China overtakes Japan as world's second-largest economic power

Slowdown in Japan fuels fears the global recovery may be stuttering to a halt

By David Prosser, Business Editor

Tuesday, 17 August 2010

A sharp slowdown in the pace of Japan's economic recovery has enabled China to overtake it as the world's second-largest economy, leaving only the United States in front of it.

Data released yesterday revealed that the Japanese economy grew at an annualised rate of 0.4 per cent over the three months to the end of June, a substantial reverse following the 4.4 per cent growth seen in the first quarter.

The slowdown meant that China officially overhauled Japan as the second biggest economy in the world this spring, at least in terms of total output. Its gross domestic product for the second quarter was $1.335 trillion, compared to Japan's $1.286 trillion, though the country's huge population means that China remains well down the global league in terms of GDP per capita.

Catherine Yeung, investment director at the fund manager Fidelity International, said: "This is a confirmation of China's growth phenomenon and underlines the long-term trends that the country, and indeed the region, will benefit from in the years to come."

The two countries have been running neck and next this year, but with China having seen average growth of around 10 per cent a year in recent times, it was only a matter of time before it overtook Japan. PricewaterhouseCoopers, the accountancy and consultancy, is forecasting that it could overtake the US as soon as 2020 and that three other developing economies – India, Brazil and Russia – will also have made it into the top six by then.

In fact, China has already claimed the number one spot for a number of indicators. It became the world's largest exporter last year, overtaking Germany, and it also makes more cars than any other country in the world. Last month, the International Energy Agency revealed it was now the world's biggest consumer of energy.

While China's remarkable growth is crucial to the global economy, it has also caused political tension. The US has consistently demanded that China consider revaluing its currency, which many believe is held artificially low in order to benefit exporters. China also now emits more carbon than any other country in the world, and has come under pressure for its position at climate change summits such as Copenhagen, though it has invested huge sums in renewable energy.

Nor has China's economy always grown consistently, and concerns about speculative bubbles, with the potential to damage growth in the short-term, have persisted. The Chinese government has this year attempted to rein in its economy amid concerns about rising inflation, while analysts have warned of the possibility of a crash in the property sector.

Mark Mobius, the chairman of Templeton Emerging Markets, said the challenge now for China was to diversify. "The government has made it very clear it wants to de-emphasise exports and move more towards the consumer."

In Japan, meanwhile, the slowdown represents a further headache for the government and will also fuel concerns that the global recovery is on the verge of stalling. That Japan's bounce in the first quarter of the year has proved so difficult to sustain may suggest that China's economy is not growing fast enough to carry others.

"Japan is the canary in the mine because it depends so much on demand in Asia and China and this demand is cooling quite a bit," said Martin Schulz, an economist at the Fujitsu Research Institute. "This is a warning sign for all major economies that just focusing on overseas demand won't be sufficient."