| Do You Believe China's GDP Numbers? Posted: 02 Apr 2013 10:19 PM PDT Do you believe growth figures in China? What about the US, Canada, or Germany? Actually, there is no reason to believe any GDP numbers. A recent email from Michael Pettis at China Financial Markets explains. From Pettis .... Last year China's official growth rate was 7.8%, above the 7.5% target but the lowest number in many years and far lower than the more than 10% growth rates China had generated for the past two decades.
But even with the lower growth numbers throughout the year economists were puzzled by evidence that the economy was in fact growing more slowly than the official numbers suggested. Energy consumption in China, for example, usually grows more quickly than GDP, but surprisingly, in 2012 energy usage grew by only 5.5%, well below the official growth rate of 7.8%. Other indicators also indicated that growth may have been lower than the official numbers suggested.
While some of the sell-side economists still insist that China's growth remained high and healthy enough, in fact among independent economists who specialize in the Chinese economy, both among Chinese and foreign economists there has been growing skepticism. A consensus is developing that China grew by less that 7.8% in 2012. For example Stephen Green at Standard Chartered, one of my favorites of the sell-side economists, refigured his numbers and guesses that instead of 9.3% for 2011 and 7.8% for 2012 (the official numbers), actual growth might have been 7.2% for 2011 and 5.5% for 2012. Other economists are suggesting even lower numbers, closer to zero.
I don't have my own estimates because it seems to me that all of these attempts to measure economic growth are actually measuring economic activity, which may itself overstate growth. If you spend $100 million each on two separate bridges, one of which is actively used and the other rarely used, the official measures will have them contributing the same amount to GDP, even though the former creates real value and the latter does not. In either case if you then adjust the overall GDP numbers downwards by examining electricity usage, cement consumption, and so on, as the likes of Stephen Green do, you may end up with a more accurate estimate of economic activity, but you still treat the two bridges as contributing the same amount.
It isn't until you write down the debt associated with the second bridge that you end up with a more meaningful measure of GDP. Of course this makes the whole process very confusing and it is hard to compare different estimates. It isn't always clear how these estimates are reached, but as far as I can tell nearly all, if not all, of the downward revisions provided by various skeptical economists are still measures of economic activity, and do not include estimates for debt write-down associated with unnecessary investment.
We Know What To Do
There have been so many articles in the Chinese and foreign press about problems in the banking system that I won't bother going through the topic much more except to note that Beijing cannot tolerate rapid credit growth and it cannot tolerate slow GDP growth. The problem is that it can only choose both or neither. There are no other options.
As credit concerns continue to rise, expect Beijing eventually to bite the bullet and stamp down on debt, in which case expect GDP growth rates to drop much, much more, in fact to well below anything we saw in 2012. The question is not whether this will happen, but when. Once Beijing is confident enough about its grip over vested interests and the consensus has developed within the leadership, growth rates will drop very sharply.
So this is probably why former Premier Wen is warning about the difficulty China faces in reforming the economy – a warning that he and Premier Li have made many times before but never more shrilly.
I have said often enough that we will be able to judge how resolute Beijing is and how capable of overcoming vested interests by how quickly credit growth is constrained and, with it, GPD growth. I expect to see high GDP growth (close to 8%) in the first half of the year but, if Beijing is able to move quickly, I expect growth to slow significantly in the second half.
If GDP growth does not slow, I will be worried about how long it takes the new leadership to get their arms around the problem that they clearly recognize (although perhaps still underestimate). The signals so far are good. Growth may be slowing even quicker than I had originally anticipated.
Does Cyprus matter?
I can't really finish this newsletter without noting the astonishing events in Cyprus, especially since everyone in the world has already mentioned them. The concern most commentators have expressed is that by going after depositors the EU may have paved the way for bank runs in the rest of peripheral Europe. Quite a few analysts warned that we will begin to see this happen fairly soon.
I agree, but see it a little differently. The Cyprus proposal will probably have little impact on deposits now, but it will have an impact on memory. Depositors in the peripheral countries will remember what happened in Cyprus and it will affect their future confidence in the credibility of deposit guarantees.
