Global growth concerns cast a pall Monday following another disappointing read on the Chinese economy.
Activity data for July missed across the board, and officials are concerned enough to cut rates, albeit not in a manner that suggests policymakers are prepared for any sort of “whatever it takes” moment.
Analysts were unequivocal. “July’s economic data were simply bad,” SocGen’s Wei Yao and Michelle Lam said, citing the “crushing” weight of virus containment protocols and the ongoing property meltdown. “Credit demand is depressed, and deflationary pressures are building, despite the higher headline CPI,” they added, calling exports “the only bright spot,” before cautioning that even there, “the outlook is dimming amid the slowdown in the West and geopolitical tensions.”
Read more: China Cuts Rates In Surprise Move As Data Disappoints
It’s hard to say what counts as conviction from the PBoC. Monday’s MLF cut was a surprise. But SocGen called it “meager.”
“The reluctance to ease looks increasingly like a new policy norm,” the bank said. “The cut shows that policymakers still care about growth, just not much.”
Why the apathy? Well, as noted in the linked article (above), Chinese officials are loath to resort to what policymakers in Beijing habitually refer to as “flooding.” They don’t want bubbles and, as Lam wrote, “they understand the unsustainable nature of any credit/investment stimulus, in light of the existing debt problem.”
There’s a political angle too. The 20th Communist Party Congress is right around the corner. As SCMP put it, this is “arguably the Party’s most important in 40 years.” “Proper stimulus” or, as SocGen suggested, some manner of sweeping debt restructuring program, will probably have to wait until the pomp associated with confirmation of Xi’s third term is over.
In the West, you could say the same thing about monetary policymakers. That is: They “still care about growth, just not much.”
The abandonment of growth-conscious monetary policy in the developed world isn’t due to any debt concerns, nor is anyone tip-toeing around a ceremonial coronation. Politics is a factor, of course. Republicans in the US have seized on generationally high inflation to assail Democrats ahead of the midterms (although America is so far gone that hot-button “culture war” issues are seemingly more important to voters than their own personal finances). In the UK, Liz Truss is scapegoating the Bank of England. The Bank of Canada is likewise under siege from at least one political opportunist. But that’s all a consequence of intolerably high inflation.
Optimists are in short supply these days. “The clouds of recession are gathering globally,” Morgan Stanley’s Seth Carpenter said, in a note called “The Brewing Storm.” The bank’s base case is for recession in Europe. Even if gas flows from Russia were to normalize (they won’t), the bloc’s economy would see only “modest relief,” the bank said, noting that the ECB is “almost single-mindedly focused on inflation,” meaning more hikes are likely “until there are hard data that show economic contraction or normalized inflation.” Policymakers may not have to wait long on the former. But, as Carpenter put it, “inflation headwinds are not dissipating any time soon.”
Carpenter described himself as “only slightly more optimistic about growth in the US.” Ongoing tightening from the Fed will make it very difficult for business spending and residential investment to pick back up following what the advance read on Q2 GDP suggested was a very weak showing in the three months ended June, and notwithstanding sundry “resilient” consumer narratives and a still strong labor market, Carpenter noted that “the Fed’s drag on the economy — and therefore jobs — is both substantial and intentional.”
“Developed market central banks now face the kind of awful choice emerging markets face all the time: Keep hiking rates, and cause great pain (but win Western approval); or don’t keep hiking rates, and cause different great pain (and lose Western approval),” Rabobank’s Michael Every wrote Monday, in a characteristically coarse summary of our global soap opera. And it is a soap opera. Petty feuds with sometimes fatal consequences, skulduggery, never-ending drama, bad plots and bad acting. Life in the 21st century is a lot like Days of our Lives. Only these are actual days and these are actually our lives.
“Let’s see what central banks do now they are on the spot,” Rabo’s Every added, noting that “back in 2008 they opted to cut rates and bail out the rich (and abandon the middle-class and poor), in complete contrast to what they always told emerging markets to do in a crisis.”
