The Chinese economy is in descent, not quite free fall but close enough.

AUSTRALIAN mining companies and the federal Treasury face fresh pressure as China’s already sluggish economy heads for a further slowdown.
The latest surveys of China’s manufacturing industry showed that activity has continued to ease as the world’s second-largest economy faces a seventh consecutive quarter of slowing growth.

China’s biggest problem remains the continuing malaise in the critical export sector where growth has slowed dramatically due to poor economic conditions in its largest market, Europe, as well as the US, as wages and other costs in China continue to climb.

The closely watched official purchasing managers index (PMI), which covers large businesses, remained in negative territory at 49.8, up from 49.2 in August — its second month in negative territory. Any result below 50 shows activity decreasing.

A parallel HSBC survey of small and medium businesses saw the 11th contraction in a row with a result of 47.9.

Both results were lower than market expectations, and HSBC’s export sub-index hit a 42-month low.

You never hear Keynes mentioned any more, except maybe by me. Wherever we had these Keynesian stimuli, the result has been abysmal. The Australian economy, tied as its success was to Chinese growth, is also melting. The laughable attempt to bring the budget into surplus – highly destructive as well since it will be mostly attempted on the tax revenue side – is now matched by a desperate desire to see interest rates come down. We have a low official unemployment rate but that’s because so much of it is driven by public spending unsupported by value adding economic activity. It can’t last. As the front page article in The Australian points out:

Although the jobless rate is low, domestic pressures are building. The employer lobby Australian Industry Group’s latest business survey, released yesterday, shows that for the seventh consecutive month, a majority of manufacturing firms are contracting.

Contracting industry and they are rushing to balance the budget! Shame this never occurred to them in 2008.

Radio Australian Interview: I’ve just done a Radio Australia interview on Ross Garnaut’s comments last night where he said that Australia’s salad days had gone and our dog days have begun. His comment, from last night’s Lateline:

I said now we’re living in the salad days. In the salad days, ordinary economic policy looks good and good economic policies look stellar. But it won’t be very many years when the salad days turn into the dog days, when good economic policy looks terrible and ordinary economic policy looks in the dogs. . . .

Certainly the rhetoric from the Government about restraint in government expenditure is consistent with what’s required, and in fact in the last couple of years we’ve run very tight budgets by long historical standards.

But this has to be maintained now for quite a long period of time and I think lots of Australians haven’t assimilated that. We’ve got elements of the Australian community thinking that economic reform now is what gives more money to them.

And who’s his example for those who don’t appreciate the need for restraint, the Business Council. Wandering around the main town squares in Athens and Madrid ought to provide a better idea of who wants governments to keep spending money they no longer have.

Lazy Keynesian thinking is found everywhere, even in places I least expect it. This is from Alan Mitchell’s column in today’s AFR.

The economic impact of the Gillard Government’s savings will depend on where they fall. If, as seems likely, it targets the tax breaks of higher-income earners, the impact will tend to fall on savings rather than consumption, and the effect on growth should be relatively short term.

So here is what understanding pre-Keynesian economics brings to you. If some economic change falls on savings it falls on investment and therefore will damage the economy. If it had actually fallen on consumption instead then the effect on the economy would have been almost negligible. Keynesian theory blots out most of an economist’s ability to understand the nature of the business cycle which is why hardly anyone saw the current slowdown coming.

Of course, to describe anything the Gillard Government does as a form of saving may be the most ludicrous part of all.