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By HaleStewart November 8, 2015 8:43 am
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International Economic Week in Review: Secular Stagnation Gains Traction, Edition

     China’s surprise devaluation over the summer brought their slowdown into a very sharp focus.  The slowdown is global.  Recent analysis argues for a general economic malaise, which global bond markets corroborate

Ask any bond trader in Tokyo, London or New York what their view on the global economy is, and you’re likely to get a similar, decidedly downbeat answer.

That’s not just because fixed-income types are a dour bunch at the best of times. A quick scan across government debt markets suggests that investors are pricing in the likelihood that growth and inflation around the world will remain tepid for years to come.    

In Europe, bonds yielding less than zero have ballooned to $1.9 trillion, with the average yield on securities in an index of euro-area sovereign notes due within five years turning negative for the first time. Worldwide, the bond market’s outlook for inflation is now close to levels last seen during the global recession. And even in the U.S., the bright spot in the global economy, 10-year Treasury yields are pinned near 2 percent -- well below what most on Wall Street expected by now.

Economists have noticed.  In a recent article in the Washington Post, Larry Summers identifies low yields, EM outflows and BRIC country weakness as secular stagnation symptoms.   And recently four economists (Michael Spence, Danny Leipziger, James Manyika, Ravi Kanbur) argued for global action to reverse the effects of three negative trends: weak global demand, a mis-match between investment funds and projects and the negative impact of technological innovation.  In fact, some are now arguing that economics must use this scenario to completely rethink basic concepts.  What the last several months shows is that economists are beginning to see a broken world economic model that must be completely re-thought.

     Chinese news was mixed.  Markit’s manufacturing number still showed a contractionary reading of 48.3.  New orders, production and employment declined.  Services, however, expanded, but the composite reading was 49.9.  This chart from the report shows the overall trend is still lower:

In other news, Bloomberg reported there’s a strong possibility China’s economy is growing slower than the official government numbers are reporting. 

     Bearish news dominated Canadian economic releases this week.  The RBC PMI printed at 48, with declines in export sales, employment, output and new orders.  And net capital outflows were the highest in the developed world:

Canada’s basic balance -- a measure of national accounts that spans everything from trade to financial-market flows -- swung from a surplus of 4.2 percent of gross domestic product to a deficit of 7.9 percent in the 12 months ending in June, according to analysis from Kamal Sharma, a foreign-exchange strategist at Bank of America Merrill Lynch. That’s the fastest one-year deterioration among 10 major developed nations.

Employment was the only bright spot; it increased .2% while the unemployment rate dropped .1% to 7%. 

     The BOE maintained their rate and asset purchase policy.  Their policy statement was very nuanced.  They noted domestic demand is positive.  The strong Sterling, weak commodity prices and spare domestic capacity will keep inflation from reaching the Banks’s 2% target for two years.  Additionally, the primary risk is downside, largely due to emerging market weakness.  The Banks’ analysis was slightly negative, requiring a dovish approach.  Other news from the UK was positive, with all three Markit releases pointing to increased growth.  The headline numbers for manufacturing, services and construction were 55.5, 54.9 and 58.8, respectively.  New orders increased in all three sectors, potentially indicating future growth.  Markit offered the following analysis of the three reports:

“The PMI surveys brought welcome news of faster economic growth at the start of the fourth quarter. The three surveys collectively indicated that the rate of economic growth rebounded in October from the two-and-a-half year low seen at the end of the third quarter.

“A faster rate of expansion in service sector activity accompanied the steep upturn in manufacturing growth and robust construction sector growth reported earlier in the week.

“The survey data point to GDP rising at a quarterly rate of 0.6% at the start of the fourth quarter, up from 0.5% in the third quarter. Such an improvement, together with the revival in hiring signalled by the three surveys, with job creation hitting an eight-month high in October, may coax more policymakers into raising interest rates before the end of the year.

Finally, production decreased .2% M/M, but increased 1.1% Y/Y.  Manufacturing, which is a component of production, increased .8% M/M but decreased .6% Y/Y. 

     EU news was deceptive; on the surface, it appeared to be strong.  But analysts argued it indicated the region would continue to print mild growth.  All three Markit releases showed mild expansion.  Manufacturing was 52.3, services were 54.1 and the composite was 53.9.  New orders for manufacturing and services increased.  But manufacturing unemployment was weak while the corresponding services number declined at its fastest pace in a year.  The Markit manufacturing report contained the following analysis:

“The eurozone manufacturing recovery remains disappointingly insipid. The October survey is signalling factory output growth of only 2% per annum, a lacklustre performance given the amount of central bank stimulus in place.

The composite report’s conclusion weren’t much better:

“The final PMI data confirm the steady but still somewhat lacklustre economic growth recorded in the euro area at the start of the fourth quarter. The survey suggests that the region’s quarterly growth rate remains constrained at around 0.4%.

     Japanese news was mixed as well.  The LEIs and CEIs both declined, the former by 2.1% to 101.4 and the latter by .3% 111.9.  However, Markit reported manufacturing at its highest level (52.4) since 10/14.  New orders were up at the fastest pace in a year.  And the service number was 52.2.  But while service sales increased, employment dropped at its sharpest rate in a year.  In addition, the BOJ has lowered their GDP and inflation forecast, indicating they will probably need to add more stimulus in the near future:

While the US Federal Reserve contemplates a finely balanced decision about whether to raise interest rates in December, its Japanese counterpart is being forced the other way. Last Friday the Bank of Japan decided to leave monetary policy unchanged. But it also revised down its inflation and growth forecasts, and pushed back its expectation of hitting the 2 per cent inflation target to the end of next year. It seems likely, and indeed desirable, that the BoJ will be forced to expand its programme of quantitative easing before too long.

     The RBA kept rates at 2%, offering the following assessment of the Australian economy:

In Australia, the available information suggests that moderate expansion in the economy continues. While GDP growth has been somewhat below longer-term averages for some time, business surveys suggest a gradual improvement in conditions over the past year. This has been accompanied by somewhat stronger growth in employment and a steady rate of unemployment.

Inflation is low and should remain so, with the economy likely to have a degree of spare capacity for some time yet. Inflation is forecast to be consistent with the target over the next one to two years, but a little lower than earlier expected.

Last week, the Australia Industry group released their three sector reports.  Manufacturing expanded for the fourth straight month with a reading of 50.2.  But while 4/8 sectors expanded, only one sub-index was firmly positive.  Construction’s top line number was 52.1, but only the apartment sector grew; residential, CRE and engineering all contracted.  Services dropped 3.3 to 48.9.  While 6 of 9 sectors expanded, one two sub-indexes were positive.

     Additional chinks in the global growth story are increasing.  China is not only lowering their growth figures, but it appears offical statistics have overstated overall growth for the last few years.  Canada is experiencing several oil related weakness.  And Japan may have to increase stimulus measures.  While the US, UK and EU are still printing positive numbers, they are all mired in slower growth.  Overall, the picture is one of malaise.   

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