April 2016

• Yet again the IMF global economic for 2016 have been revised downwards by 0.2 percentage points – to 3.2%. Global growth remains weak and uneven, beset by financial, geopolitical and political risks. The best-performing economies, like the US, are growing at stall speed (0.5% in Q1), while the global economy is “faltering from too slow growth for too long” (IMF). In short: global growth continues to lose momentum, with weak pricing pressures signalling poor world demand.
• BUT the Chinese reflation trick, spurred by its massive fiscal and monetary stimulus, has worked. It has succeeded in stabilizing economic activity and the markets, buying time for China and the rest of the world. Much of the recent improvements, from the recovery in global manufacturing to better credit conditions or the frenzy in commodity futures, is almost entirely attributable to the Chinese stimulus.
• HOWEVER, this can only last for a few more months. The Chinese recovery is fuelled by debt (standing at more than 280% of GDP and with as much as $1.3 trillion in non-performing loans), rising faster than ever at a time when it takes more than 5 yuans of new credit to produce a yuan of new GDP (put another way: new investments are increasingly inefficient). At best and helped by strong central control, the Chinese economy will slow sharply over the next few years, without triggering a crisis. At worst, it will decelerate abruptly and in a chaotic manner, triggering a global financial crisis. It’s impossible to tell which will occur.

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