Investors in China and India might be excused for feeling a bit of whiplash these days. Three months ago, Asia?s two nascent superpowers were said to be immune from the credit crisis gripping developed nations. Recently, their economic booms were supposed to stabilise global growth. Now, both countries are suddenly looking inward and fretting over the destabilising effects of sluggish growth.
It?s a reminder that 2008 is the year of the contrarian. As it began and a global recession loomed, the so-called Bric?Brazil, Russia, India and China?were supposed to save us. Let?s hope Jim O?Neill, the Goldman Sachs Group economist who in 2001 coined the acronym, is right that the ?Bric consumer is going to rescue the world.?
Yet India hasn?t begun to count the fallout from its worst terrorist attack in 15 years. PM Manmohan Singh?s decision to grab the finance portfolio from P Chidambaram shows how concerned India is about its growth outlook.
Singh is a respected economist. He opened India to foreign investors as finance minister in the 1990s. Yet won?t he be busy enough trying to avoid hostilities with Pakistan, from where the Mumbai attackers reportedly hail?
China is doing its best to show it?s on top of things. Its efforts seem more like growing panic than steady policy making. The central bank cut its key interest rate by the most in 11 years, and the government said ?forceful? measures were needed to arrest a faster-than-expected economic decline.
?China and India were touted as the saviours of world growth, but very quickly they?re looking third world again, so investors are stampeding for the exit,? says Simon Grose-Hodge, a strategist at LGT Group in Singapore.
You would think China?s recent four trillion yuan ($586 billion) stimulus plan would fall into the forceful category. Yet Beijing?s plans to spend a fifth of gross domestic product were more spin than reality. Much of it was a tally of existing efforts, and economists were quick to call China on it.
There?s no doubting China?s importance, not with Merrill Lynch forecasting it will contribute 60% of the world?s growth next year. Merrill?s forecast of 1.5% global output next year is based on an 8.6% expansion in China. You can forget that as China slows.
Economists such as Jim Walker of Asianomics are right that ?China is now at the heart of the global slowdown.? Chinese officials must be miffed that their economic miracle is being interrupted by a crisis emanating from the US. If Walker?s prediction that China will grow 4% or less next year is even close to being right, the nation is in trouble. The country needs to grow closer to 10% to generate the jobs needed to contain social unrest.
In India, growth may drop to 6.5% in 2009, from 9% in the year ended in March 2008, according to CLSA Asia-Pacific Markets. If the global crisis worsens, that call might prove too optimistic. Exports declined for the first time in seven years as recession in some of India?s biggest markets, including the US, damped demand.
China and India boast incredible potential. At the moment, they are teaching investors a course in Economic Whiplash 101. One lesson is the risk of developed nations relying heavily on developing ones. Another is the folly of less-advanced ones thinking they can thrive as the biggest ones plunge. Our world is too interconnected for that.
The US started this mess, yet Asia?s shiniest growth stars may be among those paying the biggest price. The only real winners are likely to be neck-pain therapists.
?Writer is a Bloomberg News columnist