The Sudden Slowdown of the Chinese Economy and its Impact

The facts that have tempered the state of the World’s economy during this period are concentrated in the sudden slowdown of the Chinese economy and its impact on the emergent economies, on the new oil prices and its impacts on the economies of the countries most directly affected, on the situation in Europe immediately before and after the Greek elections and in how the United States (who opted to maintain its almost zero rates policy) would resume its place as leader in pulling the world economy.

The share prices seem to have bottomed out after the whirlwind of the two previous months following the fall of the Shanghai stock exchange, which pulled all the other stock exchanges in its wake, due to the worries over the Chinese economy. But the sequel of this Chinese slowdown, the surprise impact of which is already accepted as a reality, must also be analyzed and its possible dimensions must be foreseen. It’s assumed [the IMF does] that the resultant weakness in the emerging economies, which developed greatly during the decade thanks to the sale of their products (Raw materials, various minerals, iron and copper, agriculture, etc.) to China and who will have another year of declining growth, will cause, as well, global economic growth to decelerate this year and that it will barely advance to a slightly faster rhythm on 2016.

The price of oil, which hovers around a bit less than $50 the barrel, is based on the following facts: there are 1.7 trillion barrels that can be extracted from known reserves, of these, Saudi Arabia has 18%, Venezuela 16%, and Iran and Iraq 9% each. Regarding prices, on the one hand with Venezuela at the lead, along with Iran, Iraq, Algeria and Libya within OPEC, hold the position of dosing (lowering) production to improve price; on the other hand, Saudi Arabia, along with Kuwait, Qatar and the Arab Emirates, who have their own resources and investors to maintain and increase production, prefer to continue in this line that allows them not only to maintain but actually increase market participation, based on their knowledge that those that battle for lowering production to increase prices are countries that have difficulties in attracting the investments necessary to increase extraction and to maintain their current fields. The theory of the Arab Gulf countries is that it is better to accept lower prices for their oil, what means lower prices for derivative fuel and keep consumers happy, and therefore extending the so-called Oil Era. Also in this way this discourages the nascent American shale oil production, that is, oil extracted from shale rock, the cost of which is above $50 per barrel, as well oil extraction in some of the oil fields of nations not member of OPEC, which is why they are ceasing to operate them. These prospects will be more complicated next year, when Iran gets the benefits of the cessation of the prohibition of it exporting its oil thanks to the agreement with the United States and the western countries regarding restrictions to its nuclear program.

Goldman Sachs announced on September 11 that oil could go down to $20 a barrel. Since then the countries that are mainly oil exporters (that have little or non-diversified exports), and whose economies and fiscal budgets depend on these incomes, as Venezuela and Ecuador in Latin American and Algeria, Nigeria and Libya [in Africa], will be severely affected. But if on the other hand, the effect on first world countries, importers and consumers of oil by-products, will be positive, since less expenses in this area will leave money for other products in the hands of the consumers, which will help the growth of other sectors of the economy.

The mid-month elections in Greece, which put power again in the hands of Tsipras and the less radical wing of his party, have returned stability to the country and diminished in the rest of Europe the fear of contagion of the crisis and reopen the period of waiting for the result of the (less strict) austerity measures imposed by the creditors and pushed by the theory that the countries must develop their advanced social policies in accordance with their own resources, derived from efficiency and productivity. Since in the past month of July the third rescue payment was agreed to, which increased the debt to around 300 billion dollars, the government has taken measures. It already reduced from this month the amount of retirement pensions for those who received between 1500 to 2000 Euros a month, and starting in October a progressive system of retirement will come into place to increase the age and conditions required for retirement. Also, the partial exemption of the VAT in the tourist islands will be eliminated, beginning with those with bigger incomes, and the diesel subsidy will be also eliminated for farmers, who will also see their income tax and advance payments become equal to that of the other Greek taxpayers. Regarding monetary policy, the capital controls have been loosened allowing bigger money transfers outside the country and there is the guarantee that foreign transfers to local accounts will be able to be transferred totally or partially outside the borders. Within this environment, its main index: Athens Composite, is amongst the very few European [indexes] that registered earnings in September (5%) and the government assures that their objective for the next five years is to liberate the country from the rescue, solve the crisis and to persevere in an economic growth “with signals of social identity.”

Generally speaking, though, in Europe the ravages of what happened in Greece and the still unresolved Ukrainian crisis with its consequent reduction in transactions with Russia are still felt, and this translates into low levels of private investment, high-localized unemployment and a dangerously low inflation, which threatens deflation. Moreover, to this is added the delicate migrant problem. In this environment there was a small decrease in the value of shares (around 1%, except Spain with 4%), but no increase occurred in the rate of sovereign bonds, which can be attributed to the fact that investors did not require higher prices, which they would if they had lost confidence in the payment ability of the emitting countries.

 As a consequence, the world looks at the United States as the option for the engine to push global financial growth. Even if not all the indexes are robust enough to this end, at least no unmanageable risks are visible. GDP growth (less than 3%), which will be slightly less than desirable, the almost optimal annual inflation (less than 2%), unemployment index (between 5% and 6%) still higher to that before the recession, the trade balance, consumer confidence and the FEDs decision to maintain an almost zero referential interest rate, are, all combined, an acceptable recipe for slow but sure growth. In this environment, shares ended with increases of 1% in average and bond yields decreased from 2.16 to 2.04. Except for the arising of an unpredictable fact, this should continue being next quarter’s scenario.

 

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