China's clean energy boost to growth

 From Assaad Razzouk

The clean energy transformation isn't just a climate goal; it’s a powerful economic engine. Exhibit 1: Clean energy - mostly EVs, batteries, and solar - fueled 1/3 of China’s 2025 GDP growth. Without it, growth would have slumped to just 3.5% www.carbonbrief.org/analysis-cle...

China's economy is slowing

This chart shows the change over six months in China's volume of industrial production.   The recovery which began in mid-2024 has aborted, probably because of Trump's tariffs.  Domestic policy missteps didn't help either.  The usual route China has taken in the past, namely, to overstimulate property development, is closed because there is a huge oversupply of housing (from previous stimuli), and house prices are still falling.  

I presume the government will step up stimulus soon.

World economy picks up

 I often forget that though I have lived through the events depicted in my charts, others haven't.  The chart below shows my calculation of the "Big 8" GDP-weighted PMI, which, coincidentally, covers about half my career in the financial markets.

So, the events: the 2001 recession, the GFC (2008/9), the euro crisis (2012/13), the 2015/16 pause, the 2016-17 Trump tax boom (nothing like deficit spending to give a growth sugar rush), the 18/19 slowdown as fiscal stimulus faded, the 2020 Covid crash, the 2020/21 post-Covid rebound with massive monetary and fiscal stimulus, the inevitable hangover in 2022/23 as fiscal stimulus faded, and interest rates were hiked, and war pushed up inflation, and now, the 2024 recovery.

My guess, after nearly 50 years in economics and the markets?  The recovery will continue.  But it won't be the steep slope of the post-covid recovery, but something shallower.  Which will stop CBs raising rates.  Will they cut rates?  Some will.  Most will --- because inflation is drifting lower and growth won't be fierce enough to push it back up again.  But inflation will be sticky downwards, for reasons I'll discuss in another post.  So the rate cuts won't be very large.

(Data through May 2024; the Big 8 are the USA, China, Japan, Euro area, India, Russia, Brazil, the UK, and they make up +- 70% of the world's economy.)

US PMI slides again

 As usual, the thick green line is the one to focus on, because it minimises the random fluctuations.  Growth is still positive, but is clearly trending lower.

A thousand posts: why I write this blog

Source: The role of neoliberalism in Spain's constitutional crisis

When I began this blog 8 years ago, what I really wanted was a place to discuss things.  Well, and vent about them too.  I worked in a place where no one else really understood or cared about economics and there was no one to talk to about the big issues in economics and their interaction with politics.  It was oddly lonely, because everywhere I'd worked before had teams of investment professionals and we'd often discuss economic theory because it interested us, and because to forecast the economy and markets you have to understand them and their dynamics.  And that means understanding where theory is applicable and right, and where and why it's wrong.  I thought maybe with a blog, I'd at least set up conversations even if it was just with myself.  I'd have to consider the facts after finding what they were, think the argument through, then try and write it down in such a way that it appeared simple and logical without being too complicated, because after all, my goal was and is to convince.

It seemed to me then that the big issue in economics was whether the neo-liberal policy consensus was in fact working.  The theory was that increased inequality was a price we had to pay for higher growth.  But the evidence has been accumulating for many years now that growth rates haven't risen as inequality has increased.  In fact, recent IMF and other research suggests that past a certain point--and we have passed that point in the anglophone economies--increased inequality reduces  growth.  And what's the point of economic growth if all the gain goes to the rich?  The neo-liberal belief system also says that markets can be trusted to regulate themselves.  Well, maybe the market in cafés is a perfect market and can be trusted to self-regulate, because in any geographical area there are dozens up to hundreds of cafés, but the market for banks or utilities or airlines isn't.  In fact, most markets are oligopolies, and the theory of perfect markets which underpins the whole laissez-faire approach doesn't apply.

And it became obvious to me that banks in particular could not be trusted.  The GFC (great financial crisis) of 2008 made this abundantly clear.  In the crisis, banks were saved with public money, i.e., money paid by taxpayers.  In Spain and Ireland, the rise in government deficits as a result of this led to swingeing cuts in welfare and rises in taxes hitting the poorest hardest.  The poorest suffered so that bank shareholders and executives could get bonuses.  The third plank of neo-liberalism is that government debt should be low, which logically means that governments shouldn't run deficits.  The problem with that is that when the economy is in recession, attempting to cut the deficit by raising taxes and cutting expenditure can actually make the deficit bigger, because the already weak economy goes even further backwards.   We could all see this by the pathetically slow recovery in Europe after the GFC.

