Friday, 21 September 2018

Soft landings and bad rebalancing

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Anthony Peters ruminates on the changing Chinese economy.

The headline of the day is surely China’s Q1 GDP release which did no more and no less than expected of it in that it, wonder of wonders, hit bang on government forecast at an annualised rate of 7%. As ever, the response of our friends at the BBC was to insist that renewed stimulus was now called for. It might lead to it, but called for it? Barely.

What is it about the 21st century which has led to people being unable to grasp that economies are cyclical beasts and excessive interference in the progress of the cycle eventually leads to nothing other than fiercer amplitudes?

Why is it that so few people, economists included, have not been able to grasp that it was Alan Greenspan’s tinkering with the cyclical economic downturn in 2001 that eventually led to the credit boom in the mid-naughties that ended in the global financial crisis of 2008?

It used to be that the holy grail of economic policy was managing downturns into “soft landings” and not their prevention at any price and, I really do mean it, at any price. China has been enjoying monetary policy not unlike that of the Greenspan years during which any and every sign of a slowing in economic activity led to instant policy response. Eventually it became common currency that monetary authorities were here entirely for the benefit of shareholders, bondholders and the construction industry.

The template was created by the Fed but the PBOC is broadly expected to follow the same route. So far it has been quite obliging, but in doing so it has, and we all know this, created a bubble in the economy built on mark-to-market profits in residential real estate. So far prices are just slipping but if, as and when the point arrives when more than just a few owners are threatened with negative equity and the trickle of forced sellers turns into a flood … We’ve been there and experience tells us that it’s not a situation which can in any way have a happy ending.

Markets remain sanguine in as much as they know – or at least they think they know – that Beijing under Xi Jinping and Li Keqiang will never let this happen but if Wei SixPack gets cold feet and decides to deleverage before Jing SixPack gets a chance, all manner of horrible things can happen. I stand accused of being a conservative fool but I am always cautious when it comes to placing my faith – and my money –in asset classes which have not been tested through a downturn. Chinese real estate has not in any significant way.

From the breakdown of the figures, it appears that a downturn in manufacturing output has been compensated by a rise in consumption which has taken the latter to above 50% of GDP for the first time. Economists have long been predicting the rebalancing of the Chinese economy away from satisfying everybody else’s needs and towards satisfying those of its own people. That’s fine and dandy but if it comes about accompanied by a secular decline in exports and with domestic demand financed by credit, then it won’t look anything like as clever as had been hoped for. I don’t have those figures to hand but I would not be at all surprised.

In the same way as we have good and bad cholesterol, so we have good and bad rebalancing.

Miss after miss

In the US yesterday, we were treated to a raft of releases which included March Retail Sales which missed forecasts at all levels. The headline figure was forecast to be +1.1% but read 0.9% and the ex-Auto component was expected at +0.7% but only made it to +0.5%. Late in the day, the NFIB Small Business Optimism Index popped up at 95.2, missing the forecast of 98.0. The painful bit was in the breakdown where only 10% of those surveyed thought this to be a good time to be expanding and also with only 10% of employers anticipating new jobs being created.

Sentiment surveys may be notoriously fickle but I’m sure the content will not be lost on members of the FOMC which meets two weeks today. My money is on the Committee becoming more accommodative rather than more hawkish, but that’s only my opinion for what it’s worth.

Empire State Manufacturing Survey today along with Industrial Production, Capacity Utilisation and the Fed’s Beige Book (it used to be called the Tan Book but I suspect not enough people knew any longer what colour tan is). Lots more to ruminate on.

Finally, UK politics has lost its head. Yesterday, the Tories, led by my near neighbour, officially launched their manifesto with the declaration that they were the party of the working people. The day before, Miliboy had presented his manifesto with the assurance that Labour was the party of economic responsibility. They’ll be closing their conference singing “The Blue Flag” next. If that all doesn’t call for a grand coalition, what the hell does?

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