The recent turmoil in global financial markets is being caused by more than just late summer concern about China. The hefty price drops see on the Chinese stock market have to be taken seriously and one should consider the cause. My assessment remains unchanged: it was primarily a speculative price bubble driven by domestic private investors. It’s fully understandable that this provides some uncertainty among investors around the globe. But the negative impact from China does not provide an explanation for declines in global equity markets over the last two weeks. The truth is a deeper global economic shift is occurring.
Until September 17, the financial markets will engage in an intense debate about a possible U.S. interest rate hike. Even before the recent sell-off in stock markets, I was far from certain over whether the Federal Reserve would raise rates at its next meeting. Now the question is, will the stock exchange at South Pudong Road in Shanghai throw a spanner in the Fed’s long-standing dream of raising interest rates by a modest 0.25 percent?
There is no doubt that Fed is taking its global role very seriously. But if China’s stock market is the only factor that speaks against a rate hike, I have no doubt that Fed will raise rates. However, the U.S. central bank will stay quiet if it considers that a move will have a strongly negative effect on financial markets in general or that the U.S. economy is still not ready for higher short-term interest rates. The last two issues are playing a central and deeper role concerning the uncertainty that financial markets are expressing. I expect we will feel more anxiety about overvalued stocks and corporate bonds. This is going to provide turmoil for months, but primarily hurt poor-quality securities.
The second question is whether the U.S. economy has grown strong enough to justify a rate increase, and I argue that the outlook for too many households is still not robust enough. My main scenario remains that the Fed will once more choose to wait.
As mentioned, I judge the turmoil in the financial markets to have roots that go deeper than just China. Global trade in manufactured goods is showing a real deterioration, as the chart from a policy analysis body under the Netherlands’ Central Planning Bureau shows. This analysis confirms a recent finding by Moody’s that there is a lack of momentum in world trade. However, global trade in manufactured products decreasing is not necessarily proof of declining global economic growth rates.
In my view, the increasing focus on domestic economic growth can be combined with expanding service sectors to the “new normal” in the global economy. Furthermore, the volume of services offered and purchased across borders is increasing, which is more difficult to capture in official statistics. However, the particular move toward a higher focus on domestic economic growth has my special attention. This increasing focus in more countries combined with the sharp drop in oil prices and other commodity prices means that the global economic map is changing dramatically.
Latin American economies are still doing quite well, but Brazil’s overheated. All in all, the continent will end up being a less attractive economic zone in the coming years. The situation in Russia is special, but the price of oil has hit the country hard, hence I will mark Russia as “not attractive” on the world map. A number of other oil-producing countries also moved down the ranking of growth areas. Overall, the European Union will not meet growth expectations, and I argue it becomes a low-growth area. Only Britain will show attractive economic growth rates in the years to come.
In Asia, Japan has disqualified its economic upturn by a completely failed economic and monetary policy. But other Asian countries that not are dependent on the export of oil and refined oil products, are expected to be quite attractive economies in the future.
This leaves only the world’s two largest economies to be rated on the new economic map – and they are winners. GDP growth in the United States will not exceed 3 percent as some in the financial markets still dream, though expansion will remain at a reasonable level. China’s economy will continue growing at a high pace for years, and the country will remain appealing even if its GDP growth drops to 5 percent. The U.S. economy has historically been more domestic than others, for instance those in Europe. The same change toward domestic growth is clearly a target in China. Chinese consumers will buy even more in the future, but the country’s economy and job creation will profit most from this development. This represents a challenge for Western companies and corporations.
These developments mean that the two economic superpowers will appear even more significant in the future, even if the traditional markets on Wall Street overshadow the wilder one on Pudong Road for some years.
Peter Lundgreen is the CEO and founder of Lundgreen’s Capital, an investment consulting and advisory company.
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