Evidence Mounts US Is Winning the Trade War

Evidence Mounts US Is Winning the Trade War

It’s no secret that global growth is slowing down, even going negative in some cases.

US growth has slowed from 3.1% to 1.8% annualised 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 October 1 sales tax increase.

Growth in the UK is also weakening because of uncertainty surrounding Brexit.

Yet none of these slowdowns are quite as dramatic as what’s going on in China…

China’s growth falls

CNBC reported that Chinese growth slowed to 6% in the third quarter; slower than expected and the slowest growth rate since 1992, writing:

China’s GDP has fallen sharply since the first quarter of 2018, when it gained 6.8% due to credit tightening and the country’s trade dispute with the U.S., said Vishnu Varathan, head of economics and strategy for the Asia and Oceania Treasury Department at Mizuho Bank.

“There is no doubt that the downturn is serious,” Varathan added in a note sent Friday before China released the GDP report.

Beijing’s official growth target for 2019 is 6% to 6.5%.

The third-quarter growth was the slowest since the first quarter of 1992, the earliest quarterly data on record, Reuters said.

With CNBC adding:

China’s growth is likely to continue to slow in the next two quarters, said Bo Zhuang, chief China economist at TS Lombard.

That comes as real output growth in services has slowed aggressively in the last few months, Zhuang told CNBC’s “Street Signs.”

Zhuang expects China’s growth to slow to 5.8% in the fourth quarter, with the country’s full-year growth target to be 6.1%.

“Given the trade talks and the conflict with the U.S., Chinese authorities are accepting lower growth rate,” said Zhuang.1

That 6% growth represents a sharp drop from the 6.8% growth China registered in the first quarter of 2018…

China will drag down the global economy

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 US) 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 war and public relations wars, and beginning to show cracks in the foundation.

All good reasons for investors to stay away.

All the best,

Jim Rickards Signature

Jim Rickards,
Strategist, The Daily Reckoning Australia