25
Jan 16

China’s Growth Rate is Finally Slowing Down

Countries around the world have recently released their GDP growth rate for the last economic quarter of 2015, and some are a little concerned with what China has to report. Despite the slow recovery the rest of the world has been making after the 2008 global recession, China’s growth rate is now 6.9%–the lowest it’s been since 2009 (Farrer). Economists were actually predicting an even larger drop, however the Chinese aren’t exactly known for providing accurate statistics. They are, however, known for downplaying most of their problems.

These numbers are the first official confirmation of the downturn in the nation’s economy since the Chinese stock market slump, followed by the surprise devaluing of money in July and August (Farrer). But perhaps what has China most worried is their dampened manufacturing sector, which disappointingly shrunk 5.7% in the past year after analysts predicted it would grow by 6%. “The manufacturing industry might cause [the] most concern as it is a pillar of China’s economy,” said Li Huiyong, an economist at Shenwan Hongyuan Securities in Shanghai (Farrer). Indeed, anyone living in the United States has heard the joke about American flags being “Made in China.” But it’s true that because of its huge manufacturing sector we import a lot from China–in fact, they make up over 20% of our total imports on an annual basis–more than any other country, including our neighbors Canada and Mexico (“Top US Imports from the World”).

As a result of this downturn, less people have been investing in the Chinese economy. In fact, many investors have started to put their money into American companies, because of the country’s uncanny economic resilience despite our recent recession. In fact, we’ve managed to bounce back the most since 2008, and are doing better than the European countries, especially because of their refugee crisis and the lowering prices of oil. In addition, with the slowing of China’s manufacturing output, the US may be forced to finally develop its own manufacturing sector, which has shrunk to the point of insignificance after China’s rocketing climb. However, investors are still unsettled, seeing as the Chinese also import tons of products from the United States, as well as spend their money at many American establishments (McDonald’s, Starbucks, etc.) which you can find on almost every corner in their major cities.

While seeing the world’s second largest economy (“World’s Largest Economies”) so uncharacteristically weak is nerve wracking when you imagine the effect this could potentially have on the rest of the world, we should keep in mind that while the Chinese economy is under downward pressure, it has remained relatively stable. A 6.9% growth rate, while slower than what we’re used to from this Asian tiger, is still incredibly good. The US’ GDP growth rate was only about 3% this year, and as I mentioned we’re still doing much better than most countries around the world (“United States GDP Growth Rate”). And meanwhile the Chinese communist government is already making adjustments in order to head a major recession off at the pass. These include lowering interests rates and taxes, as well as stimulating certain sectors (Farrer)–which is similar to what President Obama did in 2009 to dig the US out of our own recession.

In actuality, what this slowing growth rate could really be pointing to is an increase in the overall development of China. China, with a huge amount of its population of living in poverty, has historically been known by political economists as a “Less Developed Country” (LDC). However, as a country develops (i.e. closes its class gap, percentage living in poverty shrinks), it is natural for economic growth to appear to slow. The explanation for this is that many people already have money, and industry is already flourishing, so there are fewer areas for the economy to drastically improve. This explains why the US–a rich developed country–can have a growth rate of 3% and still be doing so well. In addition, the decreased manufacturing output of China could indicate more people entering into service sector jobs, i.e. jobs requiring more skill and training. This would in turn suggest that more Chinese people now have access to higher education. And of course, the slowing growth rate could also have to do with China’s gradual decrease in population–another good thing in a country so overpopulated that it can’t feed itself.

What I’m saying is, most economists that study development have seen this drop off in China’s growth as something inevitable, although not necessarily in a bad way. Besides, the Chinese economy is already so advanced, they’ll certainly be able to handle themselves throughout this recession just fine. I’m interested to see what direction this blossoming country decides to take next.   

Farrer, Michael. “Chinese Economic Growth Slows to 6.9% in Third Quarter Despite Stimulus.” The Guardian. Guardian News and Media Limited, 18 Oct 2015. Web. 25 Jan 2016.

“Top US Imports from the World.” World’s Richest Countries. Homestead, 2015. Web. 25 Jan 2015.

“United States GDP Growth Rate.” Trading Economics. Trading Economics, 2016. Web. 25 Jan 2016.

“World’s Largest Economies.” CNN Money. Cable News Network, 2015. Web. 25 Jan 2016.


19
Jan 16

What the Drop in Oil Prices Could Mean for Saudi Arabia

The oil industry over the years has been known for its booms and busts. Currently the world is experiencing the largest bust since 1990. Oil prices have dropped by 60%–the lowest they’ve been since 2004 (Krauss). The reasons for this are complicated, but they boil down to some simple rules of supply and demand:

Over the past few years, the United States’ production of oil has nearly doubled, causing Americans to start buying the cheaper domestic oil instead of products from foreign markets. Because of this, countries like Saudi Arabia, Nigeria and Algeria that once was sold their oil to the United States are now being forced to market themselves in Asia–and lower their prices in order to compete. Canadian and Iraqi oil production and exports are also rising continuously. Even Russia, with all its economic problems, has managed to keep the black gold flowing (Krauss).

