Archive for August, 2010

Slowing Dragon?

One of the key drivers of the poor performance of equity markets in the second quarter was the perception that action taken by the Chinese authorities to take steam out of the economy would threaten world growth. The release of continued upbeat data from China this week prompted us to consider how realistic those concerns are looking a few months down the line.

It is true that there are more question marks than usual over Chinese economic reports. Not every country has to impose penalties on officials who are caught falsifying statistics. Can an economy whose latter day prosperity was established as the workshop of the world really have been insulated from the collapse of its export markets to the extent that it grew by over 9% in both 2008 and 2009? If so, the country really is a riddle, wrapped in a mystery, inside an enigma.

Taking the data at face value, however, as we must, this week’s numbers are of a pattern with recent releases that together suggest an economy in rude health. Some July numbers released over the last couple of weeks are admittedly lower than they were a month ago. Annual growth in exports: 38.1% (down from 43.9% in June). M2 growth on the year: 17.6% (18.5%). Retail sales: up 17.9% on the year (18.3%). Increase in industrial production over a year ago: 13.4% (13.7%) … The list goes on. So while it may be true that the numbers are technically showing signs of slowing, the conclusion must be that China continues to expand at a breakneck pace. (This is of a piece with the situation in developed economies too – as we wrote a week ago, an easing off in growth rather than a “double dip”.)

What does this mean for markets? Well, for one thing, fears in the spring of a pronounced policy-driven slowing in China look to have been overdone. And if equity markets continue their recent falls on growth concerns, that would look overdone to us as well.

20/08/2010 at 3:28 pm

Double Dip

There has been a lot of talk of late about the possibility of another recession – an economic “double dip” – at home and abroad. Even today, as the Eurozone posted GDP growth for the second quarter of a more than respectable 1.0%, markets sold off and the euro weakened, apparently on the back of this concern.

What is going on?

In our view, two things are being confused. On the one hand, authoritative sources such as the Fed and the Bank of England have recently downgraded their growth forecasts. What they are absolutely not doing, on the other hand, is suggesting that growth will turn negative again, which is what some observers seem to be (over) extrapolating from their actions.

It is well known that the global economy faces headwinds. There are doubtless more disaster stories in the pipeline, from unemployed homeowners being dispossessed to nation states facing bankruptcy. But across the world as a whole – and even across America as a whole, or across Europe – all indications are that while the pace of growth might well ease off, it will stay positive and the recovery, however tentatively, will progress.

Things do change of course. The data is not yet available but it seems likely that the Eurozone’s strong performance will have been driven in part by an increase in exports as the euro has weakened by almost 10% on a trade weighted basis since the beginning of the year. An equivalent strengthening in the currency could well see some of that effect reversed. And economic forecasting, as we have observed, is an intractable business at the best of times.

For the moment, however, and knowing what we know, it is our view that the world should take its central bankers at face value, and that talk of a renewed period of negative growth seems … well … Dippy.

13/08/2010 at 1:04 pm 4 comments

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