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Friday, April 17, 2009

To Round Out The Global Picture

First, more on China. Yesterday they reported a YoY GDP growth rate of 6.1%, which was down from 6.8% they reported in the fourth quarter. I have my doubts about this because of the power consumption figures. Those are also reported on a YoY basis, and power consumption in the first quarter dropped. Electricity consumption dropped 4%, whereas total power consumption dropped 5.2%.

The March figures were reported to be much more favorable, and supposedly industrial production in March was up 8.3% compared to the prior year. This is however a falling figure (+11.0% in February), and that doesn't support the theory that the Chinese economy was rebounding at the end of the quarter.

Historically there has been a strong correlation between Chinese GDP and power consumption figures. For more background, see this January post at the Global Economy Does Matter blog. I would say this equates to about a minimum 3-4% drop in GDP, annualized. It could be more.

For further comparison on a YoY basis, Chinese exports in December 08 were down 2.8% compared with March 09's YoY drop of 17.1%. That was up from the major drop in February (25.7%). YoY Chinese comparisons will be affected all this year by various odd factors affecting China's economy in 2008, which include major snowstorms in the spring which affected travel, energy production, industrial production and ag, the huge quake in the late spring, plus the Olympics and the measures taken to drop power consumption and pollution in advance of the main events. So quarterly averages are best, but are still erratic. Overall the disruptive snowstorms in Q1 08 should have biased 09's comparisons on the positive side.

The final data point is that China has adopted major stimulus measures. One item that seems to concern their own economists is the massive growth in bank loans in the first quarter, which have caused them to up their ALLL requirements on loans. One would expect this massive loan growth to be followed by some pretty severe consequent defaults and to result in a drag on growth in the future without the resumption of very strong expansion.

European industrial production is now falling faster than US industrial production. The latest figures are for February. There is no significant difference between Eurozone (-18.4% YoY) and EU (-17.5%). The decline was largest in capital goods. Both the monthly decline and the YoY declines were significantly higher than for the US. This may not be that surprising, but it is disappointing and it raises further worries about European banks. For comparison, US February industrial production dropped 11.2% (12.8% in March). The rise in European unemployment is very similar to unemployment in the US:

This is the Eurozone measure and it is calculated very similarly to the US official unemployment numbers.

There is now a very close correlation between GDP declines, freight declines, etc across the world's major industrialized nations. This increase in correlation is disturbing, because while it may increase one's confidence in the definition of current circumstances, it also tends to skew downwards any reasonable projections of future growth. Further, the close correlation between Eurozone power production (-3.6% YoY in February) and the Chinese and US figures suggest to me that there is something badly wrong with the official Chinese industrial production figures. I am prepared to believe many things, but not that industrial production is rising significantly over a year while power production is dropping significantly.

Thus we have a picture of a world with a very hefty trade slowdown, and the expectation of significant second order effects as capital and heavy industrial equipment supply businesses continue to substantially contract. Trichet is now on board the concept of "Do everything", but does not have consensus.

India was the last holdout, but its wholesale price inflation figures have dropped to about flat on the year. Only food is holding a real increase, and retail sales figures have continued to trend down by significant factors. India is still squeezing out a tiny rise in YoY power production, which would indicate that it is holding out better than China.

Food inflation in currency-depreciated economies (Poland and Mexico are examples) is further eroding worldwide consumptive power.

In the US, food prices in grocery stores seem to show that weakness in consumer spending power is continuing to grow. This is a very important measure of the economic potential in the near future, because it separates out the psychological factor. Households that are not cash-strapped, even if financially conservative, will continue to spend on their preferred food items even with mild inflation (and currently, these stores are showing an absolute roll-back in food prices from a year ago across all product lines). Households that are under genuine economic stress are forced to control food spending overall (these households tend to be lower-income, but may also be older households diverting their income to medical expenses or to help children and relatives).

Pricing trends in several supermarkets I check in relatively high-end markets over the spring so far have shown an absolute inability to raise prices, which strongly suggests that there is significant further downside to US consumer prices. I have been through bad recessions before, but I have never seen such an astonishing pattern in the US in grocery stores. The closest thing to it were trends during times of very high inflation. However, flattened profit margins were quickly recouped at least somewhat as overall inflation fell. This is not occurring.

By combining these numbers with the WalMart numbers, I have what should be a sample of a very broad majority of the US population. I can only account for the results by adding in demographic effects. In any case, the implications are that US consumer spending will be constrained for several years to come, and the March retail numbers appear to be not a flier, but more of a prediction.

So to sum up:
All of this suggests a significant leg down for the global economy remaining in 2009.

It further suggests that Chinese internal capital needs are going to grow for several years to come. I don't really know who we are going to get to fund our government borrowing.

I see the wall looming and an economic state change. There has never been anything remotely like this post WWII. The peak oil people are going to have to give it a rest for a few years. CF may hit his $18 crude mark yet if the Europeans can't get it together. The downturn is now too correlated across countries with financing problems (Spain, the US, etc) and countries that had strong balance sheets (China, Canada).

At this point the Europeans might as well pull the Eastern European blocs directly into the EU with a favorable currency conversion. There is not much downside left, and it would stabilize intra-European exports some what and put a floor on some of the bank losses.

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