Overinflated and Bursting: Growth Prospects of the US, China, and Global Trade

The port of Singapore is the world's largest transshipment port. Global trade growth is projected to clock in at 3.2% in 2015, the worst performance since the Great Recession.
The port of Singapore, depicted, is the world’s largest transshipment port. Global trade growth is projected to clock in at 3.2% in 2015, the worst performance since the Great Recession.

The International Monetary Fund has again cut its forecast for global GDP growth in its World Economic Outlook, which is now only 3.1%, a decrease of 30 bps from 2014. This is during a time in which the vast majority of the world’s central banks have lowered their discount rate, with some even adopting NIRP. To complicate matters even more, the European Central Bank is in the process of massive quantitative easing program, while the Bank of Japan is anticipated to resume theirs towards the end of October.

This week global growth is based almost solely on asset bubbles created by the economic distortions of central banks. The Federal Reserve in the United States is perhaps the most infamous example, when it purchased $3.7 trillion in securities through open market operations in three rounds of QE from 2009 to 2014. Equity markets in the US are still in this bubble, albeit without quantitative easing, the bull market is beginning to reflect signs of subsiding.

The fundamentals of the US economy are disturbingly weak during this expansion, leaving many to wonder if the Federal Reserve will raise the federal funds rate in the next FOMC meeting. PCE is currently at 0.3% on an annualised basis, far below the level the Fed would consider optimal for raising rates. The latest BLS report was an abject disappointment with only 142,000 jobs added in September and labour force participation diving to a 38-year low of 62.4%. Considering these reports, it is unlikely that a rate hike will occur, however if it does, it will most likely be a small 25 bps, which could place this current bubble in jeopardy.

Projections from the IMF report peg US GDP growth at 2.6% in 2014. This will be strenuously difficult to achieve, as the latest data from the Federal Reserve Bank of Atlanta’s GDPNow index nowcast third quarter growth at 0.9% annualised, combined with 0.6% in Q1 and 3.9% in Q2.

A large feature of the WEO focuses on the state of the Chinese economy. The nation recently underwent the correction of a bubble in the equity market, which quickly prompted liquidity support and trading restrictions from the People’s Bank of China and China Securities Regulatory Commission, respectively. Despite these measures, the Shanghai Composite rests at just over 3,000 at 6 October market closing, equal to the trough evident in late August. Li Keqiang stated on 10 September that the PBOC will not begin a quantitative easing program, which signifies that the Communist Party has finally obtained an elementary level of competence. Due to this burst and subsequent slowdown, the report projects Chinese GDP to grow at under 7% in 2015, the rate long regarded as a technical support.

The highlight of the WEO also the most depressing inclusion. Global trade, which is less affected by myopic actions of central banks, is predicted to grow at only 3.4% in 2015. This level is the lowest seen since the end of the financial crisis of 2008-09 and is unconventionally low during an economic expansion. Global trade has grown significantly faster than other components of the world economy due to increasing levels of globalisation. Growth rates this low reflect that GDP growth is propped up only by central banks.

Despite the plead of many economists, global central banks have continued easing their monetary policy, the only exception being the Reserve Bank of India, and have produced asset bubbles combined with economic stagnation as a result. Many problems facing the world economy, ranging from overregulation to high welfare spending to a lack of property rights, will not be rectified, as the motives for reform are greatly inhibited by the constant cycles promulgated by central banks. While another financial crisis is not the most desirable outcome, it is the only way to restore the proper function of price discovery and create a pathway for policy reform, both from central bank and government.

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15 thoughts on “Overinflated and Bursting: Growth Prospects of the US, China, and Global Trade

  1. James Lankford October 6, 2015 / 7:27 pm

    Forget them. We’re the US. We could grow lots faster if we had a growth friendly leader vs a chump who likes the pie smaller and everyone to give their pie away to others.

  2. Vivian Embro October 6, 2015 / 7:28 pm

    I suppose with the lousy employment report, widening trade deficit and now the IMF cutting growth forecast, the stock market will soar to record highs.

    • FantasyMaker2010 October 6, 2015 / 7:36 pm

      that is because central banks around the world are trying to stimulate growth by keeping the cost of money as cheap as possible. I doubt you can grow out of the world’s problems starting with the trillions of dollars in debt, stagnant wages and currency wars just to name a few

  3. Orchan Kwon October 6, 2015 / 7:32 pm

    Then the hundred trillion dollars from those emerging countries will stay in where? Landers, developed countries by the money will blow bubbles in their economy? The bubbles in emerging countries are global bubbles which are globally overblown. No organization is saying about how for the woe but writing horrible senarios. Are they waiting until a country(or few countries?) kneeled down to US?

  4. Larry Haysteam October 6, 2015 / 7:33 pm

    Awesome! Now the Fed can keep rates at zero forever, just like Japan!

  5. Mark Linklater October 6, 2015 / 7:36 pm

    It is so nice of the IMF and their high priced staff to regale us with tales of the obvious! I continue to ask myself why is this organization needed. Don’t we have enough politicians and bureaucrats line their pockets with high paying jobs. Or perhaps we need a place to put politicians and EU life long political bureaucrats like Ms. Lagard once they have outlived their usefulness at another position.

  6. Frank Moetsk October 6, 2015 / 7:37 pm

    Are we still giving this organization US tax payer funds?

  7. ldurg October 6, 2015 / 7:37 pm

    Imagine that: The second half economic recovery proved as illusory as all the other anticipated and never realized economic bounce backs of the last seven years.

    I mean who could have ever of guessed.

    QE to Infinity and Beyond!!!!!!!!!!!!!!!!!!!!!!

  8. Lucille Affman October 6, 2015 / 7:38 pm

    Slow train wreck coming. Rich will be just fine. The rest of us will have our issues.

  9. Craig Mundo October 6, 2015 / 7:39 pm

    Is there anything that IMF or other such bureaucratic leftist houses can tell us that the markets did not already tell?
    Just follow the interest rates. Not the short end, that is artificial and controlled by the central bank drones. Take a reasonable rate, such as 2 year or 10 year. Almost always, the useless IMF will be behind what those rates already were saying for a few months.
    And therein lies the problem with central banks setting the reference rate. They are no better than IMF, and they too are late, and know not much more. But somehow they are given the power to set the short rate and set the money supply and basically sc$ew up the markets and distort everything else.

  10. William Fitzpatrick October 6, 2015 / 7:42 pm

    Liquidity injections can’t counteract anti-growth fiscal policies? Shocking. Maybe if we just try QE ad infiniteum.

  11. rkw October 6, 2015 / 7:47 pm

    Somehow this will be twisted into good news for the markets.

  12. Jellin’ with Yellen October 6, 2015 / 7:50 pm

    As they slowly emerge from their torpor, the IMF is realizing what every sentient person could tell them any where in the world. But that would mean they would have to put down their drinks for a while and sober up. What do we pay them for, anyway?

  13. Nathan Hale October 6, 2015 / 8:17 pm

    Knew years ago. Planned accordingly. BTW, the fed will not raise rates for the next few years.

  14. asteroid165 October 6, 2015 / 8:41 pm

    Notice how every projection is positive. Happy Happy. Until folks start reporting the truth. That things really aren’t Happy Happy everywhere all the time. Assume they are lying to you and take it with a grain of salt or ignore them.

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