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Fabled transition to a service economy? Forget it.

The export and manufacturing powerhouse of the world, the locomotive – along with the US – of the global economy, and an indicator of the global economy itself, disappointed economists once again. The operative word in the media today is “unexpectedly.”

China has been on an glorious debt-and-stimulus binge for the past few months. New corporate borrowing shot up to record levels as the People’s Bank of China opened all valves, and juice rushed through the state-owned megabanks to corporate borrowers and others all around.

In the first quarter, total debt ballooned by 6.2 trillion yuan (nearly $1 trillion), the largest quarterly jump ever, to a record 163 trillion yuan ($25 trillion), or 237% of GDP, up from 148% of GDP in 2007, according to some of the more benign estimates. Others peg total debt as high as 282% of GDP. Corporate debt alone is now estimated at 160% of GDP. But no one knows for sure. With the Chinese economy, everyone is groping in the dark.

It’s not the debt itself that scares observers, but the speed with which this debt has ballooned. It’s impossible to invests this sort of moolah this quickly in productive activities whose proceeds would allow for this debt to be serviced [read… China’s “Lehman Moment” or Decades of Japan-Style Stagnation?].

Economists thought that this stimulus-and-debt binge would actually perk up manufacturing, boost services, and end China’s economic malaise, the extent of which remains unknown because no one, not even the Chinese leadership, trusts the official numbers according to which the economy grew 6.7% in the first quarter. Inflated as that number may be, it’s the slowest growth since 2009.

…click on the above link to read the rest of the article…

Why no economic boost from lower oil prices?

April 18, 2016

Why no economic boost from lower oil prices?

Many analysts had anticipated that a dramatic drop in oil prices such as we’ve seen since the summer of 2014 could provide a big stimulus to the economy of a net oil importer like the United States. That doesn’t seem to be what we’ve observed in the data.

There is no question that lower oil prices have been a big windfall for consumers. Americans today are spending $180 B less each year on energy goods and services than we were in July of 2014, which corresponds to about 1% of GDP. A year and a half ago, energy expenses constituted 5.4% of total consumer spending. Today that share is down to 3.7%.

Consumer purchases of energy goods and services as a percentage of total consumption spending, monthly 1959:M1 to 2016:M2. Blue horizontal line corresponds to an energy expenditure share of 6%.

But we’re not seeing much evidence that consumers are spending those gains on other goods or services. I’ve often used a summary of the historical response of overall consumption spending to energy prices that was developed by Paul Edelstein and Lutz Kilian. I re-estimated their equations using data from 1970:M7 through 2014:M7 and used the model to describe consumption spending since then. The black line in the graph below shows the actual level of real consumption spending for the period September 2013 through February of 2016, plotted as a percent of 2014:M7 values. The blue line shows the forecast of their model if we assumed no change in energy prices since then, while the green line indicates the prediction of the model conditional on the big drop in energy prices that we now know began in July of 2014.

…click on the above link to read the rest of the article…

Bank of Canada keeps benchmark interest rate at 0.5%

April 13, 2016

Bank of Canada keeps benchmark interest rate at 0.5%

Central bank’s rate has impact on rates offered by commercial banks for loans and savings accounts

The Bank of Canada, lead by governor Stephen Poloz, kept its benchmark lending rate at 0.5 per cent on Wednesday.

The Bank of Canada, lead by governor Stephen Poloz, kept its benchmark lending rate at 0.5 per cent on Wednesday. (Adrian Wyld/Canadian Press)

The Bank of Canada’s rate, known as its target for the overnight rate, affects what Canadian borrowers and savers are offered from commercial banks on their loans and investments.

BANK OF CANADA KEY OVERNIGHT RATE Broadly speaking, the bank cuts rates when it wants to stimulate the economy, and hikes rates when it wants to pump the brakes on inflation.

After standing on the sidelines for years, the bank unexpectedly cut its benchmark rate twice last year in an attempt to stimulate a Canadian economy waylaid by low oil prices.

Since then, the economy has showed signed of improvement, however, as the cheap loonie has helped manufacturers and exporters, and oil prices have stabilized around the $40 level in recent months.

