Imagine spending US$834 million an hour for 18 months.
That’s how much central banks have spent buying bonds since the pandemic hit, according to Bank of America Corp. strategists, who estimate the Fed alone has put in US$4 trillion.
It’s a statistic that speaks to the unprecedented wall of money that kept companies afloat during lockdowns and sparked the biggest stock market rally of a generation.
“Stimulus has caused immense inflation of Wall Street assets,” wrote strategists led by Michael Hartnett.
With central banks sucking up so much of the bond market and forcing down borrowing costs, there’s now more than US$16 trillion in debt with a negative yield. And it’s part of the reason why money managers say they’ve got no alternative except to keep buying up stocks.
For investors, the big question is how much longer can central banks keep the cash spigots flowing at full force. At the Fed’s last meeting, most policy makers agreed the tapering could start later this year.
The delta variant could be the wild card. In New Zealand, the central bank refrained from raising interest rates after the country entered a three-day lockdown. But as Bank of America pointed out: “Investors have zero fear of central banks.”
During china’s lunar-new-year holiday, which ran from January 21st to 27th, tourists flocked to the sprawling Taihao mausoleum in Henan province. Many enjoyed slapping a statue of Qin Hui, a scheming official in the Song dynasty who is notorious for having framed a military hero. One visitor got carried away, striking the statue with the lid of an incense burner. Feelings are running high after Qin’s villainy featured in a new film, “Full River Red”, which topped the box-office charts during the holiday.
This enthusiastic movie-going, sightseeing and statue-slapping is evidence of a surprisingly speedy consumer revival in the world’s second-biggest economy. The mausoleum says it received 300,000 visitors in the festive period, the most in three years. Box-office revenues were not only better than last year, they were also higher than in the year before covid-19. China’s population, subject until recently to mass screening, is now massing at the screens.
The recovery is arriving earlier than expected because the virus spread faster. Since China hastily abandoned its zero-covid regime, infections appear to have passed remarkably quickly. State epidemiologists estimate that at least 80% of the population has already caught the disease. According to official figures, hospital inpatient numbers peaked on January 5th. A second wave of infections was expected after holiday travel spread the disease from cities to villages. But the virus beat the festive rush. The much-feared second wave appears to have merged with the first, notes Airfinity, a life-sciences data firm.
Although the death toll from all these infections is unknown, the economic aftermath is becoming clearer. As people have caught and recovered from the virus, China’s service economy is returning to life. An index of activity outside the manufacturing sector, based on monthly surveys of purchasing managers, jumped from 41.6 in December to 54.4 in January, the second-biggest leap on record. Xiaoqing Pi and Helen Qiao of Bank of America observe that activity in the service sectors “battered by the pandemic”, such as retail, accommodation and dining, has risen sharply.
On Meituan, an e-commerce platform, some restaurants have amassed waiting lists 1,000 tables long. People used to queueing for pcr tests now wait to pray at popular temples. In Hangzhou, the capital of Zhejiang province, people gathered outside the Linshun temple at 4am to light incense for the God of Wealth. Others who reached the top of the spectacular Tianmen mountain in Hunan province, famous for its vertiginous glass walkways, had to wait until 9pm to catch a cable car back down, according to the National Business Daily, a state newspaper.
Can this frenetic pace be sustained? Optimists point out that households are unusually liquid. Their bank deposits now exceed 120trn yuan ($18trn), over 100% of last year’s gdp, and 13trn yuan more than might have been expected given pre-pandemic trends, according to Citigroup, a bank. These deposits could provide ammunition for a bout of “revenge spending”.
Yet the ammunition may be set aside for other purposes. Much is composed of cash that nervous households kept in the bank rather than using to buy property or ploughing into a mutual fund. They are unlikely now to lavish it on goods and services. More likely, reckons Citigroup, is a bout of “revenge risk-taking”, as households gain confidence to buy bonds and shares that are less safe but potentially more rewarding than a bank deposit. This would lift asset prices and give a much-needed boost to the housing market.
Perhaps a more accurate way to assess the forthcoming spending boom is therefore to look at the gap between household income and consumer spending. In the three years before the pandemic, households saved 30% of their disposable income. During the pandemic they saved 33%. The cumulative result of this extra saving is about 4.9trn yuan. If consumers added that to their spending this year it would increase their consumption by 14% (before adjusting for inflation).
The exact size of the spree will ultimately depend on broader economic conditions. Property prices have fallen and the job market is weak, with youth unemployment still above 16%. But China’s labour market has bounced back quickly after previous covid setbacks, and jobless youngsters count for only about 1% of the urban labour force. With luck, a bit of extra spending will result in higher sales and stronger hiring, in turn motivating additional spending. All this means consumption could account for the lion’s share of China’s growth this year: almost 80%, according to Citigroup, if government spending is included. This would be the highest share for more than two decades.
China’s splurge will make a welcome contribution to global growth. According to the imf’s forecasts, released on January 30th, the country’s economy will grow by 5.2% this year, accounting for two-fifths of the expansion in the world economy. Together, America and the euro area will contribute less than a fifth.
A recent study by economists at America’s Federal Reserve makes a basic point with its title: “What Happens in China Does Not Stay in China”. Their estimates suggest a policy-induced expansion in China’s gdp of 1% adds about 0.25% to the rest of the world’s gdp after a year or two. The authors do not examine spillovers from China’s reopening. But their results give some indication of the possible consequences. If China’s reopening lifts the domestic growth rate from 3% to 5-6% this year, the spillover effects may be 0.5-0.75% of the rest of the world’s gdp, or about $400bn-600bn at an annualised rate.
