The two most profound changes our generation has been witness to is the advent of the Internet and the explosive growth of the Chinese economy.
Before the Chinese government introduced economic growth reforms in 1979, the average annual real gross domestic product (GDP) growth rate in China was estimated at 5.3% (from 1960 to 1978). Since then, the Chinese economy has maintained consistent and rapid development, with its annual GDP growth averaging 9.3% between 1978 and 2001. (Source: “China’s Contribution to Global Economy,” China Consulate web site, May 22, 2004.)
According to the World Bank, in terms of stabilized prices, the rate of China’s contribution to global economic growth was 14.0% between 1980 and 2000, versus 20.7% for the United States and seven percent for Japan. During the same period, the rate of China’s contribution to global trade growth reached 4.7%, ranking third in the world, following the United States (14.4%) and Japan (6.9%).
Since 2000, China’s economy has fluctuated in step with the global economy. In 2008, when the recession circled the globe, China’s GDP dropped to 9.6%, versus 14.2% in 2007. (Source: ”China GDP: how it has changed since 1980,” The Guardian, last accessed December 19, 2012.)
In spite of the slow recovery of the global economy, China’s economy has continued in its robust ways, attracting increasing attention from the international community. While the U.S. and nations of the eurozone are worried about slipping into recession, the Chinese economy is expected to grow at a slow, but still healthy, 7.4%.
Today, China’s GDP is equal to about one-half that of the U.S. Only 15 years ago, China’s GDP was only one-tenth that of the U.S. With the rapidly shrinking divide, China’s economy could surpass that of the U.S. sooner than previously thought. If the economic growth gap is six percent per year and real appreciation is 2.5% per year, then that would be sufficient for China’s economy to become bigger by 2020. According to economist Stefan Karlsson, “If the growth gap and/or real appreciation is closer to the average rate for the last decade, it could happen even sooner.” (Source: ”China economy may surpass US before 2020,” The Christian Science Monitor, January 26, 2012.)
What does the future hold for the Chinese economy?
China’s phenomenal economic growth has significantly increased living standards, and helped give rise to a burgeoning middle class. Over the coming decades, economic mobility means more and more Chinese will enter the middle class, creating one of the most important and influential social and economic groups on the planet.
With increased global prosperity come shifts in influence and power. Some estimate that by 2030, Asia will have surpassed North America and Europe combined in terms of global power, based on GDP, population size, military spending, and technological investment. China alone will probably have the largest economy, surpassing that of the United States a few years before 2030.
A powerful Chinese economy means the economic fortunes of the U.S. and European countries will have a diminishing impact on the global economy. As such, the health of the global economy will be linked to, and contingent upon, how well the developing world does.
In Profit Confidential, we regularly comment on the Chinese economy, where we believe it’s headed, and how an average investor in North American can partake in, and even profit on, the unprecedented transfer of economic power from the U.S. to China.
A recession for the global economy is becoming an increasingly likely scenario.
The Chinese economy, the second-biggest in the world, witnessed a contraction in manufacturing in May. The HSBC Flash China Manufacturing Purchasing Managers’ Index (PMI) registered 49.6 for May, declining from 50.4 in April. (Source: Markit, May 23, 2013.) Any number below 50 represents contraction in the manufacturing sector.
The Chinese economy exports a significant amount of what it produces to the global economy. Contraction in Chinese manufacturing shows exports are falling—the global demand for goods is falling.
Similarly, Germany’s Flash Manufacturing PMI showed continuous contraction in the manufacturing sector. The index stood at 49.0 in May. (Source: Markit, May 23, 2013.) The German economy is important to observe, because it’s the largest economy in the eurozone and an economic slowdown in the nation can send the common currency region into another downward spiral, again affecting the global economy.
Looking at other key indicators, they are pointing to an economic slowdown ahead in the global economy. Consider the copper market. Demand for copper is suggesting activity in the global economy is sluggish, even deteriorating.
Copper prices are down more than 10% since the beginning of 2013, and stockpiles of the brown metal, tracked by the London Metals Exchange (LME), are up a staggering 95% this year! (Source: Bloomberg, May 23, 2013.)
Other industrial metal prices, such as aluminum, lead, nickel, and zinc, are in decline as well.
How can the U.S. economy possibly improve when the global economy is in trouble?
The U.S. is highly affected by any shift in demand in the global economy.
After the financial crisis … Read More
Economic conditions in the U.S. economy may be improving slightly, but the global economy is on the verge of witnessing an economic slowdown—and a possible recession. Key indicators are flashing red signals and warning of trouble ahead for the global economy.
In these pages, I have written rigorously about how the main economic hubs of the global economy are witnessing an economic slowdown, with the eurozone and Japan in an outright recession. The Chinese economy is slowing down, and emerging market economies are now starting to show concerns, as their troubles are quickly brewing.
