In the past week, there were two seemingly unrelated events at two ends of the globe but for discerning economists, it will be foolhardy not to note the events and their implications for the rest of the world. The events happened almost simultaneously as though they were part of a script: China tightened its noose on credit and Bernanke’s Federal Reserve in the US announced that it could scale down on asset purchases later this year.
Let’s try and simplify this. The US and China are big trading partners to Nigeria. On a country-by-country basis, the US and China are the largest economies in the world (even though the European Union comes first when classified as a single economy). According to the CIA World Factbook, Rank Order GDP, the GDP figures for the US and China in 2012 were $13.86 trillion and $12.38 trillion, respectively. Therefore, whatever affects the Chinese and American economies is bound to affect other economies especially Nigeria.
By the way, the size of a country’s economy is measured by its Gross Domestic Product, GDP. The GDP measure is an aggregation of four key components, namely, personal consumption expenditure, business investment, government spending and net exports of goods and services.
Very importantly, China has been credited with being solely responsible for about 30% of global growth in 2012. Now, the three-month-old government of Premier Li Keqiang is pursuing the tightest squeeze on credit in at least a decade in what it describes as an attempt to balance the Chinese economy. The objective, they say, is to deliver a more sustainable and more even economic growth in the neighbourhood of 7%. This will be a marked departure from the over 9% the economy witnessed in recent years.
A slow-down of the Chinese economy of up to 2% will have significant global impact!
Chinese decision makers have a right to decide what’s best for their economy. If fact, the underlying principle behind this current decision is to achieve a more balanced growth in the longer term. To put it more succinctly, they are no longer merely impressed by economic growth for the sake of it. They also consider the quality of that growth very significant. (Now, this is a lesson for our own statisticians and economists who sought to mesmerize us just a few weeks ago as to how fast our economy was growing).
Back to our discourse. Within the same week Ben Bernanke, Chairman of the US Federal Reserve, announced that the central bank may start to scale back its asset purchases later this year if the economy continues to strengthen, as the central bank expects. This proposed winding down of quantitative easing, he said, is dependent on two factors: continued improvement in the labour market and a rise in the inflation rate toward the Fed’s 2% goal.
Again, we cannot afford to forget so soon that the global financial meltdown had its origin in the US mortgage-backed securities market way back from 2006. The result of those sophisticated financial misadventures sent major stock market indices southwards. Even here in Nigeria, the reverberating effects of the global financial meltdown were felt. It took the Toxic Assets Relief Programme (TARP) and the stimulus package to get the economy up and working and achieve some stability and growth in stock market indices again.
Now, it seems Christmas is over. Already, the impact of both the Chinese and Feds decisions have been felt globally. The Dow Jones Industrial Average experienced a 560-point tumble in two days following the Feds announcement. Asian stocks are headed for the biggest monthly loss in a year (http://proshareng.com/news/20262). The NSE All Share Index experienced a pull-back further reducing the year-to-date returns to 29.86%.
For us as an emerging nation, we must pay attention and take appropriate measures that would absorb the shocks of these economic policies. It may even seem like these matters do not affect us at the moment. Just give them between 6 to 12 months and they will hit our shores. Like someone said sometime last year, it’s time to have “economics with common sense.” Let the adjustments begin now.
Keywords: Federal Reserve, China, US, Nigeria, Economic Growth, GDP, TARP, stimulus