In January, Canada’s gross domestic product grew by its biggest amount in more than two years, official data showed last month. That helps explain the new cautiously optimistic outlook from the central bank’s decision-makers.

BANK OF CANADA ECONOMIC OUTLOOK “It does appear that the positive forces at work in the economy are starting to outweigh those that are negative,” the bank said in its statement Wednesday. “First-quarter GDP growth appears to have been unexpectedly strong.”

The Canadian dollar reacted positively to the news, erasing earlier losses of about a third of a cent to trade hands virtually unchanged on the day, at 78.35 cents US.

While keeping rates steady for now, the bank hiked its forecast of how it expects the economy to perform this year.

…click on the above link to read the rest of the article…

Downtrend In the Growth Rate of Money Supply Poses a Threat to Bubble Activities

March 7, 2016

DOWNTREND IN THE GROWTH RATE OF MONEY SUPPLY POSES A THREAT TO BUBBLE ACTIVITIES

The yearly growth rate of real gross domestic product eased to 1.9% in Q4 from 2% in the previous quarter.

Using our large scale econometric model we can suggest that the yearly growth rate of GDP could fall to 1.7% by Q3 before bouncing to 2.4% by Q4. By Q4 next year we forecast also a figure of 2.4%.

Other latest data portrays a mixed picture of economic activity. The yearly growth rate of durable goods orders jumped to 1.8% in January from minus 0.1 in the month before.

Meanwhile the Kansas Fed manufacturing index fell to minus 12 in February from minus 9 in January.

Also, in the housing market there are mixed signals with the yearly growth rate of existing home sales climbing to 11% in January from 7.5% in December while the yearly growth rate of new home sales plunged to minus 5.2% in January from 9.9% in the month before.

Furthermore, Conference Board’s consumer confidence index has weakened in February from January with the index falling to 92.2 from 97.8.

Changes in various indicators by themselves do not provide the information about the underlying reason for these changes. In our writing we have suggested that the key is the state of the pool of real wealth.

We suggest that strong increases in the yearly growth rate of money supply prior to its major peak in October 2011, when the yearly growth rate closed at 14.8%, were instrumental in undermining the pace of real wealth generation.

Since October 2011 the yearly growth rate of our measure of money AMS has been following a choppy declining trend. We hold that this is undermining various bubble activities, which sprang up on the back of past strong monetary rises.

…click on the above link to read the rest of the article…

Canadian Oil Slammed By Low Prices, Pipeline Woes

March 2, 2016

Canadian Oil Slammed By Low Prices, Pipeline Woes

Canada has been particularly hit hard during the downturn in oil prices. A major oil-producing country, Canada rode the commodity wave upwards over the past decade, but has suffered from the downturn.

The economy briefly dipped into a recession in 2015. Even after growth resumed, Canada’s GDP slowed the most out of all G7 nations. The unemployment has rate ticked up, especially in Alberta where most of its oil and gas production is concentrated. And the Canadian dollar has plunged in value to its lowest level in over a decade.

The problems for Canada’s oil industry are compounded by several factors. First, Canada’s oil is more costly to produce than other regions, particularly when compared to oil produced in United States where Canada competes for pipeline capacity and market share. Similarly, Canada’s oil sector is also struggling to build enough pipelines to get their oil to market. With elevated levels of production in the U.S., Canadian producers have very few options to move their product. Pipeline routes to the east and west coasts for export abroad are limited, vexing Alberta producers.

That has led to a third problem that puts Canadian producers at a disadvantage to some of their peers: Canadian crude oil sells at a steep discount to more widely recognized benchmarks like WTI. In mid-January, for example, when WTI dropped to $30 per barrel, heavy tar sands in Canada traded at just $8 per barrel temporarily. Canada’s oil, at a lower quality and produced at a higher cost, needs to be discounted in order to entice buyers.

Job losses have proliferated across the oil patch. Earlier this week, Nexen Energy, a Calgary-based subsidiary of China’s Cnooc, announced that it would lay off another 120 workers because of low oil prices.

