The global economy is slowing down rapidly and it is conceivable that the developed world may face a recession next year. Already, the Japanese economy is contracting and even Europe is barely growing. Across the pond, the US is still muddling through but the leading economic indicators and all the major Fed regional activity surveys (Figure 1) are suggesting economic weakness ahead.
Figure 1: Is the US Heading Towards Recession?
Over in the developing world, the situation is deteriorating as many nations are now facing currency devaluation and asset deflation. Furthermore, the ongoing slump in commodities is severely hurting the exporting nations (Australia, Brazil, Canada, Malaysia, Indonesia and Russia) and some of these are already in recession.
Related: Stratfor’s Reva Bhalla: BRICS in Trouble; Russia a “Huge Concern”
In Asia, China’s economy is really struggling and data points such as power usage, railcar loadings and trade figures indicate that the official GDP print of 7% is grossly inflated. Although nobody really knows the exact pace of China’s expansion, we are of the view that the world’s second largest economy is not growing by more than 3-4% per year. Whether you like it or not, China’s export-driven model is now acting as a major headwind for economic growth and its debt build-up (282% of GDP!) is a serious risk. Moreover, China’s asset markets are now deflating and if things get ugly, the repercussions will be felt throughout the world.
Today, the consensus view is that the US is insulated from overseas troubles and its domestic economy is doing just fine. Unfortunately, this sanguine line of thinking seems to be ignoring the fact that the S&P500 companies derive approximately 40% of their earnings from overseas! Furthermore, the optimists seem to be forgetting that the US shale industry is in serious trouble; thus America’s junk bond market may pose problems in the future.
Given the above economic weakness, the prominent central banks are desperately trying to combat the deflationary forces by cutting interest rates and buying bonds (QE). It is notable that over the past month, the PBOC cut interest rates and the bank’s minimum reserve ratio and the ECB stated that it would expand its QE initiative by year-end. Elsewhere, the Federal Reserve stayed on hold and some officials even talked about the prospects of negative interest rates!
This post was published at FinancialSense on 11/13/2015.
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