None of these things are absolutes.  On the whole, markets prolly are better than bureaucratic diktat.  But not always, and certainly not with banks.  Banks need to be tightly regulated.  Governments prolly shouldn't run debts during booms, because that would leave no space to run them when they're needed during downturns. But they should during recessions.  And borrowing money to acquire long-lasting assets like roads, railways, hospitals, power stations, etc, is perfectly sensible and useful.  Obviously people who work hard or are massively creative (Elon Musk, for example) should earn more than hoi polloi.  But ever increasing inequality is bad not just for economic growth but also for democracy.  Sharply economically divided societies are also going to be sharply divided politically.  Hungry and angry people aren't interested in polite disagreement and live and let live when they see the rich getting ever richer.  The rise of extreme right-wing parties is dangerous for democracy, just as extreme left-wing parties were.  Getting poor people to vote for right-wing policies is hard.  So right-wing parties have to manufacture "enemies": Mexicans, immigrants, gays, foreigners, dole bludgers (who "parasite" on ordinary folk)  It's a technique which manufactures and disseminates hate.  That's bad for society and for democracy.

The problem was and is that advocates of neo-liberalism are in the grip of quasi-religious belief system.  If you point to the failures of modern capitalism and neo-liberalism, they counter that we haven't got enough deregulation, we haven't got low enough taxes, we haven't cut welfare enough to increase the incentive for the poor to work harder, while if there is a deficit, we should run a surplus to release more funds for private enterprise which is always (they say) better and more efficient than governments.

Over time, I started to get more and more worried about climate change.  Global temperatures have been  rising on average by 0.2 degrees C per decade since the 1970s.  That means by 2050 they will have risen another 0.6 degrees, at least, because it is highly likely that aerosols (i.e., sulphate particles) released during the burning of coal and oil have hitherto limited that increase.  As we slash coal burning with renewables replacing coal, sulphur dioxide emissions will fall, and this will cause temperatures to rise even more rapidly.   Even 0.2 degrees C per decade is frightening enough.  0.3 or 0.4 would be terrifying.

It's perfectly obvious that global temperatures are rising and that is us making that happen.  The right-wing obsession with neo-liberalism leads to climate denialism.  Climate action is collective, right?  We all have to do our bit.  We have to agree to take action, all of us, because it's no good me cutting emissions if you increase yours.  The Right thinks that's tantamount to socialism.  Plus, you know, markets are always right.  If people want to burn oil and coal, let them.  The increasing economic and political division in developed economies which was a direct result of neo-liberalism made action to prevent or reduce global warming even harder.  The Right was against it simply because the Left was in favour.

I have tried to present the facts on climate change/global warming without blaming the Right for everything.  Unfortunately, my contempt for the Right has risen over time as it has become obvious that far from being genuine conservatives (who are supposed to conserve) they have devolved into semi-fascist bullies who spend a lot of time denying indisputable facts.  Don't get me wrong.  The Left is deeply flawed.  But climate change is the greatest crisis facing our civilisation.  And the Right doesn't want to do anything about it.

To leaven the serious articles I put in cartoons that I like.  Sometimes they're funny, sometimes not.

Anyway, thank you all for reading it.  I hope my next thousand posts will be as interesting.

The success of the Energiewende

The Energiewende is Germany's "energy transition" to renewable energy, and out of nuclear and fossil fuels.  It is pronounced with a hard g, as in English "get" and w is pronounced as a v.

It is often criticised as a failure, because

1. It's pushed up the price of electricity in Germany. Germany has among the highest electricity price in the world 
2. Germany still uses lots of coal, so what's the point?
3. They've been doing it for nearly 2 decades and they're still haven't reached 100% renewables.  Surely they should have done more?

When the Energiewende started in 2000, wind was very expensive.  Wind turbines were much smaller than today, and the electricity they generated was much more expensive than it is now.  But as the industry moved down the learning curve, costs fell--since 2009, wind has fallen 66% in cost.  Today, wind is the cheapest generation source.  Solar was even more expensive than wind in 2000.  Its costs have fallen 85% since 2009.  The feed-in tariff contracts signed were for a duration of 20 years, so it will take a while before the newer low-cost wind and solar start to influence electricity costs.  But electricity costs in Germany have probably peaked and will start falling from now on.

We must thank Germany (and Denmark) for their decision to install expensive wind turbines 17 years ago.  They started the world down the learning curve, making it cheaper and easier for us to do the same.  Die Welt sagt Danke, Deutschland.  Verden siger tak, Danmark

As part of the Energiewende, Germany had long-term plans to gradually scale back nuclear.  After Fukushima, the German government promised to close down all nuclear plants by 2022.  You can see what happened (in the chart below): nuclear halved from 10% of total supply to 5%.  Coal picked up the slack.  But through it all, renewables kept on rising, from 7% of total supply (mostly hydro) to 34%, a rise of 27 percentage points in 16 years.  I suspect coal has peaked, and will steadily decline from now on, even as nuclear goes to zero.  There's politics involved: lots of German coal miners.  But Germany is good at transitions, and will find a way.

