Week in Economics: Sign of Slowdown

Signs that growth in the world economy is nearing its peak strengthened this week, with projections that the Chinese economic juggernaut would slow sharply next year and indications that US growth is cooling. But one of the darkest clouds hanging over the economy - high oil prices - became a little lighter this week, although economists aren't ruling out another surge.

The importance of imports

China has become a net importer of farm produce, raising concerns at the highest levels of government about the security of the food supply for 1.3bn people as land and water shortages put pressure on domestic grain production.

Hu Jintao, China's president, has commissioned urgent studies on food security after evidence in 2003 and this year that China's grain output was dwindling as demand rises in the long term, officials and academics said.

China's growing dependence on western imports comes as trade in agriculture becomes one of the most bitterly fought-over aspects of the Doha global trade round.

The leadership is very concerned about food security. They were all young men during the famine of the late 1950s and 1960s. It is not only a strategic issue of dependence on foreign markets for them, it is also a very personal issue of food self-sufficiency,said one academic who advises the government on food security issues.

Braking China

Meanwhile, the International Monetary Fund said China's economy should grow at about 7.5 per cent next year as the effects of recent macro-economic controls continue to cool activity and inflationary pressures.

In its annual review of the Chinese economy, the IMF said that this rate of growth in 2005, if it materialises, would represent a significant slowdown from the 9.0 per cent gross domestic product growth rate that the IMF predicted for the Chinese economy this year. That prediction was revised from an earlier 8.5 per cent forecast and compares with a revised official 9.7 per cent expansion in the first half of this year.

Separately, China's increasing reliance on private companies as a motor for economic growth and new jobs has received official confirmation in a national survey showing them outpacing the economy as a whole.

The annual survey by the All-China Federation of Industry and Commerce, a government body monitoring business, said that privately owned and run companies with revenues of more than Rmb120m ($14.5m), the benchmark for inclusion in their list, rose from 1,582 in 2002 to 2,268 last year.

Japan holds firm amid global jitters

Japanese exports, a vital engine of the country's recovery, increased for the eighth straight month in July, a signal that they have so far withstood deceleration in the US and Chinese economies. But analysts expect export growth to slow later in the year and said it was not clear that domestic demand, which appears to be wavering, would be able to pick up the slack.

Overseas shipments were up 14.3 per cent from a year ago, according to data published this week. The high price of oil raised the total value of imports but Japan's trade surplus grew by 44 per cent - its 13 consecutive month of expansion.

The country is enjoying its strongest recovery since the asset bubble burst in the early 1990s, but recent gross domestic product data have sparked fears that momentum is slipping as domestic investment and consumer spending weaken.

US growth hits the buffers

Figures showing lacklustre growth in manufacturing orders and a slowdown in new home sales added to evidence that the US economy is continuing to cool.

Durable goods orders initially appeared strong, rising by 1.7 per cent over July. But the figure was flattered by bumper purchases of civilian aircraft, which doubled over the month. Outside the notoriously volatile aircraft sector, orders rose by just 0.1 per cent.

"It is important to recognise that today's report is not as strong as the headline suggests since orders were not anywhere close to being balanced across sectors," said Geoffrey Soms, an analyst at Economy.com, the consultancy. "The recovery of the overall US economy had lost a bit of steam in the middle of this year."

Britain's roof caving in?

The widely heralded British housing market slowdown finally appeared to be materialising, economists said, after banks reported a surprising 20 per cent fall in the number of mortgages approved last month.

When the Bank of England earlier this month said the overheated market was easing, many City economists thought it had called the end of the boom prematurely.

However, the British Bankers' Association's mortgage approval figures, considered a reliable indicator of where house price inflation will be in four or five months' time, suggested the Bank's assessment might be coming true. The BBA, which accounts for about two-thirds of mortgage lending, said 70,756 loans were approved for new house purchases last month, down sharply from 89,352 a year earlier.

Meanwhile, a CBI survey found manufacturers reporting a strong recovery, with order books at their most positive in six years. Separately, official figures showed that while total business investment softened during the second quarter, investment in manufacturing companies grew for the first time since 2000.

The flouting continues

In Germany, the government is expected to report next week a breach of the European Union's fiscal rules for a third consecutive year in 2004.

According to information obtained by FT Deutschland, the FT's sister paper, Hans Eichel, German finance minister, will report a deficit forecast of 3.7 per cent of gross domestic product against the original forecast of 3.3 per cent. Joaquin Almunia, EU monetary affairs commissioner, is expected to relaunch deficit procedures against Germany.

For 2005, Mr Eichel pledges a deficit of less than 3 per cent of gross domestic product, to stay within the rules.

Drilling down

And of course, the economic week wouldn't be complete with some wild oil price gyrations.

After coming close to the $50-a-barrel mark, prices fell by 13 per cent in the last five trading sessions. US crude oil futures traded on the New York Mercantile Exchange hit a record high of $49.40 last Friday, but fell sharply this week as news of improving supply and a better-than-expected cushion of inventories in key consuming countries, particularly the US, prompted a sell-off among traders looking to cash in their profits.

Exports from Iraq over the past week have more than doubled to 2.2m barrels a day, while the cloud overshadowing Yukos, the Russian oil major, has been partially lifted. On Thursday, even news of several explosions at Iraqi pipelines again lowering exports from the troubled country was not enough to end what many analysts call merely a correction.

Despite record oil prices, some of the world's biggest oil-producing countries have reduced their investment in new capacity. The Organisation of Petroleum Exporting Countries this week revealed its members drilled 6.5 per cent fewer wells in 2003, suggesting the global supply crunch and high oil prices could last longer than expected. The numbers appear to contradict statements by Opec members that they are actively building extra capacity.