Though the US is finally emerging from an extended period in which potential output exceeded demand, high unemployment continues to suppress demand in Europe. One of the main casualties is the tradable sector in China, where domestic demand remains inadequate to cover the shortfall and prevent a slowdown in GDP growth.

This is no surprise for an export led economy dependent on faltering global demand. But China s looming slowdown is likely to be both manageable and welcome.

With imports still growing strongly and commodity prices beginning to fall as a result of the world slowdown, Argentina s large trade surplus is disappearing quickly. Fearing a weaker peso, spooked investors demand dollars.

Containing China s Slowdown

Import demand within the developing economies is unlikely to compensate fully for the slowdown in the developed economies, but China will continue to be an important determinant of trade performance for most parts of the region.

Since 2009, India has been expanding its deficit as a deliberate measure to counter its economic slowdown. Because fiscal expansion followed several years of restraint, it was very effective in spurring demand and output growth.

Long Live China s Slowdown

The economic headwinds are formidable fiscal austerity, high interest rates outside AAA rated countries, credit cutting by banks, deleveraging households, weak private sector investment, and declining exports as the global slowdown undermines demand.

Some suggest that, given the economic slowdown, we should put global warming on the backburner. On the contrary, retrofitting the global economy for climate change would help to restore aggregate demand and growth.

China acknowledges that high levels of air and water pollution create discomfort and harm the public s health. Government spending on remedying environmental damage could absorb substantial funds if demand side weakness exacerbates the expected supply side slowdown.

The most common explanation is the global economic slowdown, which has diminished demand for energy, minerals, and agricultural products. Indeed, growth has slowed and GDP forecasts have been revised downward since mid year in most countries.

On the demand side, the ongoing economic slowdown in China is starting to affect companies orders and revenues, adding to the challenges stemming from the persistently sluggish US economy. Meanwhile, the euro s recent appreciation (particularly against the Japanese yen) limits Europe s ability to compensate for anemic global demand by capturing greater market share.

Instead, they have cut back on spending. Gains in inflation adjusted personal consumption expenditure have averaged a mere 0.8 over the past five years the most severe and protracted slowdown in consumer demand growth in the post World War II era.

The danger lies in debt fueled investment that shifts future demand to the present, without stimulating productivity growth. This approach inevitably leads to a growth slowdown, possibly even triggering a financial crisis like the one that recently shook the United States and Europe.

The past three months, however, have seen a significant slowdown in China s exports, domestic investment, industrial output, and tax revenues. A major slowdown seems to be looming.

Weak external demand is partly responsible for the falloff in growth, but internal factors namely, slowing investment and stagnating consumption are also holding back economic expansion. Maintaining growth in the face of a global slowdown is a daunting task, and it requires rethinking the future of factory Asia.

As they prepare for the coming Chinese slowdown and seek to minimize the risk of regional destabilization, Asian economies must strengthen domestic demand and reduce excessive reliance on exports to China. In other words, sustainable growth requires all of Asia s China dependent economies to rebalance their two main growth engines.

Weakness in the rest of the world implies a stronger dollar, which will invariably weaken US growth. The deeper the slowdown in other countries and the higher the dollar rises, the less the US will be able to decouple from the funk everywhere else, even if domestic demand seems robust.

For China s, the income effect of global demand is significantly larger than the price effect of the exchange rate. The fall in China s trade surplus since late 2008 is attributable mainly to the global slowdown and the stimulus package introduced by the Chinese government, rather than to changes in the RMB s exchange rate.

Commodity markets, too, have become a source of disinflationary pressure. North America s shale energy revolution has weakened oil and gas prices, while China s slowdown has undermined demand for a broad range of commodities, including iron ore, copper, and other industrial metals, all of which are in greater supply after years of high prices stimulated investments in new capacity.

Those who know their history will recognize that Summers is reviving an argument advanced by the American economist Alvin Hansen in 1938. Owing to a slowdown in population growth, and thus lower demand for capital, the world, Hansen claimed, faced a problem of secular, or structural, unemployment in the decades before us.

If excessively high real interest rates are undermining the domestic demand that China needs to reverse the economic slowdown, one naturally wonders why the government does not take steps to lower them. The apparent answer is the government s overriding commitment to shifting the economy away from investment and export led growth.

China s slowdown, coming after years of over investment in real estate and infrastructure, is also causing a global glut of manufactured and industrial goods. With domestic demand in these sectors now contracting sharply, the excess capacity in China s steel and cement sectors to cite just two examples is fueling further deflationary pressure in global industrial markets.

Indeed, strong Chinese demand has supported its trading partners export led growth for much of the past three decades. But now, faced with a slowdown in China and significant downside risks there, the rest of Asia must abandon over reliance on export oriented development strategies and strive to ensure stable and sustainable growth domestically and regionally.

All of the major emerging economies face weakening external demand, but India s slowdown has been exacerbated by a drop in investment that reflects a deeper loss of official direction and business confidence. Even the International Monetary Fund s forecast of a modest improvement in 2013 is predicated on the government s ability to breathe life into a spate of stalled economic reforms.

This explanation may seem even more paradoxical than the first, but the logic is straightforward Governments often try to escape the hard task of improving economic efficiency through supply side reforms and rely on demand side fixes instead. So, when confronted with a growth slowdown caused by structural factors, many countries responded by lowering interest rates and stimulating credit.

The outcome of premature fiscal consolidation is all but foretold growth will slow, tax revenues will diminish, and the reduction in deficits will be disappointing. And, in our globally integrated world, the slowdown in Europe will exacerbate the slowdown in the US, and vice versa.

With significant elements of the global economy and external demand facing headwinds, China s acceptance (so far) of a growth slowdown, while its new growth engines kick in, is a good sign, in my view. It suggests that policymakers are playing for longer run sustainable growth and have become warier of policies that, if used persistently, amount to a defective, unsustainable growth model.

Even if the euro crisis is resolved, austerity in Europe, along with anemic growth or worse in the US, will mean a slowdown in export dependent Asia. But Asia s economies can still grow much faster than the developed West if they respond to prolonged stagnation by rebalancing their growth toward internal demand, especially household consumption.

Energy demand

Demand reduction

Demand reduction

Demand reduction

A further slowdown in China is a distinct possibility. China s leaders must do what it takes to ensure that such a slowdown is not viewed as secular trend a perception that could undermine the consumption and investment that the economy so badly needs.

World trade has stalled. And China s economic slowdown and market turmoil this summer have created further uncertainty.

Moreover, donor countries had reduced their official development assistance owing to a slowdown in their economic growth.

Global economic conditions remain precarious, with no signs of healthy GDP growth in the eurozone, a weak recovery in the United States, commodity exporting countries like Australia suffering from diminishing Chinese demand, and an emerging market slowdown that is now well into its third year. In such an uncertain environment, even small changes in advanced countries monetary policy can destabilize developing economies.

(g) Demand reduction and treatment of addicts

The realities of our world demand it.

Demand or Supply?

Netanyahu s Useless Demand

Price reflects demand.

Drug demand reduction

Drug demand reduction

Demand savings accounts