Private equity investor Herb Pinder offers a country-by-country investor review. Second in a series of three. .CHINA — Only a few years ago China's rate of growth consistently exceeded 10%. Its recent economic performance is consequential, surprising, and disappointing..China is a poster boy for the damage of unwise government policies, now reeling from the extended COVID lockdown that crippled economic activity. Albeit hard to measure, economic challenges may also be connected to the recent National Congress of the Communist Party by which President Xi asserted his authority, probably now as dictator for life. This breaches the previous protocol of transition after two five-year terms..It appears from a distance central authority prevails (as always?) over long term prosperity — the hegemony of the Communist Party as evidenced by shutdowns unmatched elsewhere in the world. The evidence of acceleration of the normal flight of capital from China is no surprise and perhaps confirms the thesis..China's constant sabre rattling and illegal intrusions into western political activities led to mistrust and blocking of Chinese ownership and corporate presence in democratic countries..We are also seeing wariness and fear elsewhere, in part a result of the constant threats and actions including the breach of the Joint Declaration with Britain of “one nation, two systems” in Hong Kong. Countries from Australia in the South Pacific to pacifist Japan in the North Pacific, and east to the US, are stiffening their military capabilities and activities in anticipation of ongoing Chinese aggression..These actions and policies accelerate the retraction of manufacturing to home countries and/or “friend shoring” — relocating manufacturing to more friendly countries such as Vietnam, or those more proximate such as Mexico..Chinese exports fell “at the steepest pace in more than two years in November” according to a recent WSJ article..Like Russia, policy priorities in China are about central authority versus the interests of citizens. Time will tell whether the recent lifting of requirements of masks, etc. in China will see it return to better economic performance or suffer a spike in COVID infections? Or maybe both?.GREAT BRITAIN AND THE EUROPEAN UNION — The Organization of Economic Cooperation and Development (OECD) in a recent release by Acting Chief Economist Alvero Pereira expects “Inflation will remain high, and the European Central Bank (ECB) will have to act more forcefully.”.Although the EU raised interest rates again in mid-December, the ECB has been slower than most other central banks to raise rates. A recent WSJ columnist expects both the German and British economies to contract next year. Fundamental to their rates of inflation and declining economic prospects are high risk energy policies resulting in inadequate supply due to the unreliability of intermittent renewables..Boasting one of the most successful implementors of wind power of any country, Germany is now utilizing more coal and emitting more greenhouse gases than ever. Contradiction or cause and effect?.Britain, also with skyrocketing energy costs, recently commissioned the first new coal mine in decades. Tepid economic performance in Great Britain, Germany, and by extension the EU, is likely a reasonable expectation for the foreseeable future. Unfortunate strategic decisions, especially regarding energy security, may require years of economic recovery..INDIA — Notwithstanding global dynamics, India’s economic performance has been relatively strong. According to a November 30 WSJ article, the IMF in October lowered expectations for 2022 GDP growth to 6.8% versus 8.7% last year. India does not suffer similar self-made energy problems as it continues to utilize coal and is currently buying discounted Russian oil. As a reminder, the Paris Accord excludes China and India, the second and third highest global emitters of greenhouse gas, for decades into the future..It also appears India is on track to become the most populous country in the world, also perhaps eventually to exceed China's GDP, moving up from its current sixth position behind the US, China, Japan, Germany, and the UK. While unduly bureaucratic, the Brits instilled market principles into India’s economy destined to outperform China’s heavy hand of communism..JAPAN — Japan is an outlier among the advanced countries in several ways. Insular but not necessarily racist — immigration is not encouraged — the population is highly skewed to older people. It also has a different approach towards the bundle of monetary policy, interest rates and government spending..An economic miracle after World War II, perhaps even more so than Germany, several decades ago it enjoyed a strong currency and minimal national debt. However, its government debt in 2021 was a startling 263% of GDP, among the highest of the major economies. It has purposely managed its currency down with the lowest interest rates of the major economies, supporting its manufacturing sector and the need to sell abroad to acquire resources denied by its minimal natural endowment..Yet, according to a recent WSJ article, with interest rates remaining low since 2016, “the country finds itself in a dilemma — inflation is rising, the yen plummeting. The consumer price inflation rate hit a 40-year high of 3.6% in October.” The combination of a high level of government debt and increasing interest rates often leads to an unhappy ending..The article also quoted the chief Japan economist for Credit Suisse indicating it also reflects “the structural deterioration” of Japan's