Archives par catégories : Emerging

China: desperately seeking growth drivers

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How bad has the Chinese economy gotten to warrant such a firm reaction by Chinese authorities in recent weeks? 

Since mid-January, the People’s Bank of China has orchestrated a 3% fall in the yuan. Our suspicions of a shift in currency policy are being confirmed  and if such a move was intended to spark volatility to discourage capital inflows the strategy has certainly been successful. And the movement could well continue because China seems to be in disarray as it faces a major problem: mopping up excess private debt in the economy while maintaining growth. It is a tall task and growing evidence suggests that the 2014 GDP growth target of 7.5% is becoming less and less credible.

Global Inflation – Disinflation Is Gaining Ground Across the Globe

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At the global level, disinflation is gaining ground. After a temporary rebound during spring, global inflation continued its downtrend in the second half of 2013 and ended the year at 3.2%. Inflation remains very weak in the developed world, at 1.3% in December, and has also sagged in many emerging markets in recent months, to finish 2013 at 6.1%.

In fact, as of December 2013, nearly half the countries (39) in our sample of 80 countries had inflation rates of less than 2%, which is markedly higher than a year ago (24). These figures have seen the addition of a growing number of Asian economies (6), the United States and Canada as well as all 27 members of the EU – without exception. Moreover, the number of countries with moderate inflation (3-4%) decreased sharply while the proportion of high-inflation economies (>6%) has not changed considerably and includes African countries and conflict-plagued countries for the most part.

  • Disinflation Is Gaining Ground Across the Globe
  • Commodity Prices Easing
  • Price Picture Still Mixed in EMs
  • Deflation Risk Remains High in the West  
  • United States, Not Quite in the Clear Yet
  • Euro Area, Deflation Risk Spreading to Core
  • Imports, an Additional Source of Disinflation
  • Increase in Real Interest Rates, the Bigger Threat

Shift Afoot in China?

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Just noise or a real signal? The hypothesis that the sudden drop in the Chinese currency in recent days is unlikely to have major repercussions and has been orchestrated by the authorities in the sole aim of curbing speculative currency flows on the currency, is not completely unfounded given the wide-scale efforts to eradicate the growing sources of shadow banking. Assuming the hypothesis is true, the move would be a sea change, and a worrisome development for a number of domestic sectors that are heavily-dependent on foreign financing, although one with no major direct consequences on other countries.

However, the reasons liable to underpin a strategic shift with a view to provoking the yuan’s depreciation are more than sufficient to support the theory that a forex policy shift is afoot in Beijing – with much more potential damage occurring abroad. After two years of near-continuous increases, the appreciation of the Chinese currency is a major handicap for the country and cannot, by all accounts, continue indefinitely. Consequently, the time of the much-feared policy shift, which we have been fearing for several quarters now, may have finally come (for more on this subject “2013-2014 Scenario: The Financial Crisis, Act III… and Epilogue?”).

Emerging Countries: Putting the Crisis in Perspectives

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After months of uncertainty, the situation in emerging countries has grown critical in recent weeks. Downward pressure on currencies has intensified, leading central banks to hastily raise interest rates. Despite the chain reactions of the past couple of days, there is a risk that the turbulence will last for a while.

In addition to the oft-cited prospect of a change in Fed policy, emerging economies are suffering from a serious decline in their economic situation, largely attributable to their export markets drying up. The crux of the problem is sluggish international demand, particularly from China, which has made it much harder for emerging countries to pursue balanced growth. Overcapacity in Asia and undercapacity in the rest of the emerging world threaten to cause prolonged instability.

