Saturday, March 12, 2016
Naturally, this continuing global weakness has its effect on us. So we shouldn't blame ourselves for our own weaker growth relative to our earlier performance. Rather, we should recognise that, relative to the other developed economies, we've been doing pretty well.
But we do need to remember that, compared with the others, we have a secret weapon: our strong economic links with China.
Nigel Ray, a deputy secretary of Treasury, spelt out the unusual features of the world we've entered in a speech this week. He notes that "global growth has struggled to regain sustained momentum post-global financial crisis, and global aggregate demand remains weak".
This is despite monetary policy (interest rate) settings in nearly all the major economies remaining "extraordinarily accommodative", and global public debt increasing since the crisis.
Official forecasters have continued to downgrade prospects for global growth, he says. The International Monetary Fund downgraded its forecast in its January update - the 17th downgrade in five years.
Now get this. Slower world growth has been accompanied by a number of trends that can be seen across the global economy: slower growth in international trade, weak business investment, slower productivity growth, slower population growth in the advanced economies, low inflation, and lower expectations about future inflation.
Wow. That's the sort of poor performance you expect to see briefly at the bottom of a world recession, not as a semi-permanent state.
We knew that slower growth in the working-age population as a result of population ageing would mean slower economic growth, but now official forecasters in other countries are also reconsidering their view of long-run "potential" growth in gross domestic product (just as we've done recently, cutting it from 3 per cent to 2.75 per cent).
For the other countries, "this partly reflects the ongoing legacy of the global financial crisis - such crises have long-lived effects on investment in productive capital and on labour markets, increasing structural unemployment and lowering labour force participation rates".
In other words, if business goes for some years under-investing in new and improved capital equipment, this diminishes the economy's production capacity. And when some workers go for years unable to find another job, they tend to lose their skills and the self-discipline that goes with having to turn up to work on time every day and do as you're told.
But it's not only the after effects of a protracted recession. Ray says recent estimates by IMF economists suggest that productivity growth was slowing in the advanced economies even before the GFC.
More recently, we've noticed that the "convergence" between the emerging and the advanced economies (as the emerging economies catch up by growing at a much faster rate than the advanced countries) that we've seen since the turn of the century is showing signs of stalling.
If that happens, it means slower global economic growth and could have other undesirable consequences.
It happened that Reserve Bank deputy governor Dr Philip Lowe gave a speech in Adelaide on the same day, adding to Ray's description of the strange state the world economy finds itself in.
Lowe noted that, although the official interest rate in the United States has been increased for the first time in nine years, the Bank of Japan has unexpectedly moved its rate into negative territory.
In doing so it joined the European Central Bank, the Swiss National Bank, the Swedish Riksbank and the Danish central bank with negative interest rates. And there's an expectation in various countries that yet further monetary easing will take place.
Lowe says that, in earlier decades, it was very rare for central banks to worry that inflation and inflation expectations were too low.
"Yet today we hear this concern quite often, and the 'unconventional' has almost become the conventional," he says.
But back to China and the special advantage it gives us in a dismal world. Ray says we have a higher proportion of our exports - about 32 per cent of our exports of goods - going to China than any other advanced economy does.
Twenty years ago, China's economy was less than a third of the size of America's. Today it's the largest economy in the world when you measure it according to "purchasing power parity" (as you should).
China's rate of growth may be slowing, but it remains one of the fastest growing economies in the world.
What many foreign observers don't seem to understand is that, just as we are "rebalancing" our economy from mining-driven to other sources of growth, so the Chinese are doing something similar, shifting from growth based on heavy industry, investment and exports, to growth based on service industries, consumer spending and imports.
It's possible the Chinese economy could falter as it makes this transition, but they'll get there in the end and this is why it's possible for us to shift from selling them mainly minerals to selling them the goods (fancy Western foodstuffs) and, particularly, the services their growing middle class demands.
We've been talking about this for years, but now it's actually happening. Ray says China is already our largest destination for services exports, taking about 14 per cent of them last financial year.
China is now our second largest source of overseas visitors, and their visitors spend far more than average. More than a million Chinese tourists arrived in 2015.
But get this: those million visits represented only about 1 per cent of China's overseas tourism market. They are so big relative to us that just a tiny share of their market is a big deal in helping us keep growing.