Recoupling Continues

One of the themes I outlined for 2009 was "China will NOT save us", here is what I wrote then:

The myth that Australia is somehow insulated from the global recession because it digs up rocks and sends them to the fast growing Chinese economy will be completely shattered if it hasn't been already. Economists are forecasting the Chinese economy to slow to a growth rate of around 7 - 8% in 2009, I find that far too optimistic giving the growing signs of a sharp slowdown in the Chinese economy.

The myth of decoupling has been replaced by the reality of recoupling. The Chinese manufacturing sector has contracted for five straight months, not a good sign for an economy that relies on manufacturing for more than 40% of its output.

How will a Chinese economy growing at 2 - 4% affect commodity prices and the Australian economy? That is the question that investors should be asking rather than clinging to the hope that China will plow through at an 8% run rate in the face of a global recession.

Indeed forecasts of 7 - 8% growth in the Chinese economy for 2009 seem farfetched given the latest GDP data on the Chinese economy today, From Bloomberg:

China’s Economy Grows 6.8%, Slowest Pace in 7 Years

China’s economy expanded at the slowest pace in seven years as the global recession dragged down exports, increasing pressure for more government spending and lower interest rates to buoy growth.

Gross domestic product grew 6.8 percent in the fourth quarter from a year earlier, after a 9 percent gain in the previous three months, the statistics bureau said in Beijing today. The figure matched the median estimate of 12 economists surveyed by Bloomberg News.

Plummeting Chinese demand for parts and materials for exports is reverberating across Asia and the Pacific, driving Taiwan, South Korea and Australia closer to recessions and worsening Japan’s slump. Premier Wen Jiabao said this week that the government must work urgently this quarter to reverse the slowdown and maintain social stability amid a “very grim” outlook for jobs.

“It’s an astonishingly steep slowdown,” said Paul Cavey, an economist with Macquarie Securities in Hong Kong. “We haven’t yet seen all of the pain.”

Click on the link for the full story. No doubt there is more pain to come. Economists will be ratcheting down their forecasts for Chinese growth and by implication their growth rate targets for the Australian economy.

It is widely acknowledged that Australia went into this economic downturn in better shape that most countries but does that necessarily mean it will whether the storm better given it's leverage to the Chinese economy? These are the questions investors need to ask rather than relying on the hope that things will turn out just fine.