Nascent And As Yet Unreported Economic Crisis In China May Be Trigger For Global Stagflation – Analysis
By Bob Savic*
The economic costs of China’s under-reported and largely undetermined consumption and production shutdowns, since the outbreak of the novel coronavirus, are beginning to tentatively flow through into international trade and production data. The numbers are signalling not only potential global economic stagnation, but even spiking inflation across certain industry sectors, as complex cross border demand and supply linkages absorb the effects of China’s emerging muted economic activity.
China’s missing January 2020 economic numbers
Somewhat auspiciously, on Valentine’s Day, Friday 14th 2020, China’s Commerce Ministry and People’s Bank of China were due to report several key sets of economic data for January 2020, including foreign direct investment, money supply, social financing and bank lending. None of the data were made available. Instead, the respective authorities deferred the releases to the following week. For what has become the world’s second largest economy, overtaking that of the Eurozone, in 2019, any delayed reporting of such materially-sizeable economic data must surely be some cause for concern.
The only January data reported since the economy went into partial-lockdown were vehicle sales. These showed a domestic car market in meltdown, as sales fell over -18% during the year. It was the 19th consecutive monthly contraction in car sales, although to what extent January’s relative sharp negative number was due to either seasonal Lunar New Year holiday closures or coronavirus-impacted shutdowns, remains an open question.
Possible China consumption-shutdown impact on global trade
In spite of the lacuna of January economic data released, thus far, there should be no doubting the degree of significance China’s possible coronavirus-induced economic dislocation may have for the global economy, much of which has become increasingly dependent on trade with China, for growth, especially since the 2008-9 global financial crisis.
For 2019, according to China’s customs authorities, the country had purchased over US$2 trillion in goods and services from the rest of the world, averaging around US$170 billion to US$190 billion a month in imports, over the year, even in the face of an exhausting trade war with the US. The sizeable scale of China’s imports has clearly placed it second-only to the US as a global importer and driver of economic growth from a trade perspective.
Yet signs of a pre-coronavirus and China-related slowdown in international trade have recently become evident in at least one key economic benchmark measuring international trade flows – the London Baltic Exchange Dry Index. In the first week of February 2020, the index’s “capsize” segment (which tracks certain vessels including cargo for China which accounts for a large portion of such shipping) fell into negative territory, for the first time in its history, reflecting increasingly subdued activity and faltering demand for ships in China. Ever since September, last year, the index has fallen by over 80%. The last time it evidenced such decline was in 2008, predating, but accurately gauging, the oncoming “Great Recession” the world experienced in the following year.
Moreover, as the coronavirus economic fallout begins to make itself felt, the frontline economies to watch must surely be those of East Asia, given that the region has become deeply embedded into China’s international supply chain with 2019’s exports to China totalling about US$1.1 trillion, while importing roughly US$1.2 trillion.
So far, regional governments have only released data for the month of December 2019. However, Vietnam was the first to provide official trade flows for the month of January. The month’s figures may be an instructive sounding board for other economies yet to report in light of Vietnam’s standing as the fourth largest exporter to China, behind South Korea, Japan and Taiwan. Somewhat surprisingly, though, January’s total exports fell by over -17%, relative to the same month last year. To what extent this was attributable to falling demand from China, which constitutes its second largest export market, remains unknown since a country breakdown of the export numbers was not made immediately available.
The second-line of economies to watch in terms of a corona-induced slowdown would be those of continental Western Europe. Accordingly, Germany is the continent’s largest exporter to China, chalking up US$105 billion in 2019, while sustaining a perennial structural trade surplus with the world’s number two importer. Other major European exporters benefiting from trade substantial surpluses with China include Switzerland, Spain, Finland and Ireland.
Gross Domestic Product (GDP) growth figures already released, for Q4 2019, in respect of each economy, have rather ominously pointed in a downward direction. Germany’s performance was especially poor recording zero growth over the last quarter of 2019. This may be largely explained by an enduring manufacturing output slump, suffering its steepest drop of -7.6%, last December. How well or badly China’s economic performance stacks up in January, and beyond, will likely become highly determinative in guiding the direction and depth of Germany’s and other European states’ manufacturing and export-oriented economic growth.
Growing China production-shutdown risks for inflation
By contrast, goods price inflation, across Europe and Asia, has been gathering steam even in the face of these regions’ slumping economic growth rates. In January, Germany’s annual producer prices rose, after seven months of decline. The increase was mainly attributable to hikes in the costs of petroleum, food and animal products. The same story is replicated across most European economies, but particularly so in parts of Asia, where fuel and food-driven price inflation has been especially strong, in recent months. For instance, Japan’s producer prices rose abruptly in January on the back of energy and food price increases.
While it is unlikely price hikes in these sectors were transmitted out of China, which has also recently seen significant price rises in these commodities, the same may not be true for surging manufactured goods’ prices. In the case of the Asian manufacturing sector’s emerging inflationary pressures, this may be a result of China’s coronavirus-induced production shutdowns where failures of just-in-time delivery systems could almost immediately cause shortages of intermediate and other goods required for global business restocking.
Is there a gold or silver-lining to the threat of stagflation?
The stagflation consequences that could arise from a temporary, let alone, prolonged China consumption and production shutdowns may have severe recessionary effects on a global economy mired in unprecedented levels of public and private debt. According to the International Monetary Fund (IMF), this stood at US$188 trillion, or 226% of world GDP, at end-2018.
Whether the global economy can withstand a major global demand contraction, under such conditions, emanating out of China, is clearly an issue many economic policy makers are preoccupied with. Among those is Federal Reserve Chairman Jerome Powell, who, in his semi-annual testimony to the US Congress, made reference to monitoring risks for the global economy associated with the coronavirus economic shutdowns.
Certain players in the gold and precious metals mining industries, however, appear to be ramping up output, as China shuts down production. Most notably, South African gold mining production rose by 25%, yearly, after nearly four straight years of contraction. Some other precious metals there saw even larger mining production increases. The highest prices in seven years for such metals could be one reason for the production surge. Yet another could be certain investors’ perceptions that the current global economic model, built on so-called ‘fiat’ currencies, has run its course and that all it took was for another, yet long overdue economic crisis to finally knock it to the floor.
Should such an outcome materialise, the world’s policymakers may, once again, favour a global monetary base modelled along the lines of a post-War Bretton Woods’ gold or basket of precious metals standard. Just as a brief recollection, such a standard placed a limit on global money supply and associated credit growth based on the intrinsic value and stock of the metals concerned. Consequently, it served to minimise risks otherwise inherent in a fiat currency based system, enabling stability for long term investments that enhance real economic growth.
Clearly, any return to a Bretton Woods-style global economic governance would require substantial consensus between sovereign governments typically loathe to sacrifice control over their national currencies and domestic policymaking in return for greater economic stability. Then again, should the coronavirus economic fallout prove a more intractable problem than first envisaged, governments around the world may be left with little choice than to redesign an irredeemably broken global financial system.
*Bob Savic, Senior Research Fellow, Global Policy Institute, London, UK