…click on the above link to read the rest of the article…

The Fed’s Nightmare Scenario

February 22, 2016

The Fed’s Nightmare Scenario

Operating under the mistaken belief that a modest dose of inflation is either a prerequisite for, or a by-product of, economic growth, the nation’s top economists have been assuring us for quite some time that inflation will stay very low until the currently mediocre economy finally catches fire. As a result, they believe that the low inflation of the past few months has frustrated Federal Reserve policy makers, who have been supposedly chomping at the bit to keep hiking rates in order to restore confidence in the present and to build the ability to cut rates in the future if the nation were to ever, god forbid, enter another recession.

In the weeks leading up to the Fed’s December 16 decision to raise rates by 25 basis points (their first increase in nearly a decade) the consensus expectations on Wall Street was that the Fed would deliver three or four additional interest rate hikes in 2016. But with the global markets now in turmoil, GDP slowing, and the stock market off to one of its worst starts in memory, a consensus began to emerge that the Fed is reluctantly out of the rate hiking business for the rest of the year.

With such thoughts firmly entrenched, many were largely caught off guard by the arrival last Friday (February 19^th) of new inflation data from the Labor Department that showed that the core consumer price index (CPI) rose in January at a 2.2 % annualized rate, the highest in more than 4 years, well past the 2.0% benchmark that the Fed has supposedly been so desperately trying to reach. It was received as welcome news.

A Reuter’s story that provided immediate reaction to the inflation data summed up the good feeling with a quote by Chris Rupkey, chief economist at MUFG Union Bank in New York, “It is a policymaker’s dream come true. They wanted more inflation and they got it.” The widely respected Jim Paulsen of Wells Capital Management said that the stronger inflation, combined with upticks in consumer spending and jobs data would force the Fed to get on with more rate hikes.

…click on the above link to read the rest of the article…

Oil Prices and Global Growth

December 14, 2015

Oil Prices and Global Growth

CAMBRIDGE – One of the biggest economic surprises of 2015 is that the stunning drop in global oil prices did not deliver a bigger boost to global growth. Despite the collapse in prices, from over $115 per barrel in June 2014 to $45 at the end of November 2015, most macroeconomic models suggest that the impact on global growth has been less than expected – perhaps 0.5% of global GDP.

The good news is that this welcome but modest effect on growth probably will not die out in 2016. The bad news is that low prices will place even greater strains on the main oil-exporting countries.

The recent decline in oil prices is on par with the supply-driven drop in 1985-1986, when OPEC members (read: Saudi Arabia) decided to reverse supply cuts to regain market share. It is also comparable to the demand-driven collapse in 2008-2009, following the global financial crisis. To the extent that demand factors drive an oil-price drop, one would not expect a major positive impact; the oil price is more of an automatic stabilizer than an exogenous force driving the global economy. Supply shocks, on the other hand, ought to have a significant positive impact.

Although parsing the 2014-2015 oil-price shock is not as straightforward as in the two previous episodes, the driving forces seem to be roughly evenly split between demand and supply factors. Certainly, a slowing China that is rebalancing toward domestic consumption has put a damper on all global commodity prices, with metal indices also falling sharply in 2015. (Gold prices, for example, at $1,050 per ounce at the end of November, are far off their peak of nearly $1,890 in September 2011, and copper prices have fallen almost as much since 2011.)

…click on the above link to read the rest of the article…

The Lull Before The Storm—–It’s Getting Narrow At The Top, Part 2

December 2, 2015

The Lull Before The Storm—–It’s Getting Narrow At The Top, Part 2

The danger lurking in the risk asset markets was succinctly captured by MarketWatch’s post on overnight action in Asia. The latter proved once again that the casino gamblers are incapable of recognizing the on-rushing train of global recession because they have become addicted to “stimulus” as a way of life:

Shares in Hong Kong led a rally across most of Asia Tuesday, on expectations for more stimulus from Chinese authorities, specifically in the property sector…….The gains follow fresh readings on China’s economy, which showed further signs of slowdown in manufacturing data released Tuesday (which) remains plagued by overcapacity, falling prices and weak demand. The dimming view casts doubt that the world’s second-largest economy can achieve its target growth of around 7% for the year. The central bank has cut interest rates six times since last November.

