Geopolitical Update : Chinese economy is contracting
By Christian Takushi, Independent Macro Economist. 29 Feb 2020 (public release adjusted and delayed)
One of the best assessments I have seen so far on TV about the Coronavirus impact on the Global Economy is by economist Nouriel Roubini, aired yesterday on Bloomberg TV. The first seasoned economist to expose on TV the consensus among experts that China is simply slowing down or growing at a more moderate pace due to the Corona Virus.
Mr. Roubini gets the math right and sees the Chinese Economy already contracting in Q1 2020 by -2%. While my assessment of China’s economy is even more negative than Mr. Roubini’s, I am slightly more optimistic than he is when it comes down to the potential G-20 fiscal-monetary response. Although the monetary stimulus can only be limited, it doesn’t matter. It is all about psychology – most investors and AI machines follow the headlines.
This Virus is exposing an unhealthy global economy that has been brought to this vulnerable point by ultra-loose monetary policy over 3 decades. The Virus is managing to do what nobody dared to do: ending a “Managed Rally” and staged “hyper-inflation” in Risk Assets. Policy makers have manipulated Supply, Demand, the Yield Curve and even smoothed Volatility to force investors into Equities and other risk assets. So, let’s not blame this Virus for the magnitude of the economic fallout.
China is contracting – the world could soon, too
For weeks I have been “taking flak” for saying that the Chinese economy is already contracting by at least 3% YTD and that the World Economy is poised to grow by 2.8% in 2020 or less – with risks to the downside. I’ve also told institutional investors this past month that the probability of a Global Recession is rising – currently at 40%.
Some investors challenged me by telling me that all big banks’ experts were in agreement, seeing China decelerating from a near 6% annual pace to a more moderate 4% pace. How could I dare to say China is contracting.
Being a trained macro economist and having worked more than three decades in the global investment industry, I have seen consensus become ever more narrow, autocorrelated and regulation-strangled. Very few economists dare to say what they really think. The regulatory tsunami after the Great Financial Crisis has created a false sense of security and augmented the problem: Only one opinion rules, dissenting views are neither tolerated nor do they pay off. The latter fact being the most troubling. Banks cannot be blamed for this, regulators and policy makers have created this environment.
If things remain on the current path, we cannot rule out that key economies of the Northern Hemisphere will contract in the 1st half 2020, and possibly for the whole year.
In a nutshell, I see markets in denial about the already unfolding contraction across industries and key economies, but I also see fast-paced recoveries in the 2nd half as likely. Provided of course, the unfolding outbreak has been contained. Financial markets are likely to get ahead of the economic fundamentals once we have touched the bottom. But this may be an opportunity to reduce equity exposure. Having managed investment funds for over two decades teaches you something about investors’ psychology.
Latest Chinese data confirms what we have been saying
The data release this weekend in China is stunning. I have never seen such a negative economic data release in my 31 years in the global investment industry.
The data release is also a shocking blow to the credibility of consensus: the compact view of top banks, economists, commentators and experts in the financial industry. With a few exceptions they have been saying for weeks that China is still growing. They hang on to the official data and official statements. The smooth “patching up” of numbers by Beijing’s superb statisticians worked for decades – Beijing benefitted, Western investors benefitted, policy makers benefitted (volatility had to be smoothed). I argued this year, “how can you rely on official statements in a situation like this. You have to come up with an independent assessment of the situation. It takes time, but we have the training and the tools to do it”.
The data released last night shows the biggest contractions on record:
The Non-Manufacturing PMI casts a frightening foreshadow on the service sector:
There seems to be a new communications strategy in Beijing. During past crises, Beijing managed the data carefully to mask the contractions. This time, China is releasing data reflecting the severe implosion. Beijing is catching Western banks and investors terribly wrong-footed. In the past they could always rely on Beijing smoothing the numbers. They have been telling to clients “don’t worry, China is now over 20% of the world economy and they know how to keep it growing. Worst case, they will grow by 4% this year”. The problem is not the final GDP figure for 2020 – that could still be a “positive digit”. The problem is the severe contraction and up-leg – this entails volatility, risks and unavoidable change.
But not all is gloom: If China can overcome this outbreak, I see the Chinese economy staging a dynamic comeback in the 2nd half of 2020. Nevertheless, some demand will never return back to China. There will be some consequences from the collapse of the Global Supply Chain: regional supply chains will be rebuilt (as we have been forecasting) and companies will be forced to diversify. This could be a great opportunity for some countries in Europe: Poland, Romania and Portugal may benefit from the restructuring of European supply chains – if they are ready.
Let’s not blame this virus
A world economy built on a business model of relentless quantity growth, where people are constantly travelling and shaking hands with people that are themselves meeting other travellers, poses some risks for humanity. We have embraced the benefits of globalisation, mass travel, free movement and ever more events without ever seriously preparing for the risks of that strategy. I heard repeatedly from European leaders these past two months: “under no circumstances, will we limit the Free Movement of people”. We all enjoy that right, but Free Movement should not become an ideological aim in itself.
It has been reported in Switzerland that 80% of the essential medicine supplies are from China, and the Alpine nation could soon run out of them. Has Bern failed in its primary duties and governance? I am personally not surprised. Sadly, it is all over the world. Marginal Costs became the sole driver of strategic and policy decisions at government, corporate, investment and – let’s be frank – consumer level. The “rush to the cheapest”, no matter the risks and no matter the consequences. Entire productions shifted to undemocratic states and their supply chains exposed to multiple risks. But let’s avoid going from one extreme to another: China bashing is not only unfair, it is also counterproductive. China can be a main center of production, but not the sole center.
The truth is that countless businesses – big and small – have been growing revenues with an unsustainable economic & business model based on “ever more” debt, ever “bigger” events, mass travel, mass maritime shipping, and mass production in vulnerable economies with autocratic regimes. Too many CEOs, CIOs and investors are blaming the Corona Virus for the unfolding economic and market havoc, I strongly disagree. We all – shareholders included – bare a great deal of the responsibility. Our economic model has facilitated growing accounting profits, but de facto .. huge debt, economic losses and systemic risks were being created elsewhere (when all spillover effects and environmental & social costs are taken into account).
Watch the Balance Sheets
In a global economy flooded with debased paper money and artificially inflated wealth (balance sheets), only a massive concerted fiscal stimulus accompanied by deep structural reforms could make a real difference. Better even would be a monetary re-set with a Global Currency Reform. In the absence of that I foresee a widespread contraction of balance sheets.
Policy makers have indeed made greed systemic. Instead ..
If you want to read the full research report, kindly write to c.takushi@bluewin.ch
By Christian Takushi MA UZH, Independent Macro Economist & Geopolitical Strategist. 29 Feb 2020
Disclaimer: None of our comments should be interpreted or construed as an investment recommendation
Personal disclosure: I exited stocks in 2019, and I have exposure to gold.
A distinct broad approach to geopolitical research
(a) All nations & groups advance their geostrategic interests with all the means at their disposal
(b) A balance between Western linear-logical and Oriental circular-historical-religious thinking is crucial given the rise of Oriental powers
(c) As a geopolitical analyst with an economic mindset Takushi does research with little regard for political ideology and conspiracy theories
(d) Independent time series data aggregation & propriety risk models
(e) He only writes when his analysis deviates from Consensus