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India and China's latest output data confirms rapid economic growth and relative global 'decoupling'

India and China's latest output data confirms rapid economic growth and relative global 'decoupling'

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Published by John Ross
An analysis of why China and India have come so successfully through the financial crisis and its relation to the analysis of world economic 'decoupling'.
An analysis of why China and India have come so successfully through the financial crisis and its relation to the analysis of world economic 'decoupling'.

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Published by: John Ross on Jul 25, 2010
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08/25/2010

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India and China's latest output data confirms rapid economic growth andrelative global 'decoupling'
By John RossThe publication by both India and China of their latest industrial production data confirmsvery rapid economic growth in both countries. This is not only important in itself but isagainst the view put forward, for example, by Stephen Roach of Morgan Stanley, BillEmmott the former editor of 
The Economist 
, and others, that the major Asian developingeconomies were incapable of economically 'decoupling' from the US.Taking first India'sdata, January's industrial production rose 16.7% year on year.Manufacturing output increased by by 17.9%. The output increase was heavily concentratedin the investment production sector - output of capital goods rose by 56.2%, intermediategoods by 21.3%, and consumer goods by 4.2%. The overall industrial output increaserepresented only a marginal slowing compared to therevisedyear on year increase of 17.6%in December - that figure was a revision upwards from the 16.8% initially announced.Overall the figures confirm extremely rapid Indian economic growth.For China, February's monthly figures cannot be used for meaningful year on yearcalculations as the long Chinese New Year holiday fell in February this year and in January in2009 - artificially distorting simple year on year comparisons. The appropriatemeasureis tocompare January and February 2010 with January and February 2009. Taking this China'sindustrial production was up 20.7% year on year. Light industrial production was up 14.5%and heavy industrial production up 23.7%. Particularly notable advances were in productionof transport equipment, up 43.7%, and telecommunications, computers and otherelectronic equipment - up 26.4%. The rapid increase of production is evident - this blog haspreviously analysed the successful shift of China into growth driven by expansion of domestic demandand this is confirmed by the continued trend of China'sfalling tradesurplus.In addition to the inherent importance of the growth data for both India and China thesefigures throw clear light on the issue of 'decoupling' - that is whether rapidly growing Asianeconomies would be able to continue to grow at a fast pace under conditions of recessionor economic slowdown in the US. The idea that 'decoupling' could take place was stronglyargued against, for example, by Stephen Roach of Morgan Stanley and Bill Emmott - formereditor of 
The Economist 
and a long term analyst of the Asian economies.Stephen Roach in
The Next Asia
argued: 'The hopes and dreams of decoupling - an overlyoptimistic scenario that envisaged emerging market economies have the wherewithal tostand on their own in an otherwise weakening world - are in tatters.' (p66) This representeda continuation of his argument, presented a year earlier, that: ''Dreams of decouplingdanced in the air on this first official day of meeting at Davos [in January 2008].... I didn'toffer much support for this view... My case is relatively simple. Developing Asia - where thegrowth dynamic is the strongest and the hopes of resilience are the deepest - remains verymuch an externally dependent economy.' (p30)
 
 
Roach argued that China was particularly vulnerable to external economic slowdowns:'There is a second factor at work that is likely to challenge the view that hyper growth ishere to stay in Asia - the region's persistent reliance on external demand as a major driver of economic growth. A slowdown in the United States - the main engine of the demand side of the global economy - can't help but work its way through the export channel and reduceexternally dependent Asian growth.... China is at the top of the external vulnerability chain...As the United States economy now slows, the biggest piece of China's out-size exportdynamic is at risk... the Asian growth dynamic remains highly vulnerable to an externalshock.' (p302)In the case of Stephen Roach's earlier articles no reversal of his view was expressed whenthey were collected together and published, after June 2009, in
The Next Asia
.Bill Emmott, in his book
The Rivals
, similarly argued: 'The onset of a global economicslowdown, an unsurprising consequence of the financial crisis in America and WesternEurope, was initially expected to leave China and India fairly unaffected... The view that Asiacould "decouple" itself from the rest of the world soon proved too sanguine. It could nevertruly have done so, given the trading links between East and West. But even more than that,the sudden slowdown in both China and India... exposed the economic weaknesses thatwere already present... A property boom turned to bust in China and, combined with fallingexports, produced the possibility that China's growth rate could halve during 2009 from2007's 13%, raising the prospects of social unrest. A difficulty in overcoming inflation inIndia, plus the drying up of the global liquidity on which big Indian companies had depended,made that country too look vulnerable, perhaps returning it to the 4-6% annual growthrates common in the 1990s.' (pxxi)It is possible Stephen Roach and Bill Emmott, or supporters of their analysis, may argue thatthe current rapid growth in India and China reflects the fact that the world economy as awhole is no longer moving downwards. But the chronology does not confirm such a view.China's economic recovery began in the second quarter of 2009, at the worst point of thedip in international financial markets and as advanced economies were continuing tocontract. It did so on the basis of stimulus package that raised both domestic investmentand domestic consumption. A decline in China's net imports continued through the wholelatter part of 2009 but its economic growth rate accelerated. While it is correct that the UStrade deficitbegan to expand after July 2009, China's trade surplus continued to fall - that isthe increased demand sustaining economic growth was not externally driven. India'seconomic growth was similarly driven by internal economic stimulus. In short China andIndia both showed themselves capable of 'decoupling'.Naturally such a process of 'decoupling' cannot be absolute in the sense that China and Indiawill be unaffected by developments in the US economy. But the emphasis of Roach's andEmmott's arguments, which stressed the limits of India and China's relative autonomyrather than its possibilities, and suggested that their growth would slow dramatically underthe impact of a recession in the US, has been shown not to be correct.Stephen Roach has a justified reputation as one of the world's most most systematiceconomists - I read every word of his I can get hold of. Emmott's
The Rivals
is similarly a

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