CHINA AT ITS SLOWEST SINCE 2000

IS RECESSION LOOMING OR WILL THE USA SAVE THE WORLD ORDER?

Fixed-asset investment in China grew at its slowest rate for 16 years in the first five months of 2016. The figures could weigh on China’s ability to hit its economic growth target this quarter. Beijing targets average annual economic growth of 6.5 per cent until 2020, and reported 6.7 per cent year-on-year growth in the first quarter, although some like France Prime Minister expressed serious doubt on the numbers.

Fixed-asset investment grew 9.6 per cent in the first five months of the year against the same period in 2015. The slowdown, to its lowest level since 2000, was led by the private sector, where investment grew by a meagre 3.9 per cent against 23.3 per cent for the state sector.
Meanwhile, industrial production rose 6 per cent year on year in May, unchanged from April, while retail sales growth slipped to an annual rate of 10 per cent in May from 10.1 per cent in April. Real estate investment decelerated to 6.6 per cent annual growth from 10.3 per cent in April.
Private entrepreneurs’ lack of enthusiasm weighed on the housing market, which is struggling to work through the ranks of empty apartment blocks in provincial cities and small county towns. Property sales have slowed in recent weeks after sharp rises in the largest and most sought-after cities in the first quarter.
In a sign of weak future demand from the construction sector, cement output rose 3 per cent in May. Steel output rose 2 per cent. Despite an eye-catching run-up in steel prices this spring, steel output for the first five months of the year is still lower than it was in the same period last year. Other industrial sectors plagued by overcapacity fared worse results. Coal output dropped nearly 17 per cent in May against the same month last year as thermal power plants curbed output more than 6 per cent and hydropower use soared. Power plants also chose to import cheaper, better-quality coal, further denting demand for coal from uncompetitive domestic mines.

All the components of a looming recession are gathering, not in 2016 but beyond and as early as 2017. Something needs to happen to keep the second largest economy in the World to continue to grow.

The US economy, contrarily to all political rhetoric of the current Administration is showing a few elements of weakness and the May unemployment numbers are not good creating only 38,000 jobs, following April: the lowest job creation’s month in six years.
On the positive side Retail sales in the US increased 0.5 percent in May on sequential basis. May’s retail sales data came in better than projection. Economists had anticipated a weaker rise of 0.3 percent. The figure was mainly driven by strong growth in auto sales and gasoline sales of 0.5 percent and 2.1 percent, respectively. The strong retail sales data for May further strengthens the view that consumers have increased their spending strongly in the second quarter following a meek spending in the months of winter. Personal consumption expenditures are at present tracking more than 3.5 percent quarter-on-quarter annualized in the second quarter. It implies that the US economic growth is likely to come in quite strong at 2.5 percent in the second quarter following a subdued growth recorded in the beginning of 2016.

The retail sales data released is quite positive even if certain growth is expected to be due to price effects. Gas purchases increased retail sales, but the strength was registered throughout the board. Drop in sales of building materials was quite a surprise given the strong sales recorded recently in the existing home segment. However, renovation activity is led by homes sales usually and hence summer months are expected to record improved building material sales. The question remains the strength of this recovery is slow and the fixed asset investment and infrastructure investment are at record low. It needs to change to encourage a stronger recovery to higher growth rate.

In addition, an election year is creating a lot of uncertainty and will not help growth either in the United States.

However, the US economy needs to continue to fuel its growth to avoid any major recession at the world level if China deep further into difficulties.

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