World GDP growth negative for Q4

 I've just updated my calculations of world GDP, to the end of  Q3, 2022.  (Some data were estimated)

As you'd expect, the world GDP and industrial production (IP) cycles are strongly correlated, shown in the first chart, where each time series has been expressed as a percentage of its moving trend.  

The chart below shows the same time series, but instead of being expressed as a percentage of trend, it shows the year-on-year percentage change.  I plotted the time series through to the end of 2019, leaving out the Covid crash and subsequent rebound, to make the relationship clearer.  Note the different scales, with IP on the left and GDP on the right.

The last chart (below) shows the month-on-month or quarter-on-quarter annualised percentage change in world IP and GDP, but only for late 2020 to 2022, again, to exclude the distortions caused by the Covid crash.  At this scale, it is clear that world IP started to fall in September, though revisions to underlying data might move that by a month or so.  

The global recession has begun.  I expect world GDP to go negative in Q4 when the data are eventually released.

The GFC permanently reduced OECD growth

The GFC (Global Financial Crisis) in 2008 permanently reduced the OECD (Organisation for Economic Co-operation and Development) trend growth rate.  Normally, after a deep recession, there is a rebound back to the previous trend line and growth continues along that trend line.  But this didn't happen after 2008.  Even taking the trend from the low point, trend growth has been just 1.8% per annum, compared with 2.8% from 1980 to 2007.   Excluding the Covid crash, trend growth was 2.2%.

And I think there is a high likelihood of deep recession in 2023, as Central Banks tighten to fight inflation, reducing trend growth even more.

Make no mistake: the GFC occurred because banking regulation was loosened.  One of the tenets of Neo-liberalism is that banks can regulate themselves, that they can be trusted to be sensible.  The GFC conclusively proved that this is false.  The fall in growth in developed countries has been a key factor in the rise of semi-fascist populist movements in the US, the UK and Europe.  And that fall in growth is due to an economic/social/political philosophy which promised higher growth and "trickle down" and instead has delivered lower growth, worse inequality, and grave danger to our democracies.

20 years of declining interest rates ending

 I've been dithering and delaying for months about some major software updates I needed to do, and as a result I haven't been doing much economic commentary.  I had to change a key program which is essential to easy manipulation of time series in Excel spreadsheets and since VBA (Visual Basic) is such a clumsy language, every time I considered doing it, I put it off to the next day.  Anyway, you'll be glad to hear, I'm sure, that I've finally done the update, and it seems to be working, so far.

Meanwhile, behind the scenes (as it were), I've been extending my interest rate times series backwards.  For over 20 years, I've been updating my spreadsheets with my own fair hand for most major world markets, but I decided I needed to add some smaller and developing economies to the data I monitor.  You can see the first result in the chart below.   It shows average central bank discount rates, weighted by PPP GDP for the world as a whole.  I had been using data for just 50% of the world (mostly developed countries), and the new time series I've added have increased this to 83%.  The biggest economy I added was China, but I also added Turkey, Indonesia, India, Russia, Taiwan and Korea and a couple of others.

The broader average is higher than the older one, reflecting higher inflation rates, but the cyclical movements are pretty similar.  Even though the USA, Europe and Japan haven't (yet) starting raising their discount rates, the world average has started to rise.  Interest rates were cut to emergency lows in response to the Covid Crash, and will now move back to pre-pandemic levels. 

The secular downtrend in interest rates has driven secular bull markets in shares and property, and I expect that a return to "normal" levels will puncture these bull markets.  We  may have already seen the beginnings of that inevitable downturn over the last few days.

I've started the same process that I've done with world discount rates with world bond yields.  I haven't yet got bond yields for all the countries I monitor going back 20 years, but I am gradually extending my time series backwards/  In the meantime, you can see how bond yields have trended sharply upwards in the last couple of weeks, moving to new post-pandemic highs.  Rising bond yields affect (reduce) property and share valuations, eventually.   Not good for these two asset classes.

Post-GFC growth slump

The chart below shows real GDP for the OECD group of nations, which includes most of the developed world, but doesn't include India, China, Russia or Brazil.  From 1980 to the peak of the cycle in 2007, the long-term growth trend was just under 3% per annum.  Since then it's been nearly one third lower, at 2.1% p.a.. In fact, that's a generous calculation.  That 2.1% is taken from the cyclical low point in 2009, not the cyclical peak in 2007.  From the 2007 peak, the growth rate has nearly halved, to 1.7% per annum.




