Roubini - Hard landing in China

NYU economist Roubini is now predicting China could be the backdrop in the next drama of the deteriorating global financial system. Not necessarily a lot of fresh produce connection here, but something to think about it. This link examines what's at stake:

For the last few years the global economy has been running on two engines, the U.S. on the consumption side and China on the production side, both lifting the entire global economy. The U.S. has been the consumer of first and last resort spending more than its income and running large current account deficits while China (and other emerging market economies) has been the producer of first and last resort, spending less than its income and running ever larger current account surpluses.

For the last few months the first engine of global growth has effectively shut down as the latest batch of macro news from the U.S. are worse than awful: collapsing consumption and consumer confidence, plunging housing, collapsing auto sales, plunging durable goods spending (while supply side indicators such as production, ISM and employment are also free falling). The U.S. is entering its worst consumer recession in decades both supply and demand data look worse than in the severe recessions of 1974-75 and 1980-82. And in due time this tsunami of awful macro news, together with ugly downside surprises to earnings will take another toll on equity valuations that are now temporarily lifted by another bear market sucker’s rally.

More worrisome there are now increasing signs that the other main engine of the globaeconomy – China - is also stalling. Let us consider now in detail the evidence that China may be on its way to a hard landing…

Later....

In conclusion the risk of a hard landing in China is sharply rising; a deceleration in the Chinese growth rate to 7% in 2009 - just a notch above a 6% hard landing – is highly likely and an even worse outcome cannot be ruled out at this point. The global economy is already headed towards a global recession as advanced economies are all in a recession and the U.S. contraction is now dramatically accelerating. The first engine of global growth – the U.S. on the consumption side – has now already shut down. The second engine of global growth – China on the production side – is also on its way to stalling. Thus, with the two main engines of global growth now in serious trouble a global hard landing is now almost a certainty. And a hard landing in China will have severe effects on growth in emerging market economies in Asia, Africa and Latin America as Chinese demand for raw materials and intermediate inputs has been a major source of economic growth for emerging markets and commodity exporters. The sharp recent fall in commodity prices and the near collapse of the Baltic Freight index are clear signals that Chinese and global demand for commodities and industrial inputs is sharply falling. Thus, global growth – at market prices – will be close to zero in Q3 of 2008, likely negative in Q4 of 2009 and well into negative territory in 2009. So brace yourself for an ugly and protracted global economic contraction in 2009.