Two Proofs That Global Economy Is Not on the Upswing

Below are two seemingly unrelated articles that tell a similar story: talk that the global economy is on the upswing seems to be premature, to say the least.

In the first report (hat tip to Calculated Risk), the Vice Chairman of General Electric (GE), a company with 14 major lines of business -- appliances, aviation, consumer electronics, electrical distribution, energy, business finance, consumer finance, healthcare, lighting, commercial and industrial markets, media & entertainment, oil & gas, rail, and security -- and a presence in more than 100 countries, states point-blank that they are not seeing evidence of the turnaround that policymakers (e.g., Fed Chairman Ben Bernanke), clueless Wall Street types (see: "The Wall Street Clown Show"), and TV pundits keep referring to.

The second article by well regarded analyst Andy Xie (hat tip to Naked Capitalism) is even more interesting, because it doesn't just undermine the notion that China is on the mend -- bolstering arguments I made previously in "Holes in the China Recovery Story" -- and poised to kick-start a global economic recovery. It also raises questions about the recent sharp run-up in commodity prices, which many analysts say is a reflection of improving economic conditions but which seems to stem from a combination of technical buying and debt-financed speculation.

1. "GE Vice Chair Rice Sees No ‘Green Shoots’ in Orders" (Bloomberg):

General Electric Co. Vice Chairman John Rice said he isn’t seeing an increase in orders even as U.S. economic statistics suggest the world’s largest economy may soon shift to a recovery.

“I am not particularly of the green shoots group yet,” Rice said today to the Atlanta Press Club, referring to a phrase used by Federal Reserve Chairman Ben S. Bernanke that described signs of a nascent recovery. “I have not seen it in our order patterns yet. At the macro level, there may be statistics suggesting the economy is starting to turn. I am not seeing it yet.”

GE is the world’s biggest maker of jet engines, power-plant turbines, locomotives, medical imaging equipment. Rice oversees the Fairfield, Connecticut-based company’s industrial businesses.

“We see a world where good companies and good consumers can’t get all the credit we would like,” Rice said. “Companies with lots of cash on their balance sheet are worried about whether they will get what they need for working capital” and are cutting spending.

2. "Fear the Dark Side of China's Lending Surge" (Caijing.com.cn):

Banks loans designed to spark economic recovery have been channeled into asset speculation, doing more harm than good.

China's credit boom has increased bank lending by more than 6 trillion yuan since December. Many analysts think an economic boom will follow in the second half 2009. They will be disappointed. Much of this lending has not been used to support tangible projects but, instead, has been channeled into asset markets.

Many boom forecasters think asset market speculation will lead to spending growth through the wealth effect. But creating a bubble to support an economy brings, at best, a few short-term benefits along with a lot of long-term pain. Moreover, some of this speculation is actually hurting China's economy by driving asset prices higher.

Comments

[Mad Hedge F...:]

There are more than two. Paul Krugman made an insightful point on his New York Times blog (see krugman.blogs.nytimes.com/). The surprise 17% improvement in new housing starts for May, which many heralded as a bonafide green shoot, is not what it seems. Sure, 17% is a nice number, but we’re coming off such a low base the number is meaningless. 17% ain’t what it used to be. It’s like General Motors (GXM) (note new ticker symbol) going from $2 to $3. Sure, it’s a 50% move, but it doesn’t mean the bankrupt company is back in the pink of health. You could use the same argument for the 40% move in the S&P500. Since virtually all of our economic data is recovering from once a century extremes, they will have to be viewed with many grains of salt.

Jun 21 10:15 AM

[Philly Jim:]

China is freaking out right now. I'm amazed at how cool they play it in front of the media. Look to their neighbors for a true glimpse of east Asian economic data. Thailand for example had nearly 27% drop in exports in May alone. These developing countries are also exhausting their resources and arable land are a record pace, all while trying to appease their "new" trading partners by paying for more than they should for their exports, not to mention burning through all their reserves with stimulus projects. A weak dollar, high commodity costs and high consumer interest rates are killing the global economy.

Jun 21 10:31 AM

[Dave Wrixon:]

"But creating a bubble to support an economy brings, at best, a few short-term benefits along with a lot of long-term pain."

The difference is that China can afford the stimulus because they are not indebted. Indeed their economy is pretty heavily skewed towards exporting so longer-term damage in that area is not the primary concern. China more than anything wants to get internal consumption going. The huge investment in infrastructure will help to support such a conversion. The addition of infrastructure is a long-term benefit.

