Hale Stewart

About the Author Hale Stewart

Hale Stewart spent 5 years as a bond broker in the late 1990s before returning to law school in the early 2000s. He is currently a tax lawyer in Houston, Texas. He has an LLM from the Thomas Jefferson School of Law in domestic and international taxation where he graduated Magna Cum Laude and is also a Chartered Asset Manager, Chartered Wealth Manager and Chartered Trust and Estate Planner from the American Academy of Financial Management. He is the author of the book US Captive Insurance Law. You can read him daily at the Bonddad blog (www.bonddad.blogspot.com).

The Slower Growth Scenario is Now Firmly Planted in the Market’s Thinking

The OECD is the latest organization to issue a report with downward global growth projections:

Global growth has eased to around 3% this year, well below its long-run average. This largely reflects further weakness in EMEs. Deep recessions have emerged in Brazil and Russia, whilst the ongoing slowdown in China and the associated weakness of commodity prices has hit activity in key trading partners and commodity exporting economies, and increased financial market uncertainty. Global trade growth has slowed markedly, especially in the EMEs, and financial conditions have become less supportive in most economies. Growth in the OECD economies has held up this year, at around 2%, implying a modest reduction in economic slack, helped by an upturn in private consumption growth.

The OECD report rehashes the general theme developed in this column and elsewhere over the last few months. First, the decline in Chinese raw material demand is hurting emerging economies. Second, this lowered growth slightly hurts developed markets with weaker demand for industrial goods (this partially explains the shallow US industrial recession of the last few months). But the OECD report adds some important color, especially in the area of trade. They note,

A key uncertainty stems from the unexpectedly sharp slowdown in world trade growth this year, to an estimated 2%. Over the past five decades there have been only five other years in which global trade growth has been 2% or less, all of which coincided with a marked downturn of global growth. “

The accompanying chart shows how large a historical anomaly this event is:

Brazil, China and Russia are responsible for half of this decline. With China rebalancing its economy, it’s natural to wonder if this trend will continue into next year.

Chinese news continues to be bearish. Producer prices contracted again, this time at a 5.3% annual rate. CPI printed a weak 1.3% Y/Y advance. The Chinese statistics agency reported industrial production up 5.6% – a six-year low. Fixed asset investment advanced 10.2% – the slowest pace since 2000. The 11% Y/Y retail sales increase was the only positive news as it potentially shows the economy is in fact rebalancing.

EU news was mixed. ECB President Draghi offered a very dovish analysis of the region:

However, downside risks stemming from global growth and trade are clearly visible. Moreover, inflation dynamics have somewhat weakened, mainly due to lower oil prices and the delayed effects of the stronger euro exchange rate seen earlier in the year. In addition, price pressures – such as from producer prices – remain very subdued. Signs of a sustained turnaround in core inflation have somewhat weakened. While the recovery will gradually strengthen the impulse underlying the inflation process, the protracted economic weakness of the past years continues to weigh on nominal wage growth, and this could moderate price pressures as we move forward. From today’s perspective, this suggests that a sustained normalisation of inflation could take longer than we anticipated in March when we first appraised the overall impact of our measures.

This is the second time Draghi expressed concern about the macro-level EU inflation environment. Previously, he noted that, should EU inflation projections drop at the December meeting, then the EU research staff would need to dig further into the data to determine the cause of the extended weakness. EU GDP grew .3% Q/Q and 1.7% Y/Y. While the markets were concerned about the .1% miss, it’s hardly fatal. But the .3% M/M industrial production drop is concerning. As this chart from the report shows, this number has flat-lined for the better part of the last year:

This table from the report highlights the last 6 months of results:

While the latest Markit manufacturing number was 52.3, the accompanying analysis argued for continued weakness:

“The eurozone manufacturing recovery remains disappointingly insipid. The October survey is signalling factory output growth of only 2% per annum, a lacklustre performance given the amount of central bank stimulus in place

“With factory production lacking vigour, employment growth sagging to an eight-month low and output prices falling at the fastest rate since February, it’s easy to see why the ECB are considering additional stimulus.

The latest IP numbers confirm malaise.

The employment report was this week’s only UK release. It was very strong. The unemployment rate dropped to 5.3% while wages increased .3%. Most importantly, the employment/population ratio reached its highest level on record:

Like the UK, the only Australian economic news was the employment report. The unemployed rate dropped .3% to 5.9%. As this graph from the report shows, total employment continues to increase while the unemployment rate is moving lower:

Japanese news was bearish. The Tankan manufacturing survey was the lowest reading in 2 ½ years. Machine tool orders dropped 14.6% M/M. As shown in these graphs from the report, this number has recently dropped sharply:

Finally, industrial production was up 1.1% M/M, but was down .8% Y/Y. This data series has simply moved sideways for the last few years:

Conclusion: The slower growth scenario is now firmly planted in the market’s thinking. Not only have central bankers highlighted the international malaise, so have the major international organizations like the OECD and World Bank. Recent Chinese news confirms this; while the Y/Y numbers are still high, they continue to move lower and also point to a general slowdown. ECB president Draghi admits deflationary pressures may be increasing. Canada is slow and some analysts are arguing for additional Japanese stimulus. And this is before we look at the EM – a wide drop in demand due to lower commodity price demand.


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