An uptick in growth would not be an unalloyed good, however. Central banks still want to quash inflation. If higher Chinese demand adds to price pressures, policymakers may feel obliged to slow their economies by raising interest rates or delaying cuts. Lael Brainard, vice-chairwoman of the Fed, has noted that China’s exit from zero-covid has uncertain implications for global demand and inflation, especially in commodities. Christine Lagarde, head of the European Central Bank, has warned it will increase “inflationary pressure”, because China will consume more energy. According to Goldman Sachs, another bank, reopening could add $15-21 to a barrel of Brent crude oil, now trading at around $80.
After the Asian financial crisis in 1997, the Chinese economy helped to stabilise the region. After the global financial crisis a decade later, China’s growth helped to stabilise the world. This year it will once again make the single biggest contribution to global growth. But whereas in the past China’s contribution came from investment spending, now consumption will take the lead. Chinese consumers have traditionally punched below their weight. This year they will hit harder. ■
Despite the threat of a recession this year, major economies are clinging to the possibility of a soft landing that avoids a painful downturn and widespread layoffs, something that’s typically proved elusive when central bankers raise interest rates to tame inflation.
In recent weeks, there have been hopeful signs. Labour demand is easing in Canada, notably through fewer job vacancies, rather than major downsizings. Wage pressures seem to be abating. Economic growth, while slowing, remains in positive territory. And inflation is fading from multidecade highs in the U.S. and Canada.
On Friday, the U.S. reported a blockbuster gain of 517,000 jobs in January – hardly a sign of an impending recession.
Investors have been pouncing on any shred of positive economic data. The S&P 500 is up 7.7 per cent so far this year, while Canada’s benchmark stock index has jumped by 7.1 per cent.
Stephen Poloz, former governor at the Bank of Canada, said there’s a great deal of uncertainty in the economic outlook, making it difficult to fully support the soft-landing argument.
However, “I’m pretty confident that we still can have a soft landing,” said Mr. Poloz, who is now a special adviser at the Bay Street law firm Osler, Hoskin & Harcourt LLP. “The ingredients are present.”
Mr. Poloz said this spate of high inflation is different from past iterations, which were usually caused by excess demand – “too many dollars chasing too few goods.” Instead, much of the recent runup in consumer prices can be attributed to soaring energy prices and supply-chain disruptions. Now, those factors are fading away, reflected in shorter delivery times and shipping costs that dropped to prepandemic levels.
“If the supply curve is doing the moving, instead of the demand curve, output still goes up. Jobs still go up. Wages can even go up. But prices go down,” Mr. Poloz said.
Bank of Montreal chief economist Doug Porter recently raised his odds for a soft landing to 35 per cent from 25 per cent.
Mr. Porter flagged three key developments: China has reopened from strict COVID-19 rules, boosting the outlook for global growth; it’s been a relatively mild winter in North America and Europe, helping to drive down energy costs; and there’s been a deceleration in price and wage growth, but so far without rising joblessness.
“Certainly, there is a potential path for things to go quite well over the next year,” he said.
Despite some headline-grabbing layoffs, unemployment rates reside at historically low levels in Canada and the U.S.
In this country, what’s changing is labour demand. The number of job vacancies has tumbled by more than 200,000 from peak levels in the spring. The hope, among many economists, is that companies will dampen their hiring plans, but spare their workers from layoffs.
Brendon Bernard, senior economist at hiring site Indeed Canada, has found that layoff rates are lower now than in the years preceding the pandemic, based on his analysis of Statistics Canada figures.
“It’s pretty tough for small pockets of the labour market to drive aggregate numbers,” he said, referencing the “high-profile” layoffs in the U.S. tech sector. “So far, we haven’t seen a broad-based shift and, in fact, employers have been holding on to workers, at least in most areas of the economy.”
In turn, that is helping consumers. Despite higher interest rates that are meant to curb demand, consumer spending hasn’t fallen dramatically. Purchases are waning in some areas – for instance, people are buying far fewer kitchen appliances than early in the pandemic – but are picking up in others, such as vehicles and travel.
“We’re expecting a resilient consumer will continue to spend,” Michael Miebach, the chief executive officer of Mastercard Inc.
At the same time, this resilience could make the task of subduing inflation more difficult. Annual rates of inflation have dropped below 7 per cent in the U.S. and Canada, but remain well above their 2-per-cent targets.
The Federal Reserve hiked its benchmark interest rate by a quarter of a percentage point on Wednesday, indicating that a “couple” more rate hikes would be needed to restrain inflation. The Bank of Canada is holding its key lending rate at 4.5 per cent as it assesses whether its policies are restrictive enough to control price growth.
“I actually think the risk – if we’re going to be surprised – is that the Bank [of Canada] and the Fed have to do more because the consumer is so resilient,” Mr. Porter said.
The BMO economist still places the highest odds – 50 per cent – on a mild recession that results in higher unemployment. That view is shared by many analysts on Bay Street.
In large part, that’s because rate increases are felt with a lag, Mr. Porter said. For example, some mortgage borrowers have yet to see the rate hikes materialize in higher monthly payments.
The Bank of Canada is projecting economic growth will stall in the first half of 2023 before picking up later on this year, with growth clocking in at 1 per cent for the full year. Governor Tiff Macklem has said it’s just as likely that the economy will notch “slightly negative growth as slightly positive growth” over the next six to nine months.
Mr. Poloz said inflation has been difficult to forecast because traditional economic models were ill-suited to account for supply shocks. Now that supply is improving, inflation could fall even faster than expected.
“The presence of the supply adjustments, of course, improves the odds of us having a soft landing,” he said. “But it’s not a guarantee. There’s still a fine balance there.”