Source Global Green Shift

The third criticism is plain silly.  Germany is a huge industrial economy, the largest to ever make this transition to a green economy (China will be next.) Although Denmark started before Germany, it was Germany which really got the ball rolling.  It's worth remembering that when they started in 2000, they didn't know how they would do the transition.  Biomass? Nuclear? Wind? Hydro?  Energy saving? Solar wasn't even in contention, it was considered too expensive, and it was thought that Germany was too far north for solar to be workable.  The Germans were pioneers, paving a road that the rest of the world could follow.  And despite the size of the German economy and its population, despite the huge learning curve they traversed, despite growing their heavily industrial economy and raising living standards, they still managed to lift renewables by 27% over 16 years.  If they repeat that achievement, renewables will provide  61% of their power by 2032 and 88% by 2048, very close to the necessary 0% by 2050.  

So far we've just been talking about electricity generation.  But that produces only part of global emissions.  Germany still needs to grasp the opportunity afforded by electric vehicles.  Germany is the auto powerhouse of Europe.  Even if the world gets to 100% green generation, it's still a long way from 100% green transport.  If Germany embraces EV targets as China and California have done, its car manufacturers, who have been dithering about EVs, will be forced into the technological future, a place Germany has always been comfortable in.  

[Read more here]

When good is bad

US employment data for February continued the strengthening trend of the last year, despite incredibly cold weather over much of the eastern US and incredibly warm weather/drought over the rest of the country.  The highest increase in a decade, if you ignore the short-lived spike when the US Federal Government hired a couple of hundred thousand temporary workers to take the ten-year census in 2010.

The US share market fell. But hang on, surely if times are good and getting better, surely the market should have gone up?  Well, no.  Because the stockmarket is a resultant (thinking of vector algebra here) of earnings, confidence and interest rates.  And this strength in employment suggests that interest rates in the US will start to rise soon.  For 6 years, the central bank discount rate (the "Fed Funds" rate) has been near zero, as the Fed tried to get economic growth going again after the GFC.  And a rule of thumb is that a "neutral" discount rate/cash rate should be roughly equal to nominal GDP growth,  which in the US over the last year has been around 4% per annum.  A stimulatory rate would be below nominal GDP growth, a contractionary rate above it.  After strong stimulus, it is now necessary to raise interest rates to prevent future asset price bubbles and rising inflation. What these strong data suggested was that the probability of that happening has risen.

Now, it may happen that interest rates can rise (slowly!) but earnings may rise too, in which case the stockmarket will go sideways or even up.  This often happens in the middle of an economic recovery.  But later on in the recovery, earnings growth becomes harder to achieve, and the annual increases in profits slip.   If interest rates start rising then, PE compression ( a falling price-earnings ratio) overwhelms the rise in earnings, and the market falls. In addition, in the case of the US share market, a big chunk (25%, 30%?) of profits are generated abroad (think of all the multinationals which dominate the Dow and the S&P)   And since the US is so out of phase with the rest of the world, where interest rates won't be rising any time soon, the US$ is soaring, reducing foreign profits when they are converted to US$.  The market isn't going to be rescued by a rise in earnings.

So this may mark the peak in the current bull market run in the US.   I don't think the fall will be substantial, but I do believe it will qualify as a "bear market", traditionally 20% or more.

China PMI up

The PMI series fit quite well with other economic data.  Markit releases preliminary PMIs on 24th of the month for that month.  They are sometimes revised when more data become available, but the revisions aren't usually too big.

The September PMI for China rose a little, extending the rise which began in August.   Looks to me that Chinese growth has bottomed.

World econ resumes growth. At last!

This shows the weighted average PMI indices for the US, Europe, China and (since the beginning of the year) Japan.  Growth is accelerating.  For most of the last 2 years, these indices have been below 50%, indicating recession.

By slashing government expenditure and raising taxes, Europe manged to push its economy back into deep recession.  But that folly is now past.

My take on it is that growth will increase form here, for now.

[See also yesterday's piece, Fiscal Folly]

The Lucky Country

Take a look at the relative growth rates of Australia, New Zealand, the US, UK and Europe in the chart. Starting in Q1/2004 at 100, Australia is nearly at 155 (and that was before today's scorching 1.2 % Q-on-Q growth estimate for Q2/2010) much higher than any of the other countries or regions shown.

Why?

Partly luck. China continues to boom, and we're selling them raw materials. China is now the world's largest consumer of commodities. And despite a Chinese "slowdown" (we should be so lucky), prices and volumes just keep going up.

Partly good management. Unlike the Fed, the RBA took away the liquor before the party got too wild. They started raising interest rates early on before the 2002-2007 boom got out of hand, whereas the Fed kept rates too low allowing an unsustainable housing bubble to swell. When it duly burst everybody was covered with gunk.

Partly immigration. Massive immigration, some of it allegedly temporary (students here to study in a cheap but definitely not nasty English-speaking country) helped push up demand for housing, demand for everything. Our unemployment rate is just 5%.

There's talk of an Ozzie housing bubble. Meself, I doubt it. Unless... they slash immigration and remove negative gearing.

BTW, did you observe the good performance of New Zealand in all this? And they don't produce any commodities. Beaut country though. Maybe it's all the tourism.