China is witnessing the after shocks of an economy that grew too fast. China’s GDP growth forecast for 2015 and 2016 by the IMF is 6.8% and 6.3% respectively. China’s economy grew in double digit levels for most part of the 2000-2010 decade and that high pace of growth is throwing up after shocks in China. Chart 1.
China has seen a series of asset price bubbles and busts. Overinvestments in the high growth phase led to sharp rise in commodity prices before prices came crashing down on China growth slowdown. Chart 2.
China’s property prices shot up multifold since 2007 fuelled by cheap liquidity as the country accumulated fx reserves. Chart 3. The property bubble has since burst with many developers finding it difficult to service debt and are defaulting. Listen to our podcast on “China’s Real Estate Debt Default”.
China’s equity markets crashed from peaks seen in 2007 and stayed down for a long period of time before rallying sharply by over 100% over the last one year. Chart 4. The latest market crash, which saw the market crash by over 30% in a couple of months, saw the government using all its state resources including its central bank to prevent a deeper fall in the markets. Read our note of China’s market crash. Retail investors took on leverage to take up stock prices and once the fall started, margin calls lead to panic selling.
China has stopped all capital raising through IPO’s and has banned trading in many stocks and this could lead to further fall in both consumer and investor sentiments.
China’s growth after shocks have repercussions for the global economy right from hurting commodity driven countries to slowing down global trade. Fall in growth of commodity export driven nations such as Russia, Brazil and Australia hurts global demand as trade between these countries slow down. Slowdown in China’s domestic demand hurts manufacturers globally as China is a huge market for cars, mobiles and other products. China’s large trading partners, US, Eurozone and Japan will be hurt by China’s growth aftershocks and growth in these economies could fall leading to fall in global growth.
Global Economic Data Analysis
Eurozone Inflation as measured by the CPI was at 0.2% in June 2015 from levels of 0.3% seen in May and against 0% levels seen in April. Eurozone inflation went into negative territory prior to April. Inflation in the Eurozone has held below ECB threshold levels of 2% over the last two years.
Eurozone unemployment rate was flat at 11.1% in June 2015. Unemployment rate is down from levels of 11.3% seen in April. Eurozone manufacturing index for June rose to four year highs indicating that ECB QE of Euro 60 billion a month is starting to take effect. Eurozone retail sales grew 0.2% month on month and 2.4% year on year in May 2015, continuing the growth seen in April. Eurozone looks to be in a recovery mode, though given its fragile situation with many of the governments facing austerity, recovery could falter and ECB will have to continue its QE for longer periods of time.
The US economy added 223,000 jobs in June 2015 from a revised 254,000 job additions in May (revised from 280,000). Unemployment rate fell to multi year lows of 5.3% from 5.5% levels seen in May.
US retail sales rose 1.2% in May from 0.2% growth seen in April. US consumer confidence rose in June, continuing from its rise in May. Single family home prices rose 4.9% in April from a 5% rise seen in March. The strong jobs numbers are having a positive effect on consumers.
US core PCE (Personal Consumption Expenditure) that is the Fed’s preferred gauge of inflation, rose annualized 1.33% in May from 1.38% seen in April. CPI (Consumer Price Index) inflation was at 0.03% in May from negative 0.20% seen in April. Core CPI that is CPI stripped of food and energy rose 1.76% in May from 1.81% levels seen in April Fed’s inflation threshold is 2%.
Fed is on course to start hiking rates later this year though pace of rate hikes will be slower than expected.
China’s Exports rose 2.8% in June 2015 after falling 2.5% in May. Imports fell 6.1% after falling 17.6% in May. Trade surplus for May was USD 46.5 billion from USD 59.5 billion seen in May. China manufacturing index was unchanged month on month at 50.2 in June and up from 50.1 seen in April.
China’s CPI inflation rose 1.4% in June from 1.2% levels seen in May. Producer Price Index (PPI) fell 4.8% in June from a fall of 4.6% seen in May. China inflation is benign and fall in producer prices suggest over capacity in the economy.
China’s Central Bank, the PBOC (People’s Bank of China) has cut rates and eased reserve requirements of banks for growth in the economy and is likely to ease policy further to lend stability to the equity markets.
Japan’s manufacturing index fell to 49.9 in June 2015 after rising to 50.9 in May from 49.7 levels seen in April.
Japan’s exports rose 2.4% in May after rising 8% in April. Imports fell 8.7% from 4.2%. Balance of trade went back into deficit after recording a surplus in March.
Japan CPI core inflation stripped of sales tax increase was 0.1% in May from 0.3% in April. Bank of Japan inflation target is 2%.
Bank of Japan is targeting an inflation of 2% and will continue its QE of USD 60 billion a month to improve the prospects of the Japanese economy.