Sputtering global economy belies stockmarket boom

Chinese industrial output rose at the slowest pace since early last year. While the US unemployment rate dropped to 7.7 percent in February, this was entirely due to a fall in the "participation rate" to a fresh low of 63.5 percent. Officials and the IMF doubt world economy has reached "escape velocity", worried over the debt overhang and chronic lack of demand.

By Ambrose Evans-Pritchard
8:53PM GMT 11 Mar 2013
The Telegraph

Japan's closely-watched index for machinery orders fell 13pc in January, nearing levels last seen after the Lehman Brothers crisis. "It is a shockingly poor number and illustrates the divergence between the improvement in sentiment in financial markets and what is actually happening on the ground," said Julian Jessop from Capital Economics.

China's industrial output rose 0.6pc in January and 0.8pc in February, the slowest pace since early last year. Retail sales growth dropped to 12.3pc, the weakest since early 2004. "The goal of consumer-led growth remains a pipe dream for now," said the group's China economist, Qinwei Wang. "The economic rebound may already be stalling."

The US economy is holding up, as cheap shale gas drives a manufacturing revival, but Charles Dumas from Lombard Street Research said America still has to navigate the most drastic fiscal squeeze since the Second World War. "We think tightening will be 2.5pc of GDP this year and that will hit profits," he said. "We expect a 10-20pc correction in the S&P 500."

While the US unemployment rate dropped to 7.7pc in February – the lowest since 2008 – this was entirely due to a fall in the "participation rate" to a fresh low of 63.5pc, as people dropped off the rolls. Jobs figures are a lagging indicator in any case. Commodities can be a better gauge and they are flashing amber, refusing to confirm that a fresh cycle of global expansion is fully under way.

The Baltic Dry Index, measuring freight rates for bulk goods, is at 2009 lows and the CRB commodities index has been slipping since September. Copper futures have fallen 10pc over the past month and "Dr Copper" is famously prescient.

Officials at key central banks and the International Monetary Fund doubt the world economy has reached "escape velocity", worried over the debt overhang and chronic lack of demand.

Albert Edwards from Societe Generale said: "Financial markets can ignore weak data for a long time so long as it is not catastrophic but reality catches up with them eventually." He said the latest phase of Wall Street's blow-off has been driven by companies raising debt to buy back their own stocks despite poor earnings, as they did during the Greenspan boom.

"It feels eerily similar to the prior mid-2007 peak. Buying shares when they are expensive in the wake of a huge rally seems designed to destroy value," he said.

Europe remains the world's economic black hole. Data on Monday showed a 1.2pc decline in French industrial output in January, weaker than expected. French real M1 money aggregates have fallen at an annual rate of 7pc over the past six months, pointing to a sharp downturn.

European Central Bank chief Mario Draghi says small firms still face a credit crunch across large parts of the currency bloc and warned that "hard" economic facts had yet to validate "soft" surveys.

The bank is sticking to its tight money stance for now, though "doves" pushed for a rate cut last week. Former board member Lorenzo Bini-Smaghi said the ECB may have to cut rates unless there is evidence of real recovery soon. "Growth is not picking up," he told Bloomberg.

China still has scope for fiscal stimulus if need be but Beijing has hit the "Phillips Curve" constraint, discovering that the trade-off between growth and inflation is becoming much harder to manage.

Fitch Ratings says total credit has jumped from $9 trillion to $23 trillion over four years, adding as much as the entire US banking system. This is yielding ever less growth. Stimulus is leaking into property and rising prices instead.

Xianfang Ren from IHS said: "The government's policy challenge this year is to strike a balance between containing the asset bubble and pushing the economy out of the growth malaise."

Sceptics say the global market boom has been driven by a wash of liquidity from the US, UK, Japanese and Swiss central banks, abetted by China's shadow banking system, with the Draghi pledge to save Italy and Spain icing the cake.

This has ignited asset prices as intended. Whether this method of stimulus will trickle down to the real economy or merely inflate a fresh credit bubble with all its attendant dangers is the great unanswered question.

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