Meanwhile, the economies of Europe and developing countries are weak, at the same time that vehicles are becoming more energy-efficient. So demand for fuel has been diminishing recently.

While this may seem great for consumers of oil (if you don’t drive, you’ve at least noticed others reacting with glee to the cheapest gas prices anyone’s seen in a decade), oil companies and the economies they’re attached to are suffering. It’s estimated that over 250,000 have already lost their jobs (Reed), with more cuts to come, even from the biggest and most secure companies. Venezuela, Iran, Nigeria, Ecuador, Brazil and Russia are just a few countries that are suffering economic and even political turbulence. The Persian Gulf states are will probably be forced to invest less money around the world, and they may cut aid to countries like Egypt. In the US, big oil states like Alaska, North Dakota, Texas, Oklahoma and Louisiana are also facing economic challenges (Krauss).

The only way to fix this, it seems, is for OPEC to intervene and cut the

oversupply of oil floating around the market. However, Saudi Arabia, which has headed the cartel on oil for years, is refusing, even with half the world pressing them to take action. Their reasoning is that if OPEC were to stop production, and the demand for oil suddenly rose, Saudi Arabia would only be helping its competitors. In fact, despite the equal toll the drop in prices is taking on their economy, the Saudi government has stated that it’s ready to allow prices to slip much lower before they do anything to stop them (Krauss). However, most oil analysts are calling their bluff.

  The thing is, Saudi Arabia needs OPEC, and this plan they’ve concocted–while serving Saudi interests–is in direct conflict with the cartel. Almost the entire Saudi government is funded off of the money they make from their OPEC oil exports (“Saudi Arabia”). And when you run a repressive authoritarian state, surrounded by unstable warring countries, with a military investment in Yemen, a newly inducted head of state and a citizenry that’s already dissatisfied with the economy, you need to make sure that everything in your regime is running smoothly. This simply cannot happen if the Saudis don’t have their oil money, or if they keep refusing to work with their partners in OPEC (Evans-Pritchard).  

Saudi Arabia also can’t expect this strategy of beating out their competitors and then selling oil at their own price to actually succeed. They would essentially be selling to a group of nations whose economies have just been gutted. In other words, most people in these countries wouldn’t be able to afford oil from OPEC at the price they plan on selling–they would already be broke!

So at the rate things are going, it doesn’t look like Saudi Arabia will be winning this fight. But what will actually happen if and when that occurs, and they have to find new strategies for making money? The surprising thing is that this “failure” could be the best thing that’s happened to the Saudi economy in a while.

For me to explain this, we have to look at the bigger picture: When a country’s main source of income stems from selling natural resources to the rest of the world, exports will be very high. As a result, foreign currency will come flooding in to pay for these exports, driving up the value of your own country’s currency. In order to avoid this huge inflation, Saudi Arabia has pegged its currency value to the US dollar, keeping their exchange rate relatively steady (Evans-Pritchard).

However, say the plan for Saudi Arabia to outlast all the other oil markets fails, and the Saudi government is forced to give up this peg; the value of their currency would then drop by 30-40% (Worstall). And that would simply do wonders for the domestic economy of Saudi Arabia. All their imports would become more expensive, indirectly causing citizens to buy domestically. This new money would make it easy to substitute OPEC oil profits with domestic production, without the added threat of inflation. In addition, anything domestically produced would then become that much cheaper on the global market. The domestic industry would be perfectly stimulated. In fact, Saudi Arabia might actually start to have a real domestic economy, instead of one based entirely on oil profits. That means they’d actually be producing things their own people want to buy–who’d a thunk it?

I know this idea is a little far reaching, especially now when the future is so uncertain. Still, it is interesting to think about as the situation evolves. Until then, the oil industry can keep us engaged with its continued cycle of booms and busts.

Evans-Pritchard, Ambrose. “Saudi Arabia Risks Destroying OPEC and Feeding the ISIL Monster.” The Telegraph. Telegraph Media Group Limited, 11 Nov. 2015. Web. 18 Jan. 2016.

Evans-Pritchard, Ambrose. “Speculators Test Saudi Currency as Oil Crisis Deepens.” The Telegraph. Telegraph Media Group Limited, 20 Nov. 2015. Web. 18 Jan. 2016.

Krauss, Clifford. “Oil Prices: What’s Behind the Drop? Simple Economics.” The New York Times. The New York Times Company, 15 Jan. 2016. Web. 18 Jan. 2016.

Reed, Stanley. “Stung Low by Oil Prices, BP Will Cut 4,000 Jobs.” The New York Times. The New York Times Company, 12 Jan. 2016. Web. 18 Jan. 2016.

“Saudi Arabia.” 2015 Index of Economic Freedom. The Heritage Foundation, 2015. Web. 18 Jan. 2016.

Worstall, Tim. “The Oil Price Crash Could Be the Best Thing that Happens to the Saudi Arabian Economy.” Forbes / Economics and Finance. ForbesBrandVoice, 21 Nov. 2015. Web. 18 Jan. 2016.


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