Global Economy: Why It Will Get Worse Before It Gets Better

Global EconomyChina is in deep trouble. Economic activity in the second-biggest economy is plunging and it looks like the situation is only going to get worse.

The Caixin Flash China General Manufacturing Purchasing Mangers’ Index (PMI), an indicator of manufacturing activity, now stands at 47.8—the lowest level in more than six years. (Source: Markit Economics, August 21, 2015.) A PMI below 50 means contraction in the manufacturing sector.

This year, the Chinese economy is expected to grow at the slowest pace since the global recession of 2008. The International Monetary Fund (IMF) expects China to grow 6.8% this year and then 6.3% in 2016. (Source: International Monetary Fund, last accessed August 21, 2015.) I think these estimates are too optimistic; it will not be surprising to see China’s actual economic growth this year come in under five percent.

Something else not being discussed about China in the mainstream: debt in the Chinese economy is skyrocketing. According to McKinsey & Company, debt in China’s economy increased exponentially from $7.0 trillion in 2007 to over $28.0 trillion by mid-2014. (Source: McKinsey & Company, last accessed August 21, 2015.) If China’s economy gets into more trouble, and payment on this debt is jeopardized, it could become a real problem, not for China but for the world economy.

Mind you, while China is certainly in the headlines these days, other major economic hubs in the global economy are also struggling for growth. Just look at Japan; the country is still in a recession. Moreover, the eurozone is in a depression, and now we are hearing of trouble brewing in Latin America.

Key Indicator Suggesting Global Economic Slowdown Soon

Commodity prices are suggesting we are setting up for a 2009-like global economic slowdown. Just look at the S&P Commodity Index (chart below)—it’s down 50% since July of 2014!

S&P Composite Index Chart

Chart courtesy of

Commodities prices are a leading indicator of where global economic growth is headed. If they are rising, we are usually headed towards prosperity. But if they decline, and they have been declining sharply over the past 12 months, you can expect an economic slowdown.

As Global Economy Slows, Stocks’ Returns Diminish

It was easy to make money in the stock market between 2009 and 2014. If investors just bought on the “dips,” they did fine. That “trade” isn’t working anymore. The threat of a global economic slowdown, something I have been warning my readers about since the beginning of 2015, is becoming a reality. And with it, stocks could be in trouble for a long, long time.

Also Read:

Global Economic Slowdown to Take Stock Market Down with It

Global Economy: Here Cometh Deflation