Daily Archives: March 9, 2012

The US employment report for February contains further evidence that, on the surface at least, the American labour market is returning to normal. The unemployment rate of 8.3 per cent is 1.7 percentage points below its peak in October 2009. Yet consumer pessimism about job prospects remains almost as bleak as it was in the darkest hour of the recession. If the labour market is really improving as much as the official data imply, no one seems to have told middle America.

Employment gains have certainly been strong in recent months. But over a longer period it seems that the labour force has been growing much less strongly than normal. The participation rate has actually fallen from 65 per cent at the height of the recession to 63.9 per cent now.

This shrinkage, part voluntary and part involuntary, leaves the potential output of the economy lower than it was before, and may explain why Americans do not perceive this recovery in the labour market as a genuine one. It is a major relief that the labour market is now clearly improving. But the financial crash of 2008 continues to cast a very long shadow on America’s economic potential. 

The release of February’s economic data confirmed that Chinese growth is slowing down. Consumer inflation fell to 3.2 per cent last month, the lowest since June 2010. Weaker industrial production, retail sales and export data all support the same pattern. China’s days of double digit growth are, at least for this century, probably over. The data releases following a “forecast” from outgoing premier Wen Jiabao that gross domestic production growth would be “only” 7.5 per cent this year, an estimate that seemed to surprise many observers. Does this mean China’s glory days are numbered and reforms including currency reform are over? Not at all.

Lower GDP growth is not a hindrance to reforms, it is an essential ingredient. Softer but more balanced, sustainable and higher quality growth requires reforms, including of the renminbi. To complicate matters, currency reform does not equal currency appreciation. The renminbi is going to become more volatile like other currencies. It will go up as well as down against the dollar, partly because China’s current account surpluses are coming to an end, but also because it is opening up its capital account. In recent weeks, policymakers have published detailed guidelines and in some ways, a timetable for all sorts of reforms. Many of them can’t be achieved without currency reform. This includes better-quality GDP albeit at a slower rate.