Friday 29 Mar 2024
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CHINA recently devalued the yuan to spur its export competitiveness and cut interest rates on Aug 25 in the hope of averting an economic meltdown. But these measures saw Chinese equities come crashing down, dragging the world financial markets along with them.

In fact, economists have opined recently that the world’s second largest economy is unlikely to meet its gross domestic product growth target of 7% this year, which spells trouble for the rest of world.

“While official Chinese data is always controversial, it is increasingly clear from other specific and confirmable economic activity data that the official 7% GDP target is unlikely to be achieved in any sustainable manner,” says Columbia Threadneedle Investments global research director Robert McConnaughey in a recent commentary.

Since the 2008/09 global financial crisis, the Chinese economy has been the world’s engine of growth as the Western developed economies struggled to recover. According to the International Monetary Fund, China has accounted for more than a third of global growth over the past seven years.

Thus, a sputtering Chinese economy means reduced demand for goods and services, which does not bode well for export-oriented countries, especially in Asia, as the republic has evolved into a major trade partner for many of them.

Meanwhile, growth in the eurozone remains sluggish as the bloc battles high unemployment and mounting debt. Many of the economies in the region, says the International Monetary Fund, are forecast to grow less than 2% in the next two years.

Exports to the eurozone are low as global growth is still weak, says Handelsbanken Capital Market in a research report. This is more bad news for Asia’s economies, which are heavily reliant on exports. Furthermore, the depreciation of emerging market currencies against the US dollar has neutralised gains in the eurozone’s export competitiveness that stemmed from a decline in the euro against the greenback, adds the report.

Nevertheless, many consider the signs of recovery in the US economy after so many years as a bright spot. Recent data has been encouraging, indicating a 3.7% annualised GDP growth in the US in the second quarter — compared with an anaemic 0.6% in the first quarter — on the back of improvements in business investments, corporate earnings and consumer spending.

Data compiled by World Economics reveals that global economic activity continued to moderate in August. The World Economics Global All-Sector Sales Managers’ Index, which is calculated on an average of business confidence, market growth, sales, price charged and staffing indexes, fell to 56.1 points in August, the slowest pace since December 2012. While this shows another month of moderation, the organisation says the latest headline figures signal solid overall improvements in global business conditions.

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This article first appeared in digitaledge Weekly, on August 31 - September 6, 2015.

 

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