When the US and Chinese economies sneeze together | TheHill - The Hill

Economy

When the US and Chinese economies sneeze together | TheHill – The Hill

Published

2 years ago

February 3, 2022

Harry Miller

It has been said that when the U.S. economy sneezes, the rest of the world economy catches pneumonia. If this is true, it raises serious questions about the current world economic outlook. Not only is the U.S. economy likely soon to be more than sneezing. So too is the Chinese economy, the world’s second largest economy. Those two economies combined now account for more than 40 percent of the monetary value of all the goods and services produced in the world.

Among the reasons to fear that the U.S. economy will soon head for troubled waters is that the Federal Reserve has belatedly recognized that the country has an inflation problem and that it will soon have to raise interest rates to get the inflation genie back into the bottle.

With inflation now running at its fastest rate in the past 40 years, the Fed has announced that it will stop its bond-buying program in March, thereby paving the way for a round of interest rate increases. At his most recent press conference, Federal Reserve Chairman Jerome Powell said that the U.S. economy was strong enough now to withstand multiple interest rate increases. This is prompting Goldman Sachs to believe that there could be as many as five interest rate hikes this year

The Fed’s imminent interest rate hiking cycle will be taking place at a time when the country is experiencing both an equity and a housing market bubble. Indeed, at the start of this year, U.S. stock prices were at nosebleed levels experienced only once before in the last 100 years. At the same time, U.S. housing prices even after adjusting for inflation were above their level on the eve of the last U.S. housing market bust.

Heightening the chances that later this year the U.S. equity and housing market bubbles might burst is the fact that these bubbles have been premised on the mistaken idea that interest rates will remain at today’s ultra-low levels for ever. When it turns out that interest rates are very much on the rise and those bubbles burst, we will experience financial market stress, especially in the unreformed and largely unregulated non-bank part of the financial system.

At the best of times, any setback in the U.S. economy would have major implications for the rest of the global economy. But these are far from the best of times, especially since the Chinese economy is now confronted with a host of challenges that likely portend a further marked slowdown in that economy.

Among China’s main economic challenges are the serious difficulties in its property sector, which now accounts for around 30 percent of its economy. Many of the Chinese property developers, including most notably Evergrande, are defaulting on their loans. Meanwhile some 20 percent of Chinese urban properties are now unoccupied, and house prices in relation to incomes have risen to clearly unsustainable levels.

China’s credit market bubble is equally troubling. According to the Bank for International Settlements, over the past decade, Chinese credit to the non-government sector has increased by 100 percent of GDP. That is a faster rate of credit increase than that which preceded Japan’s lost economic decade or the 2006 U.S. housing market bust. Generally, credit bubbles of the size that China is now experiencing are followed by many years of sub-par economic growth.

Further clouding China’s long-term economic growth prospects are President Xi Jinping’s recent clampdown on the country’s high-tech sector and the pursuit of his Common Prosperity Program. Those measures appear to be rolling back at least in part Deng Xiaoping’s reforms of the late 1970s that underpinned the country’s economic miracle.

The prospect of a simultaneous slowdown in the U.S. and Chinese economies casts a dark cloud over the economic outlook for the rest of the world economy in general and the emerging market economies in particular. Economic policymakers in those countries would ignore the impending world economic slowdown at their peril.

Desmond Lachman is a senior fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.

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Economy

China Wants Everyone to Trade In Their Old Cars, Fridges to Help Save Its Economy – Bloomberg

Published

6 hours ago

April 24, 2024

Harry Miller

China’s world-beating electric vehicle industry, at the heart of growing trade tensions with the US and Europe, is set to receive a big boost from the government’s latest effort to accelerate growth.

That’s one takeaway from what Beijing has revealed about its plan for incentives that will encourage Chinese businesses and households to adopt cleaner technologies. It’s widely expected to be one of this year’s main stimulus programs, though question-marks remain — including how much the government will spend.