The covid crash will reduce world GDP  by as much as the GFC did.  And the question is:  will the trend growth rate over the next 10 years fall again?  The GFC was the result of excessive credit growth by poorly regulated banks.   Yet what were the reasons for the slump in the long-term growth trend?  Rising inequality; an obsession with balancing budgets in Europe, come what may; an aging population; loss of confidence in stable growth by people; austerity; falling tax revenues because of cuts to company and high-income personal tax rates?

I fear that when "normal" returns, the pernicious gods of neo-liberalism will again be worshipped.  Governments will try to balance budgets by cutting spending, by slashing welfare, by raising indirect taxes.  They will continue to believe that how much leverage there is in the economy is best left to the "markets", that banks can be trusted to manage their affairs, despite the evidence.  They will continue to put their faith in monetary policy instead of Keynesian  fiscal policy, despite the fact that interest rates are now zero almost everywhere in the OECD, and bond yields are absurdly low or negative in all developed countries.  Interest rates have trended lower with each cycle for 30 years.  How will they cut interest rates below zero?  And how will Central Banks stop the consequent asset price speculation and subsequent ever deeper busts?

It's obvious that neo-liberalism has failed.  But, alas, even though governments have embraced socialism, for now, (how ironic is that?) I suspect the lure of orthodoxy as the world economy recovers will be irresistible.  Which will mean that our trend growth rate will fall again, and it will take another crisis to force a rethink.  After all, it was the Great Depression which led to Keynes's famous work, The General Theory of Employment, Interest and Money, and his prescription that when interest rates are extremely low, the only way to generate growth is for governments to undertake deficit spending.  The US unemployment rate is likely to rise to heights not seen since the Great Depression.  Low unemployment only returned with the deficit spending occasioned by the war.  What will reduce the unemployment rate this time?

I don't know which way things will turn.  Are our politicians, financiers and economists perceptive enough to rethink the dogmas of neo-liberalism?  Or are they too hidebound to change course?   Will the public put up with more austerity stretching out over the next decades?  Or will they start voting for extremist right-wing populist parties which distract them from uncomfortable economic realities by manufacturing "enemies of the people"?

One thing is for sure:  without a change in direction, trend growth will fall again, making all these political shifts all the more stark.

China GDP down 4% in Q1

China has released some data for January and February this year, showing very sharp declines in several macro-economic time series as a result of the virus lockdown.  E.g. car sales down 80% year-on-year, industrial production down 13.5% yoy, the volume of retail sales down 14.3%.  My alternative GDP calculation points towards 'genuine' GDP, as opposed to the official GDP data, being down by at least 4% in Q1 2020.  Even though production has restarted in China as the number of infections declines, it's only just crunching now in the rest of the world, so recovery of demand is likely to be sluggish.  It could take until Q3 or later for growth to return to normal.

I introduced my alternative calculation for China's GDP here.

Indonesia: growth continues

Indonesia has grown reasonably fast (5-6% p.a.) over the last 2 decades, and growth barely stuttered during the GFC (Global Financial Crisis) in 2009.   It's around 2% (or a bit more) of world GDP now, so not a giant like China or India, but as big as Mexico or Canada.  GDP data are a little out of date, but the latest PMI (for May) suggests that growth remains strong.

It's interesting that Europe and the US are slipping into recession, but several smaller developing economies are still doing OK.  Bigger developing economies, like India, seem to be more closely tied to world economic fortunes.  Its growth has fallen from 8% a year ago to just 5.8% in Q1/2019.

We start to feel the effects of Fed tightening

Not yet in the USA, but across the developing world, the rise in US interest rates is starting to have a serious negative effect:

Argentina has hiked interest rates to 60% as it takes dramatic steps to restore confidence in its plunging currency,in the latest sign of turmoil among emerging market economies this year.

The Argentine central bank raised the cost of borrowing by 15 percentage points on Thursday in an attempt to shore up the peso, which has plummeted in value. The central bank said it would keep rates unchanged at 60% until at least December.

