Macro Economics: Demand supported by EU and US while China is creating uncertainty


All eyes are on China in recent months as most other non-Chinese economic indicators have been dwarfed by the government’s actions and markets’ reactions. It is all of the things that we don’t know about the Chinese economy that is worrying, not the fact that the economy is in a transition phase which inevitably will drive down GDP growth and change import and export patterns.
Global economy: 
All eyes are on China in recent months as most other non-Chinese economic indicators have been dwarfed by the government’s actions and markets’ reactions. It is all of the things that we don’t know about the Chinese economy that is worrying, not the fact that the economy is in a transition phase which inevitably will drive down GDP growth and change import and export patterns.

The apparent troubles in the second largest economy in the world have shaken the belief in the overall global growth story. China’s growth has positively affected global growth, especially in recent years when the Western growth engine has stuttered. Thus we all become more sensitive than usual when China changes its course and we don’t see the full picture and understand what’s happening.

We have seen declining commodity prices in the past years, and more recently the stock market got shook up. The world’s multinationals prepared for quite different demand levels of key commodities as production was scaled up. Today we have a glut of coal, iron ore and oil although we are experiencing the highest economic activity in the world ever.

The Federal Reserve Bank (Fed) is still scouting for the right moment to increase interest rates. If it wasn't for the most recent uncertainty about China, which is felt in the US too, it would probably have happened by now.

Considering the US is getting close to full employment and the acknowledgement by the Fed that the inflation rates cannot be controlled, the only thing which stands in the way now is the lack of rising payrolls. Being a large but closed economy (only 12% of US consumer spending is imported), the US will gain most by raising payroll to boost consumer spending, rather than being focused on the nation’s competitiveness. 

The GDP growth rates in the US continue to strengthen. Following the revision of the first quarter growth from -0.7% up to +0.6%, the second-quarter growth rate has also been revised upward to an annualised rate of 3.7%, owing to stronger business investments, and higher government and consumer spending. 

To provide stimulus to its economy, the Chinese Central Bank (PBoC) has lowered interest rates as well as the amount of cash (reserve requirements) that banks must keep on hand to boost lending. In a statement released by the PBoC, it said that “economic growth remains under pressure” and initiatives were carried out to “support the real economy to continue to develop healthily”. 

While the official GDP growth for the second quarter hit bull’s eye exactly at 7%, which was the government’s official target, factors pointed out already in 2007 to be more accurate for China’s economic development by the incumbent Premier Li Keqiang tell a different story. The three factors he mentioned were the cargo volume on the province’s railways, electricity consumption and loans disbursed by banks. Using these factors, the economy seems to only be growing by up to 3% if it grows at all. The lack of trustworthy data means that the uncertainty is severe.

The Caixin China General Manufacturing Purchasing Managers’ Index (PMI) saw the quickest deterioration in operating conditions for over six years in August. It now stands at 47.2, being below 50 threshold level dividing expansion from contraction since March. Accompanying that, the “official” PMI also dropped below the 50 threshold level in August. Is this what a 7% GDP growth looks like?

The labour market conditions are equally poor at a six-year low. That’s likely to be troubling the government most of all. A short-term fix could be stimulus to the construction industry, which is labour intensive, but a long-term solution must also be found.

The Japanese economy grew by 1.0% in first quarter 2015 compared to the previous quarter. This strong growth rate was brought around by higher business spending. The data put economic growth in Japan at the strongest level in two years. However, sluggish consumer spending and lower industrial output in April could limit the expansion in second-quarter somewhat.

In Japan, the PMI rose to a seven-month high in August, showing an overall improvement and new orders coming in faster. New export orders still grow quietly, as trade with China is slowing down considerably. The September PMI was slightly lower. As expected, the second-quarter growth was limited; it actually became negative at 1.6% annualised growth pace, lower exports and consumer spending being the explanation.

2015 has also been a disappointment for South Korea’s manufacturing industry, impacting the overall GDP level in second quarter, which came in 0.3% up from the first quarter.

As the European recovery continues at a time-consuming pace, the unemployment level responds remarkably well and has now come down to 10.9% in the Euro area. This is the lowest level seen since February 2012 and a much-needed relief since the pinnacle at 12.1% in mid-2013. It remains the southernmost parts of Europe where the unemployment is most severe.

Europe is also impacted by the sanctions against Russia and to a smaller extent by the Russian sanctions against Europe. The EU is Russia’s largest trade and investment partner. The Russian GDP fell by 4.6% in the second quarter year-on-year, while the EU28 GDP growth rose by 0.4% in the second quarter from the previous quarter.

Our base case for China is that the authorities will still manage to pull off a soft landing. Regardless of where the “real” GDP growth is at, China is in a transition phase that brings around slower yet safer and more sustainable growth. According to the International Monetary Fund (IMF) this requires that the market is given a more decisive role in the economy. At the end of the day, we all need to know more about these changes in order to understand them and so we don’t become anxious about them. The call in the financial markets is for the Chinese authorities simply to communicate what they intend to do before they do it and explain what they aim at accomplishing by the moves.

At some point in time, we will stop talking about a recovery and focus more on the lack of investments that has brought down the “potential future growth level”. The combination of the demographic situations in many of the developed nations mean a declining workforce and the lack of investments that lowers the productivity gains results in future GDP growth that will not reach the highs of the past. This “new normal” affects the shipping industry already, implying that the ability to think ahead as well as the willingness to adapt are prerequisites in coming years. 

What should comfort us, in the midst of uncertainty and with a longer-term mindset, is the fact that the world’s largest economic regions, the EU (23.7% of world GDP) and the US (22.2% of world GDP), are back on solid and positive growth tracks. While China’s economic growth is under pressure, China’s share of world GDP is “still only” 12.1% according to Eurostat, UN, the IMF and World Bank. Global GDP growth in 2015 is estimated at 3.3% by the IMF, slightly lower than 3.4% in 2014.
in Copenhagen, DK


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