This week, the central bank of South Korea cut its interest rates to 2.5% from 2.75%. The main reason for this cut in rates was deteriorating exports. In March, industrial output for the country declined 2.6% from February—the biggest decline in a year.
Similarly, central banks from countries like India, Taiwan, and the Philippines may do the same and cut interest rates to boost their exports and economies.
Emerging market economies export to developed nations in the global economy. If these emerging markets experience an economic slowdown, it will mean that demand is weak in the developed countries.
Other key indicators, like industrial metal prices, are reaffirming the economic slowdown.
Consider the price of aluminum, a metal used in many different technologies. On the London Metal Exchange (LME), aluminum traded for about $2,100 per ton at the beginning of 2013. Fast-forward to today, and the price has declined almost 12% to around $1,850 per ton. (Source: London Metal Exchange web site, last accessed May 9, 2013.)
According to the Bureau of Labor Statistics (BLS), there were 3.8 million jobs opening in the U.S. jobs market in the month of March, unchanged from February and lower than March 2012 (Source: Bureau of Labor Statistics, May 7, 2013.) The hires rate, which is the number of people hired relative to those already working, declined in March in the durable goods manufacturing, nondurable goods manufacturing, arts, entertainment, and recreation sectors.
There are still almost 12 million individuals in the U.S. economy who are jobless, and a significant portion of them have been unemployed for more than six months.
So far this year, 783,000 jobs have been added to the U.S. jobs market. While this number sounds good, in the same period last year, there were almost 900,000 jobs added to the jobs market. In 2011, it was 774,000 jobs. (Source: Wall Street Journal, May 8, 2013.)
In addition to all this, there are threats to the jobs market ahead, such as sequestration—$85.0 billion in spending cut from the U.S. federal government. These cuts are expected to hit the jobs market in the summer. The Congressional Budget Office (CBO) estimated that the cuts in government spending will result in a reduction of 750,000 jobs. (Source: CNBC, May 1, 2013.)
I am looking at the recent declining number of jobless claims as a positive sign, but the jobs market is still in a dismal state. Until the jobs market really picks up, my negative opinion on the U.S. economy won’t change.
Consumer spending in the U.S. economy looks to be in trouble.
A popular measure of U.S. consumer confidence, the IBD/TIPP Economic Optimism Index fell 2.4% in May. It registered at 45.1, compared to 46.2 in April. What’s problematic is that this consumer confidence measure is only 0.7 points above the reading in December 2007, when the U.S. economy entered into a recession. (Source: Tipponline, last accessed May 7, 2013.) A reading below 50 indicates consumers have a pessimistic view of the U.S. economy.
This U.S. consumer confidence measure essentially has three different components. It asks consumers three questions: 1) how will the U.S. economy perform in the next six months; 2) what is the status of their personal financial outlook; and 3) how confident are they in federal economic policies? Of the three components, two witnessed a decline. Consumer confidence toward the U.S. economy had the biggest drop in May, down 8.5%.
As we all know, consumer confidence is essential to consumer spending, as consumers tend to hold back on their purchases if they believe economic conditions will become worse.
Another major obstacle in front of consumer spending, consumer credit in the U.S. economy grew at an annual rate of only 5.7% in the first quarter of 2013. If this rate remains the same, then 2013 will post an increase in consumer credit, which was lower than the credit expansion rate of 2012. (Source: Federal Reserve, May 7, 2013.) When consumers borrow less, they spend less.
Adding to the misery of consumer confidence, jobs growth in the U.S. economy isn’t anywhere close to what it really should be. Last month, … Read More
Exports from the Chinese economy increased 14.7% in April. This was a surprise, because analyst consensus estimates were expecting an increase of only 10.3%. The China General Administration of Customs reported the country had a surplus of $15.1 billion in April—it exported more than it imported. (Source: Reuters, May 8, 2013.)
This is a good sign for the Chinese economy; but the threats of an economic slowdown in the country still persist.
Looking closely at the data, exports from the Chinese economy to the U.S. fell 0.1% in April; and to the European Union, Chinese exports declined 6.4%. The economic slowdown in Europe is still a major issue and exports to the region will likely decline even further.
It is way too early to say the Chinese economy is coming back.
In the first quarter of 2013, the gross domestic product (GDP) in the Chinese economy only grew at an annual rate of 7.7%, compared to 7.9% growth in the last quarter of 2012. While this number looks great when measured against the growth in developed nations in the global economy, it’s nowhere close to the growth rate the Chinese economy has experienced in the past.
According to Fitch Ratings, a credit rating agency, credit in the Chinese economy reached 198% relative to the country’s GDP at the end of 2012. In 2008, this number was only 125% of the GDP. (Source: Time, April 28, 2013.)
Similarly, the debts of local governments in the country are stacking higher, estimated to be $2.0 trillion, or about 25% of GDP. The Chinese economy may very well be faced with … Read More
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