Furthermore, prior to the collapse China was running very tightly controlled monetary policy. There interest rates and reserve ratios were and still are massive by western standards. I think they can afford to cut themselves a bit of slack, and I think you can afford to cut them a bit too!

Jun 21 12:07 PM

[Valley Boy:]

The global economy will probably continue to weaken somewhat in the overall sense. However, the global trade patterns will change in favor of those countries with trade surpluses and savings. The emerging markets seem to indicate such a global transfer of wealth. The various countries are probably now in the process of figuring out how and what to trade with each other in order to get out from under their over-reliance on American and European consumption. They recognize that the American and European consumers are tapped out. If China is successful with their stimulus program and infrastructure investments, many other countries will follow their example.

Jun 21 01:41 PM

[odin:]

In a global downturn, its precisely those countries who run a massive surplus that get hurt the worst. The evidence is clear from the previous global downturn (notably the Great Depression).

Ultimately, a nations ability to spend/overspend is dependent on someone else's willingness to finance it. Hence, the US has been able to maintain a deficit (apart from the fact that it promises to repay in a currency that it prints -- nearly all its debt is local debt and global trade for the most part happens in USD). If China tries to run US-style deficits for a period of time, how many investors will be willing to hold RNB-denominated debt cheaply (US-style rates)?

Infrastructure investment is good to a point. There is such a thing as over-investment as well. And looking at spending in real estate (office space etc), I often wonder who it is that will occupy all this space. (See: articles.latimes.com/2...)

The purpose here is not China-bashing, its more to clarify the situation so the right policy measures are idenfitied.

It is clear that by keeping the yuan undervalued, China has, in the past, transferred buying power from the consumers and workers to the exporters (and the world in general - exporting deflation). The challenge now is to keep its massive population employed. Pumping expensive money (via leverage) into an overleveraged world to keep up its exports is not going to work any longer. It needs to spur internal _consumer_ demand -- this is the distinction made by the article. Commodity buying is not consumer demand -- it is an investment to spur exports or to build offices and highways that support the export industry.

The real change needed is to empower the workers and the consumers via investment in health infrastructure, social security. To cushion the inevitable slowdown in global trade, China needs to consume, rather than add to global overcapacity.

Jun 21 03:32 PM

[whidbey:]

Most of us fail to realize that the majority of China's industrial policy is aimed at avoiding social-political problems. Growth is secondary so long as jobs are created, profitable or not.

The real paradox is that China depends on businessmen to run its growth oriented initiatives. They really do not trust the judgment of bureaucrats in entrepreneurial matters.

These are little things we hope our government is aware of as it creeps around looking for ideas. I think Mrs Romer feels all will be well if we only we can lift the costs of health care from business. She thinks businesses are turning down orders to avoid health care costs. God knows what else she tells Obama.

Jun 21 03:36 PM

[conceptwizard:]

That's not all. In a statement released June 6 ,2009, a Chinese government official noted signs of trouble in a key sector. Vice Minister of Commerce Zhong Shan warned "exporters were facing 'unprecedented difficulties' at present and that the situation would not improve amid the global economic downturn," Reuters reported. 'It is increasingly difficult for us to make a quick turnaround, and the trade situation will not be optimistic in the second half of this year,' Zhong said in a statement on the ministry's website."

At least one closely watched data series also casts doubt on the notion that an economic revival is at hand. Last week, Reuters wrote that "the decline in China's power output accelerated in the first 10 days of May to 3.9 percent from a year earlier, the influential Caijing Magazine reported on Monday, providing the latest evidence that the Chinese economic recovery still lacks a solid footing."

In addition, "nationwide electricity consumption via major grids had fallen 4.3 percent in the first 10 days of May, also 0.7 percentage points sharper than that for the last 10 days of April, it said, confirming earlier local media reports. The power data is considered by some as more of a leading indicator than manufacturing and export data."...

Jun 21 05:42 PM

[one eye:]

What is the definition of a "Global Economy"?

If you confine the Globe to the Developed countries, then it is definitely not growing, deceleration may be, but Growth, No.

Indian and Chinese economies however never stopped growing and are accelerating, additional economies are being added to the Growth side like Indonesia and Australia. New Zealand may be added this week. Toss in the ME and Brazil which never went negative, the Global Economy Is growing. Eventually, the Developed world will profit from the strength in those countries, just as we finally did in 2003.

