The Chinese financial system remains under stress. The PBOC has injected cash into the markets the last few days to alleviate tight financing conditions. Once a central bank begins supporting the financial system with cheap money, it is difficult to stop. Over the next few weeks, the PBOC will either become more deeply involved with supporting weak institutions or it will allow the system to collapse and clear. It’s a 50-50 proposition at this point, but keep in mind that the latter option will wreak havoc on world markets.
Not only is the country not creating enough jobs, the ones that are being generated are low-quality McJobs. The economy is creating part-time positions in favor of full time work at over a 3 to 1 clip. Economic growth will not become self-sustaining anytime soon with these poor results because workers require quality jobs in order to begin spending again.
It is a foregone conclusion that Greece will require a generous debt-forgiveness package from its Eurozone partners as the chart illustrates nicely. Wildly optimistic assumptions regarding GDP expansion, tax revenue growth and privatization receipts were crafted with an eye towards kicking the Greek can past German elections. Everyone except German voters knows that Greece will require a fourth bailout, but it is not being stated openly except by the potential future finance minister of a Social Democrat-Green coalition. This is exactly why that coalition will lose. The proper method here is to pretend that everything is fine until after elections. Once you are safely in office, then you tell the voters about all of the extra tax money that the government will be spending on Greece.
The official Chinese PMI continues to point to a slight expansion while the HSBC Markit number has been in contractionary territory for two months now. Which one is correct? South Korea and Australia have one thing in common: both count China as their best customer. As the charts illustrate, business has not been very good lately. The only place China’s slowdown is not evident is in the official Chinese data.
The worst is not over for Europe. The continent may finally break the streak of contracting quarters, but the sustained boom required to lift the PIIGS out of depression is far away. In context of the PMI chart, Eurozone PMIs would have to improve more than 20% to lift the region to the 3-4% growth desperately needed to reduce its debt pile. A contracting China and an anemic US will crimp growth in the second half though a stagnant rather than contracting 3rd quarter may surprise some.