Is global economic recovery statistical or real?
This Bare Talk column is all about collecting and documenting questions about the supposedly synchronized recovery that has been under way in the last four to six quarters, including in parts of the developing world. The more I tried to make sure that there was indeed a global recovery, the more I became confused and disoriented. Forget about its strength; even the alleged truth of the recovery is in doubt.
My interest in the topic was piqued when I saw a chart on the Twitter handle of American economist Brad Setser that showed a strong recovery in Chinese exports (as per Chinese data and in dollar terms) to the US, the Eurozone and Japan. Brad Setser was widely followed for his commentaries on China’s foreign exchange reserve accumulation before the crisis of 2008. He briefly went to work in the US Treasury during the Barack Obama presidency. Now, he is back to blogging, at the Council of Foreign Relations.
As is to be expected, the growth in exports to the US has been the fastest. So, I decided to check if growth in US domestic demand had indeed accelerated. I looked at the nominal dollar values of gross domestic purchases and private non-residential fixed investment. I calculated annualized growth rates over rolling six and eight quarters. The results added to my puzzle. There is, if anything, a slowdown in the growth of both these indicators that reflect underlying domestic demand.
Then, there was a post by Matthew Klein in FT Alphaville. His blog post of 1 July showed that China had, in the last 12 months, gone from de-stocking to re-stocking. He suggests that we send a “Thank you” note to China for the world economy avoiding a recession in 2016, since China decided to abandon any pretence at reforms and restructuring and went back to doing what it does best—priming the pump. But more than thanking China, we must “thank” the Federal Reserve, for it made life easier for China with just one rate hike each in 2015 and in 2016.
If China were indeed re-stocking, then China’s imports must have risen faster than its exports in recent months. Turns out that China’s imports had began to rise faster than its exports only in 2017. Data from the Organisation for Economic Co-operation and Development on China’s imports (in US dollars) show that imports by China were contracting for eight quarters from the last quarter of 2014 until the third quarter of 2016. Turns out that we need to thank the American private sector too. America’s imports of Chinese goods had recovered from the fourth quarter of 2016 and the recovery has continued well into the second quarter of this year. American demand has helped Chinese producers, and not American producers so much. America’s rolling 12-month trading deficit had widened to $780 billion in May this year, from a recent low of $745 billion in September 2016. There is not a big jump in US growth but whatever growth there is, it is helping China, as usual.
China’s own domestic demand growth is, perhaps, only now beginning to help the rest of the world, as per their import data. So, how has economic growth in China recovered really? The real estate sector has contributed to growth. An index of home prices in 100 cities in China rose nearly 20% last year and an index of prices of newly built homes in 70 cities in China has been growing at double-digit rates in the 12 months up to June 2017.
Now, there are stories about China’s waning credit impulse. Two financial market participants have written about it in the Financial Times in recent months and they warn that it would spell the end of global recovery. Maybe that is why Janet Yellen threw hints of going easy on her own plans for interest rate increases in the coming months, in her testimony to Congress earlier this month, and Mario Draghi of the European Central Bank did not announce plans to end asset purchases by the European Central Bank last week.
But is China really going to slam the brakes on credit growth? China’s reforms have always been high on intent and low on delivery. In fact, over the weekend of 15-16 July, the president of China had presided over the National Financial Work Conference and supposedly expressed outrage at the extent of leverage in the economy. Surely, he could not have been in the dark about it until now. Separately, The Telegraph carried a report last week that according to the latest “China Financial Stability Report” of The People’s Bank of China, its shadow banking size is more than double the original estimates. The report is not yet available in English. So, with this revelation and outrage, one would have thought that China would be pulling in its horns. That is what we are being led to believe. But a story in Bloomberg that reported on the National Financial Work Conference suggests that there was also a call to “serve the real economy” and to “reduce lending costs for the real economy”. So, is the credit impulse in China going to weaken or go right back up?
The only region that appears to have done well is the Eurozone. But quite how they racked up the trade surplus (whom did they sell to?) and turned around a sclerotic economy is not clear. Perhaps a weak euro and weaker oil were behind it. But, in a recent article for the Financial Times, Martin Wolf had shown that more than 60% of the population has seen its real incomes decline in France, Sweden and Italy (almost 100%) after the crisis. Maybe, beyond raging asset prices and official statistics, there isn’t a real global economic recovery.
V. Anantha Nageswaran is senior adjunct fellow (geoeconomics studies) at Gateway House: Indian Council on Global Relations, Mumbai. These are his personal views. Read Anantha’s Mint columns at www.livemint.com/baretalk
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