We can imagine the "Cyprus effect" as a point on the credibility curve at which there is a sudden discontinuous or non-linear jump. As a country's credibility declines, the deterioration in credibility was never likely to be smooth and linear because the process is self-reinforcing, but now we have added a sharp discontinuity. At some point of lower credibility, depositors, remembering Cyprus, will suddenly and sharply speed up their deposit withdrawal. And even if the original Cyprus plan is modified to protect small depositors, it probably won't matter. The cat has already been let out of the bag.
Instead of embedding countercyclical mechanisms we have just embedded a big, fat, highly pro-cyclical pump into the credibility curve. It won't matter so much now, but as things deteriorate, it will matter at some point, and of course always at the worst possible time. Problem In The Definition I italicized the key point. By definition, government spending contributes to GDP. No products have to be produced. Economic benefits are unnecessary. Pettis used an example of governments building worthless bridges. Previously I have noted that if the government hired people to spit at the moon it would add to GDP. And that is an inherent problem with the definition. In France, government spending accounts to 56% of GDP. How much of that spending is wasteful? How much government spending in the US is wasted? Consider how Davis-Bacon and prevailing wage laws affect the answer. In the case of roads repairs, if the private market could do as good a repair job for 1/3 less, then the answer is 33.3%. But what about projects that should not be done at all? Spending can even be net-negative as is the case in bombing countries for no reason. What did the US accomplish in Vietnam or Iraq? Even bridges to nowhere have more economic benefit. While everyone is ready and willing to consider that China overstates its GDP, too few point the same finger at the US for the same reason. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Sharp Deterioration in French Manufacturing; Hollande Orders Employers to Pay 75% Tax; Top Executives Join France Exodus Posted: 02 Apr 2013 10:50 AM PDT As expected, economic news in France continues to worsen. The Markit France Manufacturing PMI shows final data French manufacturing sector operating conditions continue to deteriorate at a marked pace. Key points:
PMI remains indicative of sharp downturn despite rising to three-month high
Output, new orders and employment fall further
Prices charged cut at fastest rate since November 2009
Summary:
Operating conditions in the French manufacturing sector continued to worsen in March. Although the headline Purchasing Managers' Index ® inched up to a three-month high of 44.0, from 43.9 in February, it continued to signal a marked rate of deterioration.
The level of incoming new orders placed with manufacturers in France decreased further during March, extending the current period of contraction to 21 months. Moreover, the pace of decline accelerated slightly since February.
Reduced workloads prompted French manufacturers to cut staffing levels further in March. The rate of job shedding was solid, albeit the slowest in three months.
Prices charged by French manufacturers for finished goods fell for the third month running during March. Furthermore, the rate of decline accelerated to the sharpest since November 2009. A number of survey respondents commented that strong competitive pressures had weighed on their pricing power.
Comment:
Jack Kennedy, Senior Economist at Markit said: "A very slight improvement in the headline PMI figure does little to disguise an ongoing sharp deterioration in French manufacturing sector operating conditions during March. Increasingly aggressive output price discounting failed to prevent new orders dropping steeply remained deficient. Further marked falls in employment, purchasing and stocks also bear witness to a beleaguered industry struggling in the face of a darkening economic climate in France." Manufacturing vs. Production  click on chart for sharper image The manufacturing PMI leads production and by implication GDP. So guess where French GDP and the French budget deficit is headed. A trio of articles from the Financial Times will fill in a few of the expected pieces. France Misses 2012 Deficit Target As expected in this corner France Misses 2012 Deficit Target and it will miss its 2013 target as well. Official figures showed the nominal deficit last year was 4.8 per cent of gross domestic product, overshooting the government's target of 4.5 per cent. The 2011 deficit was also revised slightly upwards to 5.3 per cent.
The government has already acknowledged it will overshoot this year's target deficit of 3 per cent previously agreed with the European Commission. With the figure now forecast to hit 3.7 per cent, France is seeking a year's delay from the commission for reaching the target, the level at which growth in the public debt should stabilise.
The figures from Insee, the national statistics agency, showed the public debt, including France's commitments to the eurozone's rescue funds, rose to a record 90.2 per cent of GDP in 2012, slightly higher than target and up from 85.8 per cent in 2011.