The peso dropped amid intense trading on foreign exchanges, falling by more than 10%, despite the bank’s rate move, in the most severe drop for the currency since it was floated in 2015. $1 (77p) is now worth about more than 39 pesos, having been worth about 18 pesos at the start of the year.

Paul Greer of the City fund manager Fidelity said countries across emerging markets were being targeted by investors due to their economic problems, including high levels of debt and imports. “There are no easy answers for Argentina to its current woes,” he said.

Elsewhere on Thursday, the Turkish lira fell by more than 4% against the dollar amid increasing concerns over economic crises in developing nations. So far this year the Indian rupee and the South African rand have also come under pressure as concerns grow that the countries will struggle to pay their dollar-denominated debts following a rise in US interest rates. The rand fell a further 3% against the dollar on Thursday.

[Read more here]

Look at the plunge in the Argentinian Peso (note a rise shows more and more national units needed to buy 1 US$, which is to say means a fall in the value of the national currency)  Chart thanks to the people at Trading Economics:



source: tradingeconomics.com

And look at the Turkish Lira:


source: tradingeconomics.com

Note: I think the charts update live, so I'm not sure exactly what picture you will see when you read this post. Prolly worse than the images I'm posting now.  

This is the stuff of deep recessions.  And we're already seeing slowdowns elsewhere, as I talk about here.

I should be able to post or to link to a piece on the US recession in 2019/20 shortly.  But all the evidence from around the world is that growth is slowing and that vulnerable economies are heading into recession already.

Climate change denialism

I don't understand the where the climate change denialists are coming from.  

1. The world's temperatures are rising. The evidence is actually quite unambiguous.

The NOAA time series of global temperatures
The warming pause myth
Sea level rise accelerating

2. But even if all the climate change scientists and meteorologists are wrong -- and they probably aren't  -- so what? The cost of renewables is now BELOW the cost of coal-fired power. Wind is 40% to 50% cheaper than new coal-fired power stations.  In Australia, wind is 40% cheaper than new coal power stations.  In the US, even without subsidy, wind is much cheaper and solar is competitive with coal  So it won't cost us to switch.  Just in case all those scientists who warn about climate change are right.

3. And the costs of renewables continue to plunge. They're as cheap as fossil fuels now, and they will go on getting cheaper:
Wind
Solar
Batteries

4. Switching to renewables won't cut growth rates or lower living standards: on the contrary, new cheap energy will increase growth.

5.  So why are the denialists still fighting for a lost and -- unless you own a coal mine or are an oil magnate -- pointless cause?  And therein lies the answer, I think.  Scratch a denialist and you'll find someone in the pay of fossil fuel mega corporations.

Source

The Paris Climate Agreement

Yes, it's tempting to dismiss the agreement.  Kyoto more or less failed.  Copenhagen was a disaster.    Why should the world, which loves the benefits brought from oil and coal, but ignores the costs,  actually do anything?

And yet .... there are some indications that the shift has already started, and will only accelerate:

•  Through October this year, 70% of new electricity generating capacity in the United States was renewables. The rest was gas, which is useful to the grid because it can be turned on or off quickly and thus will help fill gaps caused by the variability of renewables supply. 
• Here are two very brief talks by the CEO of a German Grid operator, who talks about how they expect the percentage of renewables in the power supplied to the grid to keep rising by 1 or 2% per annum, and how they too can take renewables to 70% of the grid without needing storage.
• Wind and solar costs have now fallen to below the costs of new coal-fuelled power. And their costs continue to decline.
• China, the largest CO2 emitter, is committed to switching its energy supply to renewables not just because of global warming but because such a switch would reduce their horrendous air pollution as well as bringing them energy independence. China has more renewables installed than the next 5 largest emitters added together. 
• Coal exports to China and India are peaking as a result of these countries' switch to renewables.
• The percentage of total global power produced from solar has doubled every 2 years for 30 years, and although it is still tiny (1%) in a global context, we are just 7 doublings away from the ability to produce 100% of all our electricity from solar. 
• The battery in your laptop cost $2500 15 years ago, $250 4 years ago, and below $100 today. This collapse in battery costs will continue, and will make cheap large scale storage possible for the grid, as well as allowing electric vehicles (EVs). 
• As battery costs fall, EVs have doubled in sales every 2 years globally and in the US. 

