There won't be a global recession—yet

Make the most of the present—the Chinese crash is coming

May 03, 2016
An office worker views the Financial Times Stock Exchange 100 index ©Tim Ireland/PA Wire/Press Association Images
An office worker views the Financial Times Stock Exchange 100 index ©Tim Ireland/PA Wire/Press Association Images
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Barely three months ago, those of a nervous disposition were claiming that another global recession was imminent, if not already underway, and that the Chinese economy was about to implode. On 11th February, as the FTSE 100 index reached a low of 5536, well below its ten-year high of 7070 in early 2015, some banks implored investors to sell everything except the safest, most boring government bonds. Now that the FTSE 100 has risen back to around 6240, wise souls who chose not to take that advice, as well as those who failed to act through inertia, can breathe a sigh of relief.

Although the FTSE, along with most European equity markets, hasn’t quite scaled its previous top, its performance has been respectable. But the US S&P500 index has hit its past peak, and even the battered sector of emerging market equities, represented in the MSCI EM index, has had a decent 20 per cent bounce. Oil and several other commodities have rallied. Last week, iron ore—a bellwether of the Chinese economy—was up almost 50 per cent since the start of the year. So is the global economic panic over?

Some indicators still look grim. In the United States, the economy rose just 0.5 per cent at an annual rate in the first quarter, after 1.4 per cent the prior quarter. In effect, it only marked time in these six months, with modest gains in consumption offset by weak investment, foreign trade, and lower inventory-building by companies. The Chinese government claims its economy grew 6.7 per cent in the year to March, though some observers had lower estimates. Japan's economy contracted at the end of 2015, South Korea expanded by just 0.4 per cent in the first quarter, the same as the UK. The only reasonable performance came in the Euro Area where GDP is estimated to have risen by 0.6 per cent, or nearly 2.5 per cent at an annual rate, with noteworthy improvements in Spain and France.

Looking at the Euro Area, it is reasonable to argue that the global economy is not as badly beaten up as many thought earlier this year. The easier monetary policy, relaxed lending conditions and most benign fiscal position since 2011 have all come together to give the Euro Area a lift. Yes, Greece is still in a precarious position, Portugal is not out of the woods and the threat of Brexit lurks over the continent, but there’s a sporting chance that low expectations for European growth could be surpassed this year. For example, the region has finally topped its pre-crisis level of GDP.

The second quarter is little more than a month old, and so data is sparse. But in Europe, the US and China, activity is most likely picking up or stabilising and this augurs reasonably well for the next six months or so. The negative impact of the slump in oil prices on the energy industry and associated manufacturing is probably fading now, and for the world as a whole, the slightly weaker US dollar and lower US interest rate expectations are positive.

The US economy seems to be leaving behind a soggy and wintry quarter. Its employment data for April will be released at the end of this week. For the last six months, the rate of labour force participation has been inching up, especially for prime age workers (aged 25-54), and this could stall the decline in the unemployment rate. On the other hand, rising participation in the workforce is usually a sign of a better economy and stronger incomes. The Federal Reserve has relaxed a bit about external threats and its language about the domestic economy will hold clues about future interest rates. If the Fed feels that interest rate rises are appropriate, it could mean that the economy is looking up.

The slippage in Chinese growth may be both a freak and an omen. It’s a freak because a surge in credit creation dating to spring 2015 appears to be stabilising the economy for the moment. The property market has revived, especially in large cities, and is drawing funds from the stock market. Prices rose 52.7 per cent in Shenzen and 21.4 per cent in Shanghai in the year to March, putting global hotspots London and Vancouver in the shade. Official reports of retail sales and online shopping have a better tone. Yet slowing growth is also an omen because one of these days, the credit boom is going end—probably badly. We can only guess at the timing. I predict that it won’t happen in the next three quarters, but within the next three years.

In any event, as long as China is plodding along, regardless of whether it’s sustainable, industrial commodity prices and trade volumes should get some wind in their sales. Accordingly, we should expect countries in China’s commodity and export supply chains to improve too.

This assessment is by no means intended to give the global economy a clean bill of health. The fundamental dislocations—a seemingly endless era of zero or negative real interest rates, a growth hiatus in emerging markets, the excess of savings, and the weakness of investment, all wrapped up in demographic and technological uncertainties—are not going to go away any time soon. We also cannot foresee the impact of the US elections and Brexit referendum or when the end of China’s credit boom will come. For the time being, though, we can make hay.

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