• The global economic outlook is becoming increasingly deflationary. The dual collapse in commodity prices and EM currencies, combined with and caused by the sharp deceleration in China, exerts strong deflationary headwinds that affect the rest of the world. A situation compounded by such global mega trends as ageing, technological innovation and rising inequalities that are deflationary by nature. As a result persistent global weakness is the new normal.
• The US is a case in point. Although in better economic shape than anybody else, and with an impressive growth performance in Q2 (3.7%, Y-o-Y), its core inflation still only rose by just 0.1% in July (Y-o-Y). US growth doesn’t seem sufficient to spur inflation towards the desired 2% threshold, and so far, tighter labour markets (the unemployment rate is now at 5.3%) hasn’t triggered wage inflation. This makes it unlikely that the Fed will raise interest rates this year.
• Somewhat perversely, the fact that China’s economic weakness has now infected the rest of the world is a clear indicator of its increasing global influence. Markets took comfort in last week’s monetary measures, but they aren’t sufficient and won’t prevent China falling into recession (growth under 4%). At 282%, its debt to GDP ratio has increased by 80 percentage points between 2008 and 2014 – the surest sign of an impending, full-blown crisis. What is a likely timeframe? As Dornbusch (an economist) famously said: “In economics, things take longer to happen than you think they will, and then they happen faster than you think they could.”

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