The inevitable Chinese slowdown – My weekly column

This post is available in pdf format My Weekly Column – January 28th

Growth in China slowed again in 2018, with an average of 6.6% across the year vs. 6.9% in 2017.
This remains a respectable figure, but it is the lowest since 1989 and 1990 as shown in the chart opposite. The 10-year average is also at a low, at around 8%. The 10% that had previously been typical of the Chinese economy is now a thing of the past, and expectations of a shift back to this trend are unrealistic. The Chinese economy is changing, setting the stage for a slower pace of growth. 

A weighty challenge for the world as a whole
Slowing Chinese growth often sets off the warning bells on world growth as a whole. Having hinged on developed countries during the period after the Second World War, growth is now dependent on the situation in China, which has displayed exceptional expansion since the start of the 1990s, creating strong and long-lasting impetus for the world overall.

The world growth driver is now China, rather than developed markets, and this shift is particularly vital as potential growth in developed countries has been on the wane since 2008. Right across the globe, from the US to France, growth that can be sustained in the long term while not generating permanent imbalances is weaker than before the 2007 crisis, and none of these countries can drive strong and self-sustaining growth from within their borders. Meanwhile, China managed to fuel momentum, taking over the role of developed economies – particularly the US – and benefiting the entire world economy.

So China managed to set the stage for stronger growth the world over on a long-term basis, either by sparking fresh competition on the Western markets, developing relationships with other emerging countries (Asia, Africa, Latam) or attracting capital to take advantage of Chinese growth, even if the price to pay for this was the transfer of technology.

According to IMF data (in current dollars terms), Chinese GDP has gone from less than 2% of world GDP in 1991 to 6% ahead of the 2007 crisis and then 16% in 2018, reflecting an astounding acceleration and putting it on a par with the euro area.

Chinese GDP as measured in purchasing power parity – a more coherent price and exchange rate system than the dollar-denominated assessment – has been higher than the US figure since 2014 and above the euro area figure since 2011.

More generally speaking, an increase in the weighting of China was achieved primarily at the expense of Europe and Japan, while the US maintained its strong representation. This also explains why the tension surrounding technological leadership is a Chinese-US matter and excludes Europe, which was not sufficiently involved in supporting China’s swift development.

A final point worth keeping in mind is that Chinese imports equated to close to 80% of US imports in 2017. A domestic Chinese shock affecting its imports would have a similar effect to a shock on US domestic demand and hence on its imports, and the worldwide impact of a shock on Chinese growth would be closer than many would expect to the effects of a shock on US growth.

Purchasing power, debt and jobs – the impossible French equation

This post is available in pdf format Forbes-23-01-2019-PW-en

Careful observation of the French economy provides some insight into the swift escalation in social unrest since November. The initial question of purchasing power sparked off the movement in November. At the start of the financial crisis, purchasing power was not too severely hit initially due to the hefty impact of automatic stabilizers, i.e. economic mechanisms that help even out the effects of shocks over time via redistribution. This system had worked fairly well in the past, keeping GDP fluctuations down during economic downturns. This is one of the key aspects of the French redistributive model.
With a continued weaker macroeconomic situation than in the past, the economy adapted. Three major changes can help shed some light on the social strife that has been dragging down the French economy.

The first problem is that French economic trend growth is now more sluggish than before the 2008/2009 crisis, and this has an impact on purchasing power trends.
We can analyze this situation using the chart below, providing an overview of purchasing power trends on the one hand (demand) and productivity data on the other (supply).
The purple line shows the trend in purchasing power per consumption unit and the blue line plots productivity (GDP per hour worked). We can see that these two indicators ran parallel before the 2007 crisis, then diverged until 2012/2013 before converging again, although with weaker trend growth than before the crisis. Under normal circumstances, these two indicators should move at a similar pace, and a long-lasting divergence is not feasible i.e. wages cannot be disconnected from income creation via the production process

The yellow vests and the French economic outlook

The French economy remains under pressure at the beginning of 2019. Business leaders do not want to commit to the long term because of the uncertainty that hangs over the immediate situation. Since November, there has been a clear drop in orders for capital goods. It may imply a sharp slowdown or even a decline in productive investment around the turn of the year.leading to a low trajectory. The protracted social unrest is beginning to weigh on employment, as shown by the rapid slowdown in hirings as measured by the French Social Security for the fourth quarter of 2018.
We can not spontaneously wait for relay from the European countries. The composite indicator calculated by Markit for the Euro zone is at its lowest since July 2013. The impetus will not come from there.
The difficulties of reducing social uncertainty will weigh on the profile of 2019 growth, which will probably have to be revised downwards. We must now think about a growth rate of around 1% for the whole year. The “Grand Débat” launched by the French President Emmanuel Macron to reduce the current social unrest and the preparation of the European elections next May, where new lists (yellow vests) appear, will maintain this deleterious climate. This will not help either employment or purchasing power. France goes around in circles.

Why is the euro area slowing? My Weekly column

This post is available in pdf format My weekly column – January 15th

The euro area economy is slowing and could even see a contraction around the end of 2018 due to recessions in Germany and Italy, along with very weak momentum in France. The trend has changed at a faster pace than had been expected at the start of 2018, when the consensus was for similar trends to the very robust growth in 2017 i.e. no acceleration but continued swift economic growth. This pointed to expectations of more self-sustaining growth via jobs, income and investment, thereby driving a more independent trend that could safeguard some of the euro area’s economy against potential external shocks.
This quickening decline is worrying as the situation in a number of countries has gone from solid to shaky, for example Germany, where external trade is now hampering growth, along with Italy and France where domestic demand is no longer on the desired trend.
This quickening decline is worrying as the situation in a number of countries has gone from solid to shaky, for example Germany, where external trade is now hampering growth, along with Italy and France where domestic demand is no longer on the desired trend.

Why this perception of a swift deterioration in the euro area economy?
The first harbinger that all economic observers picked up on is the very swift deterioration in economic indices as measured by business leaders surveys. From a peak in the last quarter of 2017, the composite index slid swiftly and steadily right throughout 2018, failing to display a recovery. This trend is revealed in the euro area Markit manufacturing sector index, which slowed severely and sustainably in sync with world trade, with an accompanying drop in domestic and external orders.