More stimulus from China? Now that’s a true absurdity—-not because the desperate suzerains of red capitalism in Beijing won’t try it, but because it can’t possibly enhance the earnings capacity of either Chinese companies or the international equities.

In fact, it is plain as day that China has reached “peak debt”. Additional borrowing there will not only prolong the Ponzi and thereby exacerbate the eventual crash, but won’t even do much in the short-run to brake the current downward economic spiral.

That’s because China is so saturated with debt that still lower interest rates or further reduction of bank reserve requirements would amount to pushing on an exceedingly limp credit string.

To wit, at the time of the 2008 crisis, China’s “official” GDP was about $5 trillion and its total public and private credit market debt was roughly $8 trillion. Since then, debt has soared to $30 trillion while GDP has purportedly doubled. But that’s only when you count the massive outlays for white elephants and malinvestments which get counted as fixed asset spending.

…click on the above link to read the rest of the article…

Looney Plunges As Canadian GDP Collapses Most Since 2009

December 1, 2015

Looney Plunges As Canadian GDP Collapses Most Since 2009

Who could have seen that coming? It appears, for America’s northern brethren, low oil proces are unequivocally terrible. Against expectations of a flat 0.0% unchanged September, Canadian GDP plunged 0.5% – its largest MoM drop since March 2009 and the biggest miss since Dec 2008. With Canada’s housing bubble bursting, it’s time for the central planners to get back to work and re-invigorate the massive mal-invesment boom (and ban pawning of luxury goods).

In the past year, we have extensively profiled the collapse of ground zero of Canada’s oil industry as a result of the plunge in the price of oil, in posts such as the following:

Since then it has gotten far, far worse for Canada… GDP is down 0.5% MoM (and unchanged YoY – the worst since Nov 09)

The initial reaction is a tumbling looney…

18 Numbers That Scream That A Crippling Global Recession Has Arrived

November 3, 2015

18 Numbers That Scream That A Crippling Global Recession Has Arrived

The stock market has been soaring, but all of the hard economic numbers are telling us that a major global recession is here. This is so reminiscent of what happened back in 2008. Back then, all of the fundamentals were screaming “recession” by the middle of that year, but the equity markets didn’t respond until later. It appears that a similar pattern is playing out right now. The trade numbers, the manufacturing numbers, the inventory numbers and even the GDP numbers are all saying that a very significant economic slowdown is happening, but stock traders haven’t gotten the memo yet. In fact, stocks had an absolutely great month in October. Of course just like in 2008, stocks will eventually catch up with reality. It is just a matter of time. The following are 18 numbers that scream that a crippling global recession has arrived…

#1 According to the biggest bank in the western world, British banking giant HSBC, the world is already in a “dollar recession“. Global GDP expressed in U.S. dollars is down 3.4 percent so far in 2015, and total global trade has fallen 8.4 percent.

#2 In September, Chinese exports were down 3.7 percent compared to one year ago, and Chinese imports were down a whopping 20.4 percent compared to a year ago.

#3 Demand for Chinese steel is down 8.9 percent compared to a year ago.

#4 China’s rail freight volume is down 10.1 percent compared to last year.

#5 In October, South Korean exports were down 15.8 percent from a year ago.

#6 According to the Dutch government index, a year ago global trade in primary commodities was sitting at a reading of 150 but now it has fallen all the way down to 114. What this means is that less commodities are being traded around the world, and that is a very clear sign that global economic activity is really slowing down.

…click on the above link to read the rest of the article…

Is GDP Over?

October 30, 2015

Is GDP Over?

Economists from rich countries increasingly agree: Sustainable development and reducing inequality matter more than economic growth.

sustainable-development-OECD-GDP-alternatives-growth-inequality

(Photo: World Bank Photo Collection / Flickr)

Organizers of October’s fifth OECD World Forum on Statistics, Knowledge, and Policy could barely contain their sense of satisfaction when the three-day event opened in Guadalajara, Mexico.

Why all the good cheer? Officials at the OECD, the official economic research agency of the developed world, feel they haven’t just been organizing gabfests since the first of these triennial forums in 2004. They believe they’ve been helping change how the world — or at least the global public policy community — thinks about inequality.

And that belief, prominent independent observers believe, reflects a healthy dose of reality.

