Well, third quarter was a humdinger.
It began with the first
International Monetary Fund (IMF) default by a developed country (Greece) and
finished with Hurricane Joaquin possibly headed toward the east coast. In
between, China’s stock market tumbled, the Federal Reserve tried to interpret
conflicting signals, and trade growth slowed globally.
After such a stressful
quarter, we may see an uptick in the quantity of alcoholic beverages consumed
per person around the world. That number had declined (along with economic
growth in China) between 2012 and 2014, according to The Economist.
No Grexit – for now
Despite defaulting on its
IMF loan, rejecting a multi-billion-euro bailout plan, and closing its banks
for more than two weeks, Greece was not forced out of the Eurozone. Instead,
Europe cooked up a deal that left the IMF unhappy and analysts shaking their
heads.
The Economist reported the new deal for Greece was an exercise
in wishful thinking. The problem is the deal relies on “the same old recipe of
austerity and implausible assumptions. The IMF is supposed to be financing part
of the bailout. Even it thinks the deal makes no sense.” It’s a recipe we’re
familiar with in the United States: When in doubt, defer the problem to the
future.
A downturn in China
Despite reports from the Chinese government that it hit its
economic growth target (7 percent) on the nose during the first two quarters of
the year, The Economist was skeptical
about the veracity of those claims. During the first quarter:
“Growth in industrial
production was the weakest since the depths of the financial crisis; the
property market, a pillar of the economy, crumbled. China reported real growth
(i.e., after accounting for inflation) of 7 percent year-on-year in the first
quarter, but nominal growth of just 5.8 percent.”
That statistical sleight
of hand implies China experienced deflation early in the year. It did not.
On a related note, from
mid-June through the end of the third quarter, the Shenzhen Stock Exchange
Composite Index fell from 3,140 to about 1,716, according to BloombergBusiness. That’s about a 45
percent decline in value.
Red light, green light at the Federal Reserve
Green light: employment
numbers. Red light: consumer prices, inflation expectations, wages, and global
growth. Late in the quarter, the Federal Reserve decided not to begin
tightening monetary policy. According to Reuters,
voting members of the Federal Open Market Committee (FOMC) decided uncertainty
in global markets had the potential to negatively affect domestic economic
strength.
They may have been right. The Wall Street Journal reported,
although unemployment remained at 5.1 percent, just 142,000 jobs were added in
September. That was significantly below economists’ expectations that 200,000
jobs would be created. The Journal
suggested the labor market has downshifted after 18 months of solid jobs
creation.
Global trade in the doldrums
The global economy isn’t
as robust as many expected it to be. According to the Business Standard, the World Trade Organization (WTO) lowered its
forecast for global trade growth during 2015 from 3.3 percent to 2.8 percent.
Falling demand for imports in developing nations and low commodity prices are
translating into less global trade. Expectations are trade growth will be 3.9
percent in 2016, which could help support global economic growth.
change is
coming. America’s share of the global economy is potent. Our country
accounts for 16 percent (after being adjusted for currency differences) of the
world’s gross domestic product (GDP) and 12 percent of merchandise trade.
According to The Economist, we
dominate “the brainiest and most complex parts of the global economy.” Our
presence is strong in social media, cloud computing, venture capital, and
finance. In addition, the dollar is the world’s dominant currency.
While the view from the top is pleasing, we may
not be there forever. The Economist
explained:
“In the first change in the world economic order
since 1920-45, when America overtook Britain, [America’s] dominance is now
being eroded. As a share of world GDP, America and China (including Hong Kong)
are neck and neck at 16 percent and 17 percent respectively, measured at
purchasing-power parity. At market exchange rates, a fair gap remains with
America at 23 percent and China at 14 percent… But any reordering of the world
economy’s architecture will not be as fast or decisive as it was last time…the
Middle Kingdom is a middle-income country with immature financial markets and
without the rule of law. The absence of democracy, too, may be a serious
drawback.”
It may be hard to believe, in light of recent
economic and market events in China, but change is on its way. Regardless, the
influence of the United States should continue to be powerful well into the
future.
Weekly Focus – Think About It
“Governing a
great nation is like cooking a small fish – too much handling will spoil it.”
--Lao Tzu,
Chinese philosopher
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