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China and the economic hangover - Global Economics Weekly

Global Economics Weekly Brief

China and the economic hangover

China’s inevitable hangover after a six-year debt-fuelled investment binge may finally be kicking in. The question is whether the government lets the slowdown play out, or reaches for the ‘hair of the dog’ in the shape of more credit.


For an open economy reliant on global conditions like the UK, the answer matters. Is this China`s final time of leading the world in growth or by borrowing even more money to expand on huge debt?

More signs. China’s industrial production grew by a meagre 6.9%y/y in August, the slowest pace of growth since the financial crisis (excluding China’s very volatile New Year months of January and February). Both electricity and cement production have weakened markedly in recent months as the country’s property slump continues. The figures add to other signs in recent weeks that China’s economy is slowing. We’ve been here before. 2012’s slowdown was addressed with an acceleration of credit growth. The key question is whether the government is going to let this necessary slowdown play out. Recent statements suggest that they are, so long as employment and incomes are not unduly harmed. Another country borrowing money at huge levels to stay in front, but at what cost to the world?

It's all about supply. The UK's productivity puzzle – a combination of very strong employment growth, slower GDP growth and falling real wages – has prompted many explanations, without a clear winner emerging. But last week Mark Carney announced the Bank of England's preferred interpretation. The answer, in a nutshell, is a big increase in labour supply. Put simply, there are more people willing to work than before the recession. This, in turn, has kept wages low, as more applicants compete for vacancies. And it has persuaded firms to expand by hiring more workers rather than buying more equipment. So Monetary Policy Committee (MPC) members think unemployment can keep falling without stoking inflation in the short term. This week’s wage data will be closely watched for any signs of a turnaround. Are we on the way back whereby people will work for less pay to obtain a job? This is why so many people are clambering to enter the UK as they will work for a lot less than UK born people, this will then lead to social unrest!

No good(s). The UK's trade deficit fell in July to £3.3bn, caused by a rise in goods imports. The main culprits were a surge in imports of oil and manufactured goods, rather than any fall in exports, which continued to grow. Unsurprisingly as a result, it was the trade balance vis-a-vis non-EU countries that took the hit. The trade balance has deteriorated in every month of 2014 and the deficit is now around 2% of GDP. We still await the much needed rebalancing of the UK economy to begin or there will be trouble ahead!.

The winds of change. UK average house prices rose 9.7%y/y in August according to the Halifax, slightly slower than July's increase. And this month's survey from the Royal Institution of Charted Surveyors (RICS) suggests that this slowdown is set to continue. Meanwhile, expectations for London are the weakest of any UK region. This is largely because new buyers have not been forthcoming. The net balance between buyer inquiries and seller instructions over the last three months is the lowest since 2003, suggesting the capital's housing market is set to hit a soft patch. Will the rest of the UK follow its lead?

Taking stock. According to the Bank of England, 82% of new mortgages in Q2 were issued with a fixed rather than a variable interest rate, up from just over 70% in early 2013. But there is still a long way to go, as 63% of all outstanding mortgages were still on a variable rate. For the time being, interest rates on variable mortgages continue to come down - the average rate on a lifetime tracker has fallen from 2.96% to 2.91% since January. But rates on fixed term mortgages are starting to edge up again. The mortgage market ground is moving beneath our feet, as we await any changes from the MPC. We see trouble ahead!

More signs. Growth in Euro zone industrial production looks quite healthy when compared to last year. Production rose 2.2% in July - this time last year it was falling by around the same amount. And production also rose a healthy 1% between June and July. Unfortunately that 1% doesn’t reverse the falls seen in the previous two months. And given the weakness in Augusts' Purchasing Managers’ Indices (PMI) for manufacturing, the signs still point to a struggling Euro zone economy. The Euro zone is still in very deep trouble!

Brighter. US consumers have a spring in their steps again. The University of Michigan’s much-watched sentiment index rose by two points m/m to 84.6, its second-highest reading since 2007. Consumers are increasingly optimistic about the prospects for wage growth. That could be one reason for the decent 0.6%m/m rise in retail sales in August. The US on the move again! But, what about the $17 trillion debt pile?

About the Author Colin Thompson

Colin is a former successful Managing Director of Transactional/Document Manufacturing Plants, Document Management/Workflow Solutions companies and other organisations, former Group Chairman of the Academy for Chief Executives, Non-Executive Director, Mentor - RFU Leadership Academy, Mentor - Coventry University, Mentor - The Chartered Institute of Personnel and Development, author/writer Business Advice Section for IPEX, Graphic Display World, NewsUSA, GraphicStart, many others globally, helping companies raise their `bottom-line` and `increase cash flow`. Plus, helping individuals to be successful in business and life in general. Author of several publications, research reports, guides, business and educational models on CD-ROM/Software/PDF and over 2000 articles and 35 books published on business and educational subjects worldwide. Plus, International Speaker/Visiting University Professor.

--- --- ---
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Dr Colin Thompson
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Direct: + 44 (0) 121 247 4589
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China and the economic hangover.

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