“We now have a broad consensus that more equal societies perform better,” as Nobel Prize-winning economist Joseph Stiglitz put it in his World Forum keynote address to the over 1,000 government statisticians, academics, and civil society analysts on hand in Guadalajara.

The OECD, Stiglitz observed, deserves much of the credit for this new consensus. The agency’s efforts have helped shift the global analytical mainstream off a mindless fixation on GDP — an economy’s total output of goods and services — and onto the importance of developing a sustainable “prosperity for all.”

In the United States today, pundits and politicians still regularly dismiss worries about our contemporary global prosperity for just a few as little more than do-gooder posturing. But at the World Forum in Guadalajara, no one treated inequality as anything less than a dangerous social pathology.

“Inequality is becoming unbearable,” former Inter-American Development Bank president Enrique Yglesias pronounced. Our economic chasms have reached “obscene proportions.”

Deeply unequal nations like Britain, lamented Catrina Williams of the UK Social Mobility and Child Poverty Commission, stand “on the brink of being permanently divided” as the offspring of the most affluent increasingly occupy most of the key levers of power in everything from the judiciary to the media.

…click on the above link to read the rest of the article…

The Reality Behind the Numbers in China’s Boom-Bust Economy

October 10, 2015

The Reality Behind the Numbers in China’s Boom-Bust Economy

Last year, the world was stunned by an IMF report which found the Chinese economy larger and more productive than that of the United States, both in terms of raw GDP and purchasing power parity (PPP). The Chinese people created more goods and had more purchasing power with which to obtain them — a classic sign of prosperity. At the same time, the Shanghai Stock Exchange Composite more than doubled in value since October of 2014. This explosion in growth was accompanied by a post-recession construction boom that rivals anything the world has ever seen. In fact, in the three years from 2011 – 2013, the Chinese economy consumed more cement than the United States had in the entire twentieth century. Across the political spectrum, the narrative for the last fifteen years has been that of a rising Chinese hyperpower to rival American economic and cultural influence around the globe. China’s state-led “red capitalism” was a model to be admired and even emulated.

Yet, here we sit in 2015 watching the Chinese stock market fall apart despite the Chinese central bank’s desperate efforts to create liquidity through government-backed loans and bonds. Since mid-June, Chinese equities have fallen by more than 30 percent despite massive state purchases of small and mid-sized company shares by China’s Security Finance Corporation.

But this series of events should have surprised nobody. China’s colossal stock market boom was not the result of any increase in the real value or productivity of the underlying assets. Rather, the boom was fueled primarily by a cascade of debt pouring out of the Chinese central bank.

China’s Real Estate Bubble

Like the soaring Chinese stock exchange, the unprecedented construction boom was financed largely by artificially cheap credit offered by the Chinese central bank. New apartment buildings, roads, suburbs, irrigation and sewage systems, parks, and commercial centers were built not by private creditors and entrepreneurs marshaling limited resources in order to satisfy consumer demands. They were built by a cozy network of central bank officials, politicians, and well-connected private corporations.

– See more at: http://www.cobdencentre.org/2015/10/the-reality-behind-the-numbers-in-chinas-boom-bust-economy/#sthash.fAtXnwDy.dpuf

With a Collapse in Commodity Prices, What Happens Next?

October 7, 2015

With a Collapse in Commodity Prices, What Happens Next?

This has to be a scary time for virtually all commodities investors, whether one is talking about investing in commodities directly or in commodities companies. From oil to aluminum, nearly all commodities are not just trading near multi-year lows, but multi-decade lows. Bloomberg recently noted that commodities are now trading at the same level they were at in the mid-1990s after a major run-up in the late 1990’s and throughout much of the new millennium.

This begs the question: ‘what will it take for commodities to recover?’

To get to the answer, one first has to understand two important things about commodities prices in recent years. First, in recent years and up to the present, China has been consuming the vast majority of commodities. As economics website the Visual Capitalist showed in a stark chart recently, despite making up only 20 percent of the world’s population and less than 15 percent of global GDP, China consumes 60 percent of all concrete, 49 percent of all coal, 46 percent of all steel, and 54 percent of all aluminum among other commodities.

