sub-index fell to 48.6 in April from 50.5 in March, a reflection on weak trade and global demand. It remains unclear how China’s government and society will be able to cope with a new era of weaker growth.

Second, the Eurozone crisis is still intensifying; the cost of government borrowing has declined sharply in many countries, but such numbers have become meaningless indicators of their underlying economies as a result of massive central bank intervention. Even mighty Germany is in trouble.

The surveys reveal a strange disconnect between reality – the Eurozone economy is in a spiral of recessionary decline – and the perception, which is that the crisis is abating despite Cyprus, and is primarily confined to the southern fringes.

A shrinking economy will make it harder for countries to cut budget deficits and prevent debt burdens from rocketing. Eurostat figures reveal that the Eurozone’s gross government debt to GDP ratio increased from 87.3 per cent at the end of 2011 to 90.6 per cent at the end of 2012, and the EU’s as a whole from 82.5 per cent to 85.3 per cent. Britain’s gross debt is put at 90 per cent of GDP, the same as the Eurozone average; it is only because the UK still retains its own currency that we are not in much greater trouble.

The Eurozone composite manufacturing and services PMI was unchanged at a terrible 46.5 on the month – anything below 50 suggests contraction, a reading above denotes expansion – suggesting a collapse in GDP of about 0.4 per cent a quarter, only slightly less bad than the fourth quarter’s 0.6 per cent decline. The German composite index fell back into contraction for the first time since October, confirming that even Germany has been badly contaminated by the chaos. France is in a severe recession, much of which is directly attributable to president Francois Hollande’s demented socialist policies. Its PMI rose from 41.9 to 44.2 but that remains an abysmal level. Too many people believe that the Eurozone is past the worst. It isn’t.

There will be more explosive crises, and at some point one may yet be sufficiently destructive as to bring down the entire rotten edifice.
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