The Chinese economy appears to be falling apart, fast…
While GDP growth figures released by the People’s Bank of China about the Chinese economy are indicating a slowdown, there are other indicators that are flashing bright red contraction signals.
When the Chinese economy was expanding at a stronger clip last year, year-over-year growth in electricity consumption ranged in the 10% to 11% range, with one month registering a 16% increase (source: Forbes, May 13, 2012). Electricity consumption is a very accurate reading of growth, because it shows how much more the Chinese economy is working to produce goods.
When the Chinese economy being slowed down in the last quarter of 2011, electricity consumption growth slowed to the six percent to eight percent range, year-over-year, and this persisted into 2012.
What is most disturbing now is that, for March, electricity consumption grew just 0.7%!
Couple this with the fact that rail cargo volumes in the Chinese economy are growing at half the rate they were last year, while sales of bulldozers are off over 50% in March when compared to last year, and it gets even more disturbing.
There are other figures released by the People’s Bank of China that point to an alarming slowdown. Loan growth is critical to any economy, because it measures how much new investment and consumption is being generated. In April 2012, the People’s Bank of China reported that loan growth fell 8.2% from last year. Can you say “contraction?”
In April, exports were expected to rise 8.5%, because, despite Europe being in a recession, the reliable U.S. of A was going to come through and buy Chinese goods to support the Chinese economy. Exports actually rose only 4.9%.
Imports were supposed to jump by 11%, because this time is similar to North America where producers prepare goods in October and November for the Christmas holidays. However, imports barely showed a pulse, up just 0.3% during their preparation for their holiday season…not a promising sign.
These statistics have not gone unnoticed by the People’s Bank of China and the leaders in China, who are clearly worried about the direction of the Chinese economy. The reserve requirement ratio—which is equivalent to lowering interest rates—was lowered for the third time since November last week.
Furthermore, just this week, the premier of China provided fast-track approval for infrastructure spending in the Chinese economy. Growth was the theme, as projects scheduled for the end of the year were moved up to right now (source: Reuters, May 22, 2012). Smells like desperation, as the leaders realize that the Chinese economy is slowing much faster than anyone thought.
If most of Europe is in a recession and China is slowing down and now showing signs of contracting, who is going to jumpstart global growth? The U.S. economy is barely hanging on and showing signs of fatigue.
If the Chinese economy continues to contract like it did n March and April of this year, this will have serious consequences for the North American economy.
Where the Market Stands; Where it’s Headed:
I received an e-mail alert from CNN Breaking News on Friday that said that last week was the worst week for major U.S. stock indices this year. The Globe & Mail (May 21, 2012) ran a story saying that Friday marked the end of the worst 13-session period for the Dow Jones Industrial Average since October 1974.
Reading these reports, I think to myself: this is nothing. Europe is in recession, China’s growth has slowed considerably, and the U.S. is not far from falling back into recession. The worst is yet to come.
The end of the bear market rally that started in March of 2009 will not be a straight line down. The market will bounce back whenever it gets oversold (we saw that yesterday). The Fed will have to finally come to the table with QE3; the government will need to borrow even more money to get the economy going.
But, in the end, the natural forces of the secular bull market will prevail. It’s just a matter of time.
What He Said:
“You’ve been reading my articles over the past few months and have seen how negative I’ve become on the U.S. economy. Particularly, I believe it’s the ramifications of the faltering housing sector that are being underestimated by economists. A recession doesn’t take much to happen. It’s disappointing more hasn’t been written on the popular financial sites and in the newspapers about the real threat of a recession happening in 2007. I want my readers to be fully aware of my economic opinion: I wouldn’t be surprised to see the U.S. economy in a recession sometime in 2007. In fact, I expect it.” Michael Lombardi in PROFIT CONFIDENTIAL, November 13, 2006. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.