It’s no secret that global growth is slowing down, even going negative in some cases.
U.S. growth has slowed from 3.1% to 1.8% annualized between the first quarter and third quarter of 2019. Germany appears to be in recession. Growth in Italy is zero. Japan is slowing again after some binge shopping ahead of an Oct. 1 sales tax increase. Growth in the U.K. is also weakening because of uncertainty surrounding Brexit.
Yet none of these slowdowns is quite as dramatic as what’s going on in China. This article reports that Chinese growth slowed to 6% in the third quarter; slower than expected and the slowest growth rate since 1992. That 6% growth represents a sharp drop from the 6.8% growth China registered in the first quarter of 2018.
China’s growth still exceeds developed economies by far, but it is notably weak relative to China’s past performance and relative to expectations. China is the world’s second-largest economy (after the U.S.) and produces over 16% of global output. A 0.5% decline in Chinese output slows global growth by 0.08%, which is nontrivial considering that global growth is expected to be only 3% in 2019, according to the IMF.
More importantly, China’s growth figures are almost certainly overstated. About 45% of Chinese GDP is “investment” (compared with about 25% for a developed economy), but 50% of that investment is wasted on white elephant projects and ghost cities that will not earn returns.
If that wasted investment were subtracted from GDP, China’s actual growth rate would be 5.8%. Other adjustments for overlooked bad debts and “smoothing” of official figures would put China’s actual growth closer to 4% or even lower.
China’s economy is a house of cards and even government figures are beginning to show that’s true; the real figures are worse. China’s best case is a possible recession and its worst case is a full-blown financial panic.
China is losing the trade wars and losing the public relations wars and beginning to show cracks in the foundation. All good reasons for investors to stay away.
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