Tag: economic forecasts

The Bull in China’s Shops and Shop Floors

In one more sign that the global economic and financial center of gravity is shifting East, a new survey by GlobeScan shows that the Chinese are more supportive of “free market” capitalism than Americans, who live in the so-called capital of free-wheeling market capitalsm.

That is remarkable given that China remains, at least nominally, a Communist country.

In the survey, respondents were asked if the “free market system and free market economy is the best system on which to base the future of the world.”

In China, 67% of respondents strongly agreed or somewhat agreed with that statement. In the U.S. the equivalent combined number was 59%. The U.S. number dropped 15 percentage points from a year-earlier survey and was down from 80% in 2002, when the first survey was taken by GlobeScan, a global research organization.

No doubt the financial crisis and resulting economic challenges of the last couple years took a toll on the U.S. scores, while China largely escaped a direct economic hit. China also had fewer naysayers — respondents who “somewhat disagree” or “strongly disagree” that a free market economy is best. In those categories China’s combined score was 19% versus 29% in the U.S.

GlobeScan also noted that “Americans with incomes below $20,000 were particularly likely to have lost faith in the free market over the past year, with their support dropping from 76% to 44% between 2009 and 2010.” Whatever patience Americans have shown for enduring recession appears to have been wearing thin by the time this survey was taken, between June and September of 2010.

Brazil also outscored the U.S. in its confidence in a free market economy, with 67% of respondents who “strongly agree” or “somewhat agree” that free market economies offer the best future – the same as in China. India’s scores were close to those of the U.S.

Other notable results for that measure include: Germany, 68%; Kenya 61%; the Philippines, 65%; and Italy, 61%. Just 31% of respondents from France agreed with those two statements and only 27% in Turkey. Japan clocked in at 47%.

Obviously China’s brand of “capitalism” – with heavy government planning and control – is far different that of the  U.S. Still, for a country that not all that long ago was pushing some of its most educated citizens back to doing manual labor on a farm, this is a remarkable time.

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Hitting an Economy While It Is Down?

The extremely weak GDP numbers out of the U.K. recently took many by surprise and raised questions about the wisdom of imposing austerity while an economy is in a weakened state.

In the U.K., fourth-quarter GDP sank by 0.5% compared with the third quarter, and compared with a projected 0.5% uptick. This poor showing, which reflects a 2% drop in GDP annualized, is occurring before recently approved austerity measures have taken their bite. A drop in GDP this big, at a time when the U.K. is not in recession, has not been seen for more than 25 years.

Spain, now turning the screws on its own austerity effort, reported last week that unemployment hit 20.3% in the fourth quarter of 2010. That is the highest level in nearly 14 years and double the average of the European Union. One economist described household income there as “collapsing.”

Then on Monday, the Irish central bank slashed its economic growth forecast for 2011 by more than half. It now expects GDP to rise just 1% vs. a forecast of 2.3% about three months ago. The new outlook mirrors the view of the International Monetary Fund, which last month cut growth projections for Ireland from 2.3% to 0.9%. Some forecasts project that consumption will drop by 0.75% this year and by an additional 0.5% in 2012.

With all three of these countries undergoing — or soon to be undergoing – major cuts in government spending just as their economies appear to be weakening, it begs the question: Is this a good time to be imposing strict austerity measures, even if some level of austerity will be critical in the medium or long term to push down swollen government deficits?

Wharton management professor Mauro Guillén, notes: “There are two schools of thought: Cut now to stabilize, or don’t cut because that further hampers the recovery. I agree with the second school, except that the markets are demanding immediate action. So, one must continue spending but without increasing government borrowing costs too much.”

Wharton finance professor Franklin Allen, however, thinks the austerity moves are “the right way to proceed. The alternative is to risk default in some form, [which] would be even more painful.” He points out, however, that the three governments have been overly optimistic about how their austerity programs will affect growth. “Unfortunately, they are still using economic models that assume markets work well so people displaced by the expenditure cuts will soon be re-employed. My own view is that it is quite likely they will have low growth or recession for some time to come.”

The economic bind these three countries are experiencing “underlines how important it is for the U.S. to start cutting its deficit soon,” Allen says. “At the moment, the dollar is a safe haven currency but this will not persist indefinitely. The longer the austerity drive is postponed, the more brutal it will eventually have to be.”



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