economy, particularly reducing the competitiveness of its manufacturers. Described as a ‘surprise” in the article, outgoing Governor Kuroda, a low interest rate hawk, allowed the benchmark rate to double to .50%. This ends a long period that Japan was the only major central bank not to increase rates. While high for Japan, inflation in Japan is well short of US and EU levels and the governor expects it to fall below 2% in 2023..Surpassed by China a few years ago, the economic future of the third largest country by GDP is uncertain. But a very positive dynamic, in the view of this writer, is the fact Japan strengthened its military, limited since World War II, to enhance its capability in response to Chinese rhetoric and aggression. Increasing its defence spending to 2% of its GDP, about $80 billion annually, will put Japan’s spending third in the world behind the US and China..UNITED STATES — Like Canada, after unprecedented four consecutive .75% increases, a mid-December increase moved the bank rate to 4.25-4.5%. The chairman of the Federal Reserve further suggested officials are moving into a new phase of policy while trying to judge just how high rates need to rise. At the other end of the question of how soon to act is when to stop, given lag times as much as 18 months between rate increases and reduced economic activity..GDP in the US increased at an annual rate of 2.9% in the third quarter of this year. A WSJ survey of economists put the probability of a recession in 2023 at 63%, but with only minor negative growth — a more appropriate term might be a “soft landing.” Recession is a technical term; the relevant point is lower and minimal or negative growth. (The recently-passed and purposely misnamed Inflation Reduction Act is really a pathway to spend more money on green initiatives without offending Joe Manchin’s state, West Virginia.) Infusing more liquidity exacerbates inflation, pushing rates higher, making the monetary solution more difficult. It is disconcerting to see the internal strife as politicians of all stripes are spending such that the debt of the federal government, once one of the lowest of the advanced world, in 2021 exceeded its annual GDP at 125%..Still responsible for more than 20% of the world's economic activity, and still its most dynamic economy, inevitable relative long-term decline appears to be well underway..CONCLUSION — With the above review of the major economies, it is easier to understand the sharp decline in this year's global GDP and the troubling prospects for the near term future. The impact of COVID, more impediments to trade, a destructive war in Europe, energy supply limitations, and divided citizens in many countries, do not bode well for our short term economic future..As we turn to Canada in Part III, the news gets worse.
Private equity investor Herb Pinder offers a country-by-country investor review. Second in a series of three. .CHINA — Only a few years ago China's rate of growth consistently exceeded 10%. Its recent economic performance is consequential, surprising, and disappointing..China is a poster boy for the damage of unwise government policies, now reeling from the extended COVID lockdown that crippled economic activity. Albeit hard to measure, economic challenges may also be connected to the recent National Congress of the Communist Party by which President Xi asserted his authority, probably now as dictator for life. This breaches the previous protocol of transition after two five-year terms..It appears from a distance central authority prevails (as always?) over long term prosperity — the hegemony of the Communist Party as evidenced by shutdowns unmatched elsewhere in the world. The evidence of acceleration of the normal flight of capital from China is no surprise and perhaps confirms the thesis..China's constant sabre rattling and illegal intrusions into western political activities led to mistrust and blocking of Chinese ownership and corporate presence in democratic countries..We are also seeing wariness and fear elsewhere, in part a result of the constant threats and actions including the breach of the Joint Declaration with Britain of “one nation, two systems” in Hong Kong. Countries from Australia in the South Pacific to pacifist Japan in the North Pacific, and east to the US, are stiffening their military capabilities and activities in anticipation of ongoing Chinese aggression..These actions and policies accelerate the retraction of manufacturing to home countries and/or “friend shoring” — relocating manufacturing to more friendly countries such as Vietnam, or those more proximate such as Mexico..Chinese exports fell “at the steepest pace in more than two years in November” according to a recent WSJ article..Like Russia, policy priorities in China are about central authority versus the interests of citizens. Time will tell whether the recent lifting of requirements of masks, etc. in China will see it return to better economic performance or suffer a spike in COVID infections? Or maybe both?.GREAT BRITAIN AND THE EUROPEAN UNION — The Organization of Economic Cooperation and Development (OECD) in a recent release by Acting Chief Economist Alvero Pereira expects “Inflation will remain high, and the European Central Bank (ECB) will have to act more forcefully.”