Friday, April 17, 2009
To Round Out The Global Picture
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:
- The Japanese are waiting hopefully for the Chinese economy to rebound, and have much longer to wait.
- The Europeans think that the US may be rebounding, and that this will at least presage their rebound at the end of 2009. Fat chance.
- The Chinese want the US and Europe to start spending again, but have conceded that this is unlikely to happen to the needed extent, and are trying to implement medical coverage for the broad population in order to boost internal spending. That could start paying off 2-3 years from now, and if it pays off enough, it might help to defray the cost of funding the imploding banks.
- Many of the emerging countries are showing signs of escalating weakness, which is rough on SE Asia because they had been big consumers of electronics and appliances. See Singapore's Q1 annualized -19.7% GDP figure, and consider that Singapore's exports to Malaysia dropped over 20%.
- The Brits are standing around with a stiff upper lip, waiting to be introduced to the recovery, which British government officials maintain has something to do with windmills.
- Sarkozy is preparing to blame all of this on Obama (some things never change),because he refuses to attack Iran, and Bush, because he did attack Iraq.
- The Germans are preparing to expand their already expansive government job support program (see description at the end of this article), so that their big industrials can cut employment in order to maintain profitability (and the ability to pay on their loans).
- The initial effects of lower interest rates (implemented in most economies) on consumer spending for durables are on average fading after 3-5 months.
- In retrospect, some of the largest German financials are regretting their decision to invest in Austrian and Irish banks.
- In retrospect, some of the Austrian banks are regretting having the equivalent of 75% of their GDP lent out to the Central/Eastern exSoviet client bloc. Something about foreign currency loans, which are functionally equivalent to Option ARM loans in situations encompassing sudden currency devaluations. NOT THAT THERE HAVE BEEN ANY OF THOSE as far as the Austrian Economic Minister knows....
- The Austrian minister is very confident in the strength of Austrian banks, due to the stress test which was conducted (although Fitch is less confident, taking somewhat of a retrospective view. The best guess is that this is related to the latest projections of 28% losses on recent Option ARM vintages). Those audits were conducted by the Easter Bunny, right before the Easter Bunny stopped off to help the US banks conduct their own stress tests. That way the US can truthfully say that their external auditor has seen much worse banks and that the big 19 are not that badly off in comparison. It's all in how you present the data. I await May 4th with jovial anxiety.
- Obama of the US sees glimmers of hope for the economy aside from the continued job losses and economic contraction. These glimmers appear to be emanating from windmills and that cute little desktop thingie Obama got from the Austrian Economic Minister.
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.