The Chinese learned their lesson about relying on External sales, which dropped some 32% in the latest month but Internal sales increased by 34%.

It seems like the Developed world is doomed to repeat the mistakes of the Past. High Taxes and more regulation are Not Green Shoots.

Jun 22 12:23 AM

[Dave Wrixon:]

This is only valid for industries that consume large amounts of electricity. Most energy intensive industries such as steel making, cement production and construction use mainly direct energy inputs from fossil fuel and will not therefore be included in the statistics. Most of the stimulus is aimed at these industries.


On Jun 21 05:42 PM conceptwizard wrote:

> That's not all. In a statement released June 6 ,2009, a Chinese government
> official noted signs of trouble in a key sector. Vice Minister of
> Commerce Zhong Shan warned "exporters were facing 'unprecedented
> difficulties' at present and that the situation would not improve
> amid the global economic downturn," Reuters reported. 'It is increasingly
> difficult for us to make a quick turnaround, and the trade situation
> will not be optimistic in the second half of this year,' Zhong said
> in a statement on the ministry's website."
>
> At least one closely watched data series also casts doubt on the
> notion that an economic revival is at hand. Last week, Reuters wrote
> that "the decline in China's power output accelerated in the first
> 10 days of May to 3.9 percent from a year earlier, the influential
> Caijing Magazine reported on Monday, providing the latest evidence
> that the Chinese economic recovery still lacks a solid footing."
>
>
> In addition, "nationwide electricity consumption via major grids
> had fallen 4.3 percent in the first 10 days of May, also 0.7 percentage
> points sharper than that for the last 10 days of April, it said,
> confirming earlier local media reports. The power data is considered
> by some as more of a leading indicator than manufacturing and export
> data."...
>
>

Jun 22 01:17 AM

[Sober Realist:]

Sources I've read say that a significant portion of the mandated lending by Chinese banks has gone into asset speculation --- as much as a third has gone into the stock market. The banks are also using low-interest mortgage-like loan structures to drive Chinese speculative inventory demand for commodities. The recent upsurge in commodities is purely speculative and a function of easy credit from banks in China. No jobs and, thus, no real growth and consumption results from expansions into such a contrived speculative economy.
"China's State Reserve Bureau has been stockpiling, but so too have producers, distributors and other speculators hoping to profit from an expected rise in prices once the world economy starts to recover....Stockpiling is fraught with risk, especially when borrowed money is used to buy goods when there is no demand, independent Shanghai-based economist Andy Xie said.
"Last year people who stockpiled went out of business," Xie said. "I know one distributor who stockpiled six million tonnes of steel and went bust when it dropped by more than half."
www.google.com/hostedn...

Many export-oriented enterprises are also cutting staff and closing factories to channel funds into the real estate market. "With loose credit, inflation expectation and the lift of measures against property speculation, more and more investors are entering the market to gamble..."
www.chinastakes.com/20...
Lang Xianping believes that under the deteriorating tangible investment environment, companies cannot conduct tangible investments after receiving their funds (Chinese government stimulus money). Parts of funds, in particular those coming from the banks, enter the virtual economy, causing illusive rebound in the stock and property markets. The current rebound in the property market is not driven by the fundamental improvement of China's economy and the rise of residents’ income....It is estimated that there are vacant areas of 160 million square meters across the country. To reduce the current stock is a priority. Take Beijing for example, by the end of March, existing vacant commodity housing areas reached 14.372 million square meters, an increase of 34.5% over the same period of last year and it would at least take 13 months to digest the stock."

We know that the Western consumer will not return to any kind of spending binge. So the alternate question is this:
What will it mean for China to fail to become a Western-style, consumption-based economy?

Jun 22 08:00 AM

[coreopsis:]

This is a transparent plug for the book, quite comical in effect. It's not quite the Panzer attack it appears to be. Hey, silly wabbit, trix are for kidz.

Jun 22 10:35 AM

[Alphameister:]

The author has a very loose definition of "proof." Especially in regard to the China "proof," it is nothing more than a completely unsupported assertion. The China growth story seems very much intact whether or not there has been some asset speculation, and no reasonable person expects China to drive a global economic recovery in the way the US once was able to do so.

Jun 22 02:39 PM