France has not had a balanced budget since 1974 and is under strong pressure to cut its big public spending bill, which amounts to more than 56 per cent of GDP, the second largest in the EU. French Unemployment Hits 16-Year High Also as expected in this corner French Unemployment Hits 16-Year High French unemployment nudged a record level in February as the jobless total rose for the 22nd month in succession to a 16-year high, adding to the acute political pressure on President François Hollande as he battles a stalled economy.
The number of people out of work actively seeking employment rose by 18,400 over the month to 3.18m, just shy of the record level of 3.19m reached in 1997, labour ministry figures showed. Hollande Orders Employers to Pay 75% Tax In the not expected but hardly surprising category, Hollande Orders Employers to Pay 75% Tax In March, the French constitutional court disallowed Hollande's controversial top tax rate of 75% on individuals. Proving that you cannot keep a dedicated socialist down, Hollande switched responsibility for paying the tax to employers. It was after all a "campaign promise". Why is it that idiotic pledges are the ones most likely to be met? Supposedly the tax hike will last only two years. Is it any wonder Top executives flee France for London, Belgium, and Switzerland? Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Spain's Deficit Set to Soar; GDP Poised to Plunge; Job Losses Fastest in 3 Years; IIF Wants Permanent Tax Hikes Posted: 02 Apr 2013 01:13 AM PDT The situation in Spain took another sharp turn for the worse. Employment losses are the greatest since 2009, tax revenue is declining, the deficit is increasing and the IIF wants economically insane tax hikes. GDP Poised to Plunge, Deficit Poised to Rise El Economista reports IIF believes that the Spanish economy will contract by 2% in 2013. The Institute of International Finance (IIF) believes the Spanish economy contraction will accelerate to register a gross domestic product (GDP) decline of 2%.
"The decline in GDP seems likely to accelerate to 2% in 2013 after 1.4% in 2012, as high unemployment, tight monetary conditions and current lower wages further reduce domestic spending and weak demand contain domestic exports," said the IIF in a report on the eurozone.
The agency believes that this growth outlook "much weaker" have made the agreed deficit targets for 2013 and 2014 are "unreachable", and believes that this year will close above 6%.
The IIF notes that the 2013 Budget predicted that the deficit falls to 4.5% of GDP this year down and 3% in 2014. "However, these growth forecasts for this year especially, seem unlikely," the report says.
In the current context, tax revenues will be lower than expected and that social spending will increase as a result of high unemployment. This will bring the deficit back above 6% of GDP, even if the government implements all the measures it has promised.
It warns the expiration of temporary tax increases such as income tax hikes approved by the Government in 2012, will cause the deficit to rise again in 2014 to 6.7%.
To ensure greater deficit reduction in 2014, the government needs to extend temporary tax increases more than expected or identify other measures to compensate their withdrawal. Decline in Manufacturing Accelerates The Markit Spain Manufacturing PMI shows Decline in manufacturing production accelerates in March. Key Points:
Faster falls in output and new orders
Sharpest decline in employment since December 2009
Input costs decrease for first time in eight months
Summary:
March saw an accelerated deterioration in business conditions in the Spanish manufacturing sector,
with output, new orders and employment all falling at faster rates than in February. This contrasted
with business conditions coming closer to stabilisation earlier in 2013.
The seasonally adjusted Markit Purchasing Managers' Index dropped to 44.2 in March, from 46.8 in the previous month. This was the lowest reading since October 2012, and represented the twenty-third successive deterioration of business conditions in the sector.
New orders fell at a steeper pace in March, with the latest decline the fastest since November 2012.
New export orders also decreased, ending a three-month period of growth. The rate of job cuts also
quickened, and was the steepest since December 2009.
Comment:
Commenting on the Spanish Manufacturing PMI ® survey data, Andrew Harker, economist at Markit and author of the report, said: "The March PMI data for Spain make grim reading for the manufacturing sector. Moreover, the latest figures have brought an end to the recent period of moderating declines, and cast doubt on any hopes of recovery for the rest of the year. The employment index again highlighted the extent of the problems currently afflicting the manufacturing sector and the wider Spanish economy, with jobs cut at the fastest pace in more than three years." The IIF wants Spain to hike taxes (extend temporary hikes if you prefer). Either way, the IIF is totally nuts. How long is Spain going to put up with this? Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
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