Scenario 2014–2015 : The Roller Coaster Economy

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2014 is off to a positive start: U.S. growth is trending upward, the euro area is pulling out of recession, Japan is reaping the benefits of its competitive strategy, and world trade is picking up. All these bright spots should be enough to end two years of global deceleration and bring about a return to growth of over 3 percent this year. But while this is certainly good news, it doesn’t tell us much about the key challenges ahead. To understand them, we need to address the much more complex question of whether 2014 will usher in a second leg of the global recovery—one that is sufficiently sturdy to ensure a lasting upswing and leave five years of convalescence well behind us. As things now stand, we feel we still have two good reasons for assuming it won’t:

  1. The deleveraging process is still producing dysfunctional effects around the world.
  2. Five years of crisis have seriously eroded the global economy’s growth potential and its ability to handle the higher interest rates the current upturn will inevitably entail.

This suggests that we are in for a period of economic instability. We are therefore forecasting that after 3.5 percent growth in 2014, global GDP will increase by only 3 percent in 2015.

The upturn, then, is likely to be short-lived, yet it’s still a reality—meaning it will necessarily affect market expectations.

We are sharply raising our long-term interest-rate forecast for the first half of 2014, but we predict backsliding before the year is out. Needless to say, there will be timid attempts at returning to normal monetary policy in the first few months of the year, but because they are unlikely to get very far, our outlook up to mid-2015 does not involve increases in key rates by the leading central banks—the Federal Reserve, the ECB, the BoJ.

Although initially encouraged by the improved economic climate to press ahead with tapering, the Fed may soon find itself overwhelmed by largely uncontrollable jumps in long-term Treasury yields.

All in all, this should be a highly volatile year.

World Trade: Recovering Without the Emerging Markets

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World trade has bounced back a bit since the end of summer. The improving European economy is one big reason. For its part, US demand has been trending more favorably since mid-year. And lastly, Japanese imports are ramping up, posting year-on-year volume growth of 5% in recent months despite significant yen weakening. So the improvement is broadly based and starting to have an impact on activity, at least in the developed countries.

Which means that, yes, this rosy picture leaves out the emerging countries, which continue to grapple with unusually soft growth in demand for imports. The reason for the anomaly? China is buying less, which is hurting export activity in the other emerging countries; Japan has reasserted itself; and demand for capital goods is sluggish. As a result, the driving force behind intra-regional Asian trade – and trade among emerging countries in general – has slackened considerably.

These trends take some of the luster off of the enthusiasm sparked by the encouraging signs coming from the developed world.

China: Population Decline on the Horizon

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The issue of population probably didn’t make it onto the agenda of the November plenary meeting held by the Chinese leadership to discuss future economic policy. Yet of all the economic challenges China will be compelled to address in the next few years, accelerated population aging definitely tops the list. In any case, the U.N.’s authoritative projections leave no room for doubt about where the country will be in 2040. Between now and then, the U.N. expects the median age to rise by more than eleven years to 46; the working-age population to shrink by 10 percent; the 15-to-44 age group to lose 200 million members, with the 65-and-over group gaining as many; and the ratio of workers to retirees to plummet from 18 to 2 at present to just 5 to 2. So the graying of China is likely to go extremely fast—even faster, in some respects, than the process under way in Europe. 

World Growth Monitor

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Going it alone. The global economic picture is unquestionably looking brighter. Unlike previous recoveries, however, this one is fueled above all by consumer spending. The trend is especially noteworthy in Europe now that austerity policies have been scrapped. But it can also be observed in the United States—since the country has steered clear of the fiscal cliff dangers at the start of the year—and Japan, where the Abe administration’s first moves have lifted the spirits of local consumers. Even in China, sustained consumer spending is what has offset the negative impact of an end to export support. So on the whole, the environment is more encouraging. Yet the missing ingredient here is what proved to be one of the key drivers of global growth in the 1990s—world trade. This has two main implications:

  1. Global growth will be weaker than in the past, and will stay that way for some time.
  2. There will be greater risk for economies that are still too dependent on exports, i.e., the emerging economies in general and more specifically those suffering from structural imbalances—Brazil, India, and South Africa—and increasingly burdened by mounting current account deficits.