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Economy

German Business Outlook Hits One-Year High as Economy Heals – BNN Bloomberg

Published

7 hours ago

April 24, 2024

Harry Miller

(Bloomberg) — German business sentiment improved to its highest level in a year — reinforcing recent signs that Europe’s largest economy is exiting two years of struggles.

An expectations gauge by the Ifo institute rose to 89.9. in April from a revised 87.7 the previous month. That exceeds the 88.9 median forecast in a Bloomberg survey. A measure of current conditions also advanced.

“Sentiment has improved at companies in Germany,” Ifo President Clemens Fuest said. “Companies were more satisfied with their current business. Their expectations also brightened. The economy is stabilizing, especially thanks to service providers.”

A stronger global economy and the prospect of looser monetary policy in the euro zone are helping drag Germany out of the malaise that set in following Russia’s attack on Ukraine. European Central Bank President Christine Lagarde said last week that the country may have “turned the corner,” while Chancellor Olaf Scholz has also expressed optimism, citing record employment and retreating inflation.

There’s been a particular shift in the data in recent weeks, with the Bundesbank now estimating that output rose in the first quarter, having only a month ago foreseen a contraction that would have ushered in a first recession since the pandemic.

Even so, the start of the year “didn’t go great,” according to Fuest.

“What we’re seeing at the moment confirms the forecasts, which are saying that growth will be weak in Germany, but at least it won’t be negative,” he told Bloomberg Television. “So this is the stabilization we expected. It’s not a complete recovery. But at least it’s a start.”

Monthly purchasing managers’ surveys for April brought more cheer this week as Germany returned to expansion for the first time since June 2023. Weak spots remain, however — notably in industry, which is still mired in a slump that’s being offset by a surge in services activity.

“We see an improving worldwide economy,” Fuest said. “But this doesn’t seem to reach German manufacturing, which is puzzling in a way.”

Germany, which was the only Group of Seven economy to shrink last year and has been weighing on the wider region, helped private-sector output in the 20-nation euro area strengthen this month, S&P Global said.

–With assistance from Joel Rinneby, Kristian Siedenburg and Francine Lacqua.

(Updates with more comments from Fuest starting in sixth paragraph.)

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Economy

Parallel economy: How Russia is defying the West’s boycott

Published

13 hours ago

April 23, 2024

Harry Miller

When Moscow resident Zoya, 62, was planning a trip to Italy to visit her daughter last August, she saw the perfect opportunity to buy the Apple Watch she had long dreamed of owning.

Officially, Apple does not sell its products in Russia.

The California-based tech giant was one of the first companies to announce it would exit the country in response to Russian President Vladimir Putin’s full-scale invasion of Ukraine on February 24, 2022.

But the week before her trip, Zoya made a surprise discovery while browsing Yandex.Market, one of several Russian answers to Amazon, where she regularly shops.

Not only was the Apple Watch available for sale on the website, it was cheaper than in Italy.

Zoya bought the watch without a moment’s delay.

The serial code on the watch that was delivered to her home confirmed that it was manufactured by Apple in 2022 and intended for sale in the United States.

“In the store, they explained to me that these are genuine Apple products entering Russia through parallel imports,” Zoya, who asked to be only referred to by her first name, told Al Jazeera.

“I thought it was much easier to buy online than searching for a store in an unfamiliar country.”

Nearly 1,400 companies, including many of the most internationally recognisable brands, have since February 2022 announced that they would cease or dial back their operations in Russia in protest of Moscow’s military aggression against Ukraine.

But two years after the invasion, many of these companies’ products are still widely sold in Russia, in many cases in violation of Western-led sanctions, a months-long investigation by Al Jazeera has found.

Aided by the Russian government’s legalisation of parallel imports, Russian businesses have established a network of alternative supply chains to import restricted goods through third countries.

The companies that make the products have been either unwilling or unable to clamp down on these unofficial distribution networks.

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