(Click to enlarge)

The point here is that China’s infrastructure boom has had a massive and unparalleled effect on global commodities demand. So much so, that China was able to temporarily offset the second important point about commodities – they have largely been declining in price not just for the last few years, but for decades. In current dollar terms – that is, non-inflation adjusted terms, commodity prices have often risen over the last century, but in real terms have generally fallen substantially over time. The 2000’s led many investors to forget this trend as numerous commodities rose rapidly in price.

…click on the above link to read the rest of the article…

Debt Déjà Vu

October 7, 2015

Debt Déjà Vu

For two years, financial markets have repeated the same error – predicting that US interest rates will rise within about six months, only to see the horizon recede. This serial misjudgment is the result not of unforeseeable events, but of a failure to grasp the strength and global nature of the deflationary forces now shaping the economy.

We are caught in a trap where debt burdens do not fall, but simply shift among sectors and countries, and where monetary policies alone are inadequate to stimulate global demand, rather than merely redistribute it. The origin of this malaise lies in the creation of excessive debt to fund real-estate investment and construction.

During Japan’s 1980s boom, real-estate loans quadrupled in just four years, and land prices increased 2.5-fold. After the property bubble burst in 1990, over-leveraged companies were determined to pay down their debts, even when interest rates fell close to zero. While large fiscal deficits partly offset the demand-suppressing effects of private deleveraging, the inevitable consequence was rising public debt. Corporate debt slowly fell (from 140% of GDP in 1990 to about 100% today); but public debt rose relentlessly, and now exceeds 230% of GDP.

Since the financial crisis of 2008, that pattern has been repeated elsewhere. In the United States and several European countries, excessive debt creation before 2008 was followed by efforts at private deleveraging, initially offset by large government budget deficits. Advanced economies’ cumulative private debt-to-GDP ratio has fallen slightly – from 167% to 163%, according to a recent report; but public debt has grown, from 79% to 105% of GDP. Fiscal austerity has therefore seemed essential; but it has exacerbated the deflationary impact of private deleveraging.

Before 2008, China’s economy was highly dependent on credit expansion, but not within the country itself. Rather, it ran large current-account surpluses – 10% of GDP in 2007 – with credit-fueled consumption growth in the US and elsewhere powering its export-led economy.

Read more at https://www.project-syndicate.org/commentary/demand-crisis-radical-measures-by-adair-turner-2015-10#cH3yY1jUKSTxDbKV.99

IMF downgrades Canadian growth outlook to 1% for 2015

October 7, 2015

IMF downgrades Canadian growth outlook to 1% for 2015

Risks for the world include low commodities prices, China’s slowdown and rate hikes

The IMF has downgraded its outlook for Canadian growth to one per cent this year because of the impact of lower oil and commodities prices.

It also has revised its expectations for global growth downwards to 3.1 per cent, the lowest since 2009.

In a report Tuesday in advance of the IMF-World Bank annual meetings this week in Lima, Peru, it highlights the downside risks to the world economy from the economic slowdown in China and low prices for commodities.

The recovery it expected earlier in the year has become uneven, it said in its World Economic Outlook with marginal advances in developed economies and slowing in most emerging economies.

“Six years after the world economy emerged from its broadest and deepest postwar recession, the holy grail of robust and synchronized global expansion remains elusive,” said Maurice Obstfeld, IMF director of research.

Growth slower in most nations

“Despite considerable differences in country-specific outlooks, the new forecasts mark down expected near-term growth marginally but nearly across the board.”

It has revised its estimate for Canadian GDP growth downward by half a percentage point from its July forecast to one per cent this year, and to 1.7 per cent in 2016. Last year, the IMF was forecasting 2.2 per cent growth for the Canadian economy.

A side report explores how the sharp decline in commodity pricesover the last three years has hurt economies dependent on commodities, including Canada, Chile and Australia.

“The weak commodity price outlook is estimated to subtract almost one percentage point annually from the average rate of economic growth in commodity exporters over 2015–17 as compared with 2012–14,” the IMF said.

“In exporters of energy commodities, the drag is estimated to be larger: about 2¼ percentage points on average over the same period.”

…click on the above link to read the rest of the article…

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