Spain’s “recovery” continues. If you Spanish stocks or bonds, you have done nicely since the Draghi pledge over a year ago. Workers continue to reel from the effects of a poor labor market. Spain must institute draconian reforms within its economy if it is to have a fighting chance at growing again. Unfortunately, the country’s political system is basically paralyzed with the Prime Minister and ruling party spending political capital on defending themselves against the revelations of the PP’s slush fund. Meanwhile, the banking sector that was supposedly fixed a few months ago has just set a new record for nonperforming loans.
While the country is no longer in immediate danger of defaulting, it will continue down the path of economic despair. An ineffective government cannot create and implement the necessary reforms to free and stimulate the economy while Spain is forced to operate under Germany’s monetary policy. Get used to the unemployment rate and lack of growth, Spain, because they aren’t going anywhere.
The Eurozone is in dire straits. The common currency has cleaved into separate, distinct areas. In the periphery, employment and particularly youth unemployment are at record highs. The core is performing adequately in these areas, but unemployment rates have begun to rise. Periphery banks are reducing their lending to the private sector while increasing their domestic sovereign debt holdings. Core banks have no such issues with private credit creation being sufficient to promote economic growth.
Eventually, the periphery will begin rebelling against the German monetary regime, but until that happens expect the employment picture to slowly, but inexorably, deteriorate over the coming months. No one knows when the system will break, but break it must.
Yea! Woo-Hoo! The mainstream media loves hyping China. The Chinese GDP growth rate rose 30 bps to an annualized pace of 7.8%. This figure is above the government’s 7.5% goal, so keep buying those Chinese stocks.
There are two reasons one should be skeptical about Chinese GDP. The first is that the figure is politically managed. The real world is messy reflected by volatile economic data, like GDP growth. Note our charts above. In the last six reported quarters, U.S. economic growth has ranged from 0.1% to 3.7%, a spread of 3.6. Chinese economic growth has logged a 7.4% low with a 7.9% high for a mere spread of 0.5. Mind you, this is a country that shuts down several times a year for days causing wild seasonal fluctuations in other data sets.
China is not in danger of an imminent collapse, but the country has slowed down appreciably from it peak growth. This dynamic will increasingly act as a headwind to world growth.
As for the second reason why one should treat Chinese economic data skeptically, you’ll have to keep reading.
What goes up, must come down. Recessions are normal. These down periods give the economy time to reallocate resources so that productivity increases ultimately lead to rising GDP and employment levels.
Once politicians figured out that they will be blamed for the twists and turns of the business cycle, they began trying to prevent contractions. The two methods for accomplishing this objective are government spending and money printing. This has been occurring for years, but credit growth is reaching an important juncture. The diminishing marginal returns of stimulus are fast approaching zero. The U.S. has printed almost $3tr extra dollars and has added over $6tr to the government debt since Lehman, and this has only added $1.4tr to GDP. That’s over a six to one ratio.
China is nowhere near that poor ratio, yet, but it is well on its way. Chinese officials wish to maintain power, and they will create as much yuan as is necessary to accomplish their goal.