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By HaleStewart November 29, 2015 8:10 am
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International Economic Week in Review: A General Tenor of Malaise, Edition

     In A Hard Look at a Soft Global Economy, author Michael Spence outlines the primary issues facing the global economy.  He begins by noting that since the end of the crisis, the world issued $57 trillion in debt to fuel growth.  And potential deflation makes repayment of that figure more difficult.  The world is also experiencing weak public investment, such that potential growth may be hindered.  Weaker demand contributed to this phenomena.  Finally, there is the issue of job polarization:

Meanwhile, technological and market forces have contributed to job polarization, with the middle-income bracket gradually deteriorating. Automation, for example, seems to have spurred an unexpectedly rapid decline in routine white- and blue-collar jobs. This has resulted in stagnating median incomes and rising income inequality, both of which constrain the private-consumption component of aggregate demand.

The only issue he doesn’t touch is how the end of the commodity super-cycle (CSS) is negatively impacting the global economy.  That being said, he nicely summarizes the many complex issues facing global policy makers.  After the shock-Chinese devaluation over the summer, these issues rose to the surface, leading to an overall increases bearishness on the part of global traders and analysts.

     The FRB of San Francisco issued an economic letter exploring the relationship between the decline in Chinese manufacturing and the drop in Chinese imports, which in turn lowers trade in raw materials.  The report included the following chart which shows a strong correlation:

In addition, former Fed Chair Ben Bernanke wrote an article for the Brookings Institution exploring the possibility of China making a successful transition from a manufacturing to a service economy.  He offers the following advice, based on the experience of several US rust belt cities:

A useful lesson from the experience of reviving U.S. cities is the importance of building and empowering a strong middle class: Middle-class households are the primary market for more-sophisticated services, from education to health care to retail to entertainment. For those cities, attracting middle-class consumers involved improving public infrastructure and education, adding amenities, reducing crime, and increasing job opportunities. In China, empowering the growing middle class will require measures such as strengthening the social safety net (which will give households the income security they need to be comfortable saving less and spending more) and reducing regulations and controls that restrict consumer choice. A strong Chinese middle class will stimulate the development of new services industries, allowing the “bottom-up” approach a chance to succeed. 

     Markit’s Flash EU figures were strong: manufacturing printed a 19-month high of 52.8, and services were 54.9 (a 54-month high).  The composite reading of 54.4 was also a 54 month high.  Analysis accompanying the report noted:

“The PMI shows a welcome acceleration of eurozone growth, putting the region on course for one of its best quarterly performances over the past four-and-a-half years. The data are signalling GDP growth of 0.4% in the closing quarter of the year, with 0.5% in sight if we get even just a modest uptick in December.

“The improved performance in terms of economic growth and job creation seen in November are all the more impressive given last weekend’s tragic events in Paris, which subdued economic activity in France – especially in the service sector.

Perhaps more important, EU loan growth continues to accelerate; loans to households rose 1.2% while those to businesses accelerated .6%.  This graph from the release shows a continued increase since bottoming in 1Q13:

Perhaps the best news is the ECB’s potential for increasing QE – which the ECB appears to have embraced wholeheartedly.  The overall strengthening seen in Markit’s numbers and loan growth could receive an additional stimulus from increasing this program.  The combination could potentially help the EU region move beyond its .3%-.5% growth rate.

     Japanese news continues to send very mixed signals.  Last week, we learned the economy had its fourth technical recession in the last 5 years:

The following chart of the leading indicators index offers the best explanation for this development; the index rose consistently in 2013 but has been unimpressive at all other times.  And the coincident index has been meandering sideways for the last two years:

Conversely, this week Markit released the latest flash manufacturing reading, with a headline number of 52.8.  And the unemployment rate dropped .3% to 3.1%:

Yet there is still little to no inflation in the economy; this week, the Statistics Bureau reported total inflation of .3% and a core rate of .7%.  At some point, an inflation rate that low should translate into pricing pressure.  Yet it is not happening.

     The UK’s Office of National Statistics reported its second estimate of GDP this week, which was unchanged at a 2.3% annual rate.

     The general tenor of the news and analysis continues to more in a bearish direction. Although ECB head Draghi stated he support additional stimulus, he also noted that downside risks were increasing.  Japan is clearly struggling.  The Fed continues to describe US growth as "moderate."  There is a feeling of overall malaise regarding growth.  Yet no one seems to understand why it's happening or how to turn it around.

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer   






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