Economic Thoughts: The World has gone Quiet

Just a few weeks ago (in September), American equity markets experienced a sickening fall (reading too much into US & Chinese data?), with Japan (& Taiwan & Singapore) back in recession, even as war raged in Syria and Europe saw a growing flood of incoming refugees & other immigrants.


This after many summer months of upheaval in thrall to Chinese market turmoil & upsetting policy actions (mini-devaluation of the Yuan, government-assisted buying of Shanghai equities, giving new meaning to “being Shanghaied”), all of it progressively worrying. Preceding all this were the latest instalment(s) of the Greek Grexit crisis, and preceding that was the Russian Game of Thrones in Ukraine & Crimea.


In comparison, the world in recent weeks has gone relatively quiet. So quiet that global financial media have had little to report on. Have economic events so far this year been overblown? Is the underlying reality more robust, if overlain by several layers of the deepest tragedy in places?


The pain of Greece (its youngsters moving to Aussie & America, and some to Germany), civil war in Ukraine (its refugees streaming west into Poland, which by now has absorbed 400 000), civil war in Syria, so far 4 million people out of its 18 million population displaced – reminding of an earlier Zim story largely gone unreported – finding themselves in Turkish, Lebanese & Jordanian refugee camps, with large numbers from there decamping for Europe, their ranks doubled by refugees & immigrants from yet farther afield (Iraq, Afghanistan, Iran, Pakistan, Bangladesh, Eritrea, Sudan, West Africa). Bombs going off in Turkey & Afghanistan. Strife in Israel.


Separate, though, these multiple tragedies on the various European flanks and their distant hinterlands from the economics playing out in America & distant China, with both these hitting hard in many commodity producing countries & other Emerging Markets (EMs).


Panic about China’s globalization unraveling, biting recessions in key commodity producers and many manufacturing hubs (large & small). Softness in American data, suggesting contamination from Chinese events & a strong Dollar, as well as a lack of adequate domestic robustness feeding suspicions, with uncertainty about Fed liftoff deepening (& rattling markets ever more).


All this set markets ablaze for awhile. And then all quiet of late, or so it seems, allowing equity markets to recover their pose, even as the Dollar took a few steps back.


Could it be that a few things were simply overdone & needed to be weeded out? The Fed’s insistence it would commence liftoff (intended for years, and argued with redoubled vigour this year) fed a strong anticipatory Dollar liftoff these past two years.


This perhaps got a little ahead of itself? After all not a replay of the Volcker early 1980s? Fed was delayed, & delayed, & delayed some more? First because labour uptake wasn’t quite there yet, then because inflation wasn’t quite rebounding, then with uncertainty about global (Chinese) fallout feeding back.


Not delayed forever, but certainly part of the way? It invited some unwinding of Dollar strength this month, and undoing of the earlier risk selloff. The earlier Dollar intensity & EM risk selloff had all been a tad premature, and perhaps too intense?


Then again, no evidence of the US economy truly sinking back into weakness. Its industry data may be a little weak, but then its energy sector is being put through the wringer. Yet most of the 85% of the US economy that is services-based is doing well. Same in Europe.


There is an underlying US growth momentum that will win through, even if it isn’t exceptionally robust. Thus resource (labour) uptake remains moderate, and does not suggest a resurgence in wage costs or inflation, with the energy price compression of 2015 about to end as base effects normalise & headline inflation converges in 2016 with 1.9% core inflation (but in a non-threatening way, if that is at all possible, but such being the deeply anchored expectations?).


So Fed liftoff is still on the cards, probably only a few months away, but it isn’t now and after crying wolf once too often markets generally appear willing to take (an extended) time-out for the time being, awaiting events.


This also creates more scope to more fully absorb what is (and isn’t) happening in China, a big topic possibly having become somewhat overblown in the telling & in need of a bit deflation?


Recent Chinese data do not offer reason for despair. Various economic indicators suggest an ongoing (but gradual) growth slowdown, with growth remaining in the 7% vicinity, and in the 6%-7% range next year. Recent fiscal stimulus and rising property prices & land sales will support growth in the near term. Risk of a banking or currency crisis appears low. Substantial further urbanization & catch-up in productivity growth will support growth for some years to come.


The severe decline in global commodity prices hitting commodity producing countries & Emerging Markets hard in recent times reflects the Chinese growth slowdown todate but also the overinvestment & increased supply by major mining companies across the world. The state of the global commodity markets must not be taken as a direct proxy for the state of the Chinese economy, whose dynamics are a whole lot more subtle.


Not quite a reason to completely relax, but certainly a reason not to overreact.


The hardship experienced in many Chinese supplier dependencies, whether as commodity producers or as manufacturing suppliers, is very real and these regions need to adjust to new realities.


Such economic hardship is a real as the hardship of the millions of refugees streaming into Europe.


In Europe the focus is on Greece (legislating austerity reforms), Hungary (closing internal borders because Europe doesn’t effectively manage its external borders) and wooing Turkey (with €3bn subsidies, seeking promises of keeping refugees in distant camps rather than having them decamp for Europe).


The €3bn subsidy for Turkey sounds a lot, until registering that the Dutch will absorb 60 000 refugees this year at an estimated cost of €1bn alone. Scale that up 20 times for Germany. And some more elsewhere in Europe. And all of a sudden everything turns out relative.


The main impression, however, is that the refugee crisis is a human tragedy & puts European politics under enormous pressure, but it doesn’t register in global economic realities where it is US softness, Chinese slowdown, recession in many dependencies, and global markets overblowing a few things and now winding back, coming up for air, which is the real story.


One wonders, though, what new instalments await in 2016? And 2017? Not only Olympics presumably.