 I read 15 or 20 articles every day about global warming and renewables, and most of them point towards a future in which global CO2 emissions peak and start falling, quite fast, in which renewables energy just gets cheaper and cheaper, in which the ingenuity of mankind allows us to go green with no effect on growth or living standards.  This shift poses major challenges to energy producers and to grid operators. But just as technological change expanded their markets, so change once again is contracting their markets.  As for Saudi Arabia, the UAE and other major oil producers, the sooner they diversify their economies, the better.  This new green energy world is not going to go away, whatever they think.  And the switch is accelerating.

Source

China industrial production slows further

China's March industrial production fell to a new low growth rate, almost back at GFC (2009) levels.  Because Chinese New Year is peripatetic (i.e., sometimes it's in January, sometimes in February), the simple year-on-year % change is very "spiky".  Extreme-adjusting the data produces an altogether smoother and easier to interpret chart.

My guess is that growth is now weak enough that the Chinese govt will be inclined towards stimulus, though there is no doubt that they do not wish to go back to the helter-skelter growth rates of the early noughties because it brought so many problems in its wake (corruption, pollution, property speculation, dodgy loans, overbuilding, etc.)

The 4% club

It seems a Sisyphean (or do I mean Herculean?) task, to cut emissions to zero.  But actually, it isn't.  Small annual declines will over time build to massive cuts.  For example, a cut of 3% per year, cumulated year after year, will equate to a cut of  50% over 20 years, 2/3rds in 36 years (i.e., by 2050) and 93% in 86 years (i.e, by 2100).

Now this is an absolute cut, not a cut relative to growth in the economy.   The use of carbon per unit of real GDP is called the carbon intensity, and that has actually been falling, just not fast enough.  The chart below (source) shows how we need to cut the carbon intensity by 6.2% per year.

What that means is that if real GDP rises 3% per annum, but emissions fall by 3% per annum, then the carbon intensity will fall by 6% per annum.  Growth in developed countries is likely to run at 2-2.5% over the next 10 years.  So if they cut total emissions by 3% a year, their carbon intensity is only falling by 5-5.5% per year, not quite fast enough, but far better than what we have managed to achieve up to now.

The problem is developing economies.  A developing economy goes through a growth cycle as it transitions from emerging through to developed, and that typically involves very rapid growth followed by a steadily diminishing growth trend as it uses up its own resources (labour) while encountering diminishing returns on new investment.    Eventually, even rapidly growing emerging economies reach the trend growth rate set by technological advance and social factors, which seems to be around 2.5%.

So even though China/India/Brazil etc are now growing at 7% per annum, they will eventually grow more slowly than that.  But eventually is too far away.  The BRIC (Brazil, Russia, India,. China) countries are 25% plus of the world economy, and even if they cut their carbon intensity by 6% per year, their emissions in absolute terms will still keep on rising.  The good news is that China, the world's largest emitter, and also, not coincidentally, the world's largest consumer of coal,  had a de-carbonisation rate of 4% in 2013 and looks as if it will do even better this year, since real GDP growth is 7-ish, while carbon imports are declining.  

To achieve a global cut in emissions of 3% per annum, the developed countries need to cut by 4% to allow emerging countries to rise by 1%.   And yet, a cut of that magnitude seems entirely feasible.  With renewables and batteries declining so fast in price, the economic cost of switching is negligible, and in fact new technology may bring new jobs and new growth, just as it has always done in the past.  Once you get past a certain percentage of renewables in total electricity generation, quite modest increases in the total from renewables will produce your 3% decline in total emissions.  Let's say renewables are 20% of total electricity (in fact 22%, but that includes hydro).  A rise of  5% a year every year in the percentage of renewables (i.e., from 20% to 25%, then 25% to 30%, etc.)  will cut total emissions in absolute terms by roughly 5% a year in the early years, accelerating to 10% a year by year 10 (assumes electricity demand growth of 1.5% per annum), and will halve emissions within  9 years.

PMI indicator has modest fall

This is my weighted average of US, China, Japan and Europe PMI/ISM, indicators which are private sector surveys of manufacturing conditions in these countries (Europe is a composite of several European countries)

A minor blip in January, prolly caused by the big freeze in the US.