.Although the EU raised interest rates again in mid-December, the ECB has been slower than most other central banks to raise rates. A recent WSJ columnist expects both the German and British economies to contract next year. Fundamental to their rates of inflation and declining economic prospects are high risk energy policies resulting in inadequate supply due to the unreliability of intermittent renewables..Boasting one of the most successful implementors of wind power of any country, Germany is now utilizing more coal and emitting more greenhouse gases than ever. Contradiction or cause and effect?.Britain, also with skyrocketing energy costs, recently commissioned the first new coal mine in decades. Tepid economic performance in Great Britain, Germany, and by extension the EU, is likely a reasonable expectation for the foreseeable future. Unfortunate strategic decisions, especially regarding energy security, may require years of economic recovery..INDIA — Notwithstanding global dynamics, India’s economic performance has been relatively strong. According to a November 30 WSJ article, the IMF in October lowered expectations for 2022 GDP growth to 6.8% versus 8.7% last year. India does not suffer similar self-made energy problems as it continues to utilize coal and is currently buying discounted Russian oil. As a reminder, the Paris Accord excludes China and India, the second and third highest global emitters of greenhouse gas, for decades into the future..It also appears India is on track to become the most populous country in the world, also perhaps eventually to exceed China's GDP, moving up from its current sixth position behind the US, China, Japan, Germany, and the UK. While unduly bureaucratic, the Brits instilled market principles into India’s economy destined to outperform China’s heavy hand of communism..JAPAN — Japan is an outlier among the advanced countries in several ways. Insular but not necessarily racist — immigration is not encouraged — the population is highly skewed to older people. It also has a different approach towards the bundle of monetary policy, interest rates and government spending..An economic miracle after World War II, perhaps even more so than Germany, several decades ago it enjoyed a strong currency and minimal national debt. However, its government debt in 2021 was a startling 263% of GDP, among the highest of the major economies. It has purposely managed its currency down with the lowest interest rates of the major economies, supporting its manufacturing sector and the need to sell abroad to acquire resources denied by its minimal natural endowment..Yet, according to a recent WSJ article, with interest rates remaining low since 2016, “the country finds itself in a dilemma — inflation is rising, the yen plummeting. The consumer price inflation rate hit a 40-year high of 3.6% in October.” The combination of a high level of government debt and increasing interest rates often leads to an unhappy ending..The article also quoted the chief Japan economist for Credit Suisse indicating it also reflects “the structural deterioration” of Japan's economy, particularly reducing the competitiveness of its manufacturers. Described as a ‘surprise” in the article, outgoing Governor Kuroda, a low interest rate hawk, allowed the benchmark rate to double to .50%. This ends a long period that Japan was the only major central bank not to increase rates. While high for Japan, inflation in Japan is well short of US and EU levels and the governor expects it to fall below 2% in 2023..Surpassed by China a few years ago, the economic future of the third largest country by GDP is uncertain. But a very positive dynamic, in the view of this writer, is the fact Japan strengthened its military, limited since World War II, to enhance its capability in response to Chinese rhetoric and aggression. Increasing its defence spending to 2% of its GDP, about $80 billion annually, will put Japan’s spending third in the world behind the US and China..UNITED STATES — Like Canada, after unprecedented four consecutive .75% increases, a mid-December increase moved the bank rate to 4.25-4.5%. The chairman of the Federal Reserve further suggested officials are moving into a new phase of policy while trying to judge just how high rates need to rise. At the other end of the question of how soon to act is when to stop, given lag times as much as 18 months between rate increases and reduced economic activity..GDP in the US increased at an annual rate of 2.9% in the third quarter of this year. A WSJ survey of economists put the probability of a recession in 2023 at 63%, but with only minor negative growth — a more appropriate term might be a “soft landing.” Recession is a technical term; the relevant point is lower and minimal or negative growth. (The recently-passed and purposely misnamed Inflation Reduction Act is really a pathway to spend more money on green initiatives without offending Joe Manchin’s state, West Virginia.) Infusing more liquidity exacerbates inflation, pushing rates higher, making the monetary solution more difficult. It is disconcerting to see the internal strife as politicians of all stripes are spending such that the debt of the federal government, once one of the lowest of the advanced world, in 2021 exceeded its annual GDP at 125%..Still responsible for more than 20% of the world's economic activity, and still its most dynamic economy, inevitable relative long-term decline appears to be well underway..CONCLUSION — With the above review of the major economies, it is easier to understand the sharp decline in this year's global GDP and the troubling prospects for the near term future. The impact of COVID, more impediments to trade, a destructive war in Europe, energy supply limitations, and divided citizens in many countries, do not bode well for our short term economic future..As we turn to Canada in Part III, the news gets worse.
