The Sky Isn’t Falling: No Need to Tell The King
Despite reports to the contrary, China’s economic crisis won’t cause our economy to grind to a halt… yet. Here’s the signal behind all of that noise.
For a group of people that came of age during the Great Recession (as well as their peers that have grown up hearing tales of misery about the aftermath), the term “market downturn” evokes a very special sort of terror. The same can be said for “correction,” “dip,” “crisis,” “panic,” and “bubble.”
Even for those of us with no money in the stock market, it’s easy to see the events of the past few weeks – China’s recent currency devaluation, worldwide stock market swings, Canada entering a recession – as signs of impending doom and unemployment.
Here’s why you should take a step back and relax.
So What’s Going On?
In the off chance that you’ve been living under a rock for the past month, let me recap:
China is struggling to get its shit together, despite some valiant attempts.
For the past few months, China’s economy has almost completely stagnated. And that might be an understatement. After years of unparalleled growth, China’s manufacturing sector has officially atrophied, shrinking at its fastest rate in years during the month of August. And its service industry, which receives less attention but has recently been buoying growth, also slipped from its July numbers.
In response to the economic downturn, the Chinese stock market has “cratered,” to borrow the words of the Economist’s recent coverage. And though the Chinese central bank has attempted to hit the brakes by devaluing the yuan and banks are implementing rounds of monetary controls, the Shanghai Composite, China’s main stock market, has continued its alarming decline.
The market has now effectively erased any gains that were made this year and the decline shows no signs of slowing down – analysts have slashed their GDP estimates for the country through 2018.
Emerging economies, often driven by commodities, are faltering.
Oil is dirt cheap. It’s been that way for a while and it’s not going to increase in price anytime soon, if experts are to be believed. While many had high hopes that industries – and world economies – would weather the storm, worldwide overproduction has depressed the price so much that it’s really wreaking havoc.
Oil-dependent economies, like Venezuela, have been suffering under the glut of expensive oil for a long time. However, China’s economic downturn has caused a sag in demand for manufacturers across the globe – from Beijing to Seoul to Sydney. The drop in manufacturing has, in turn, reduced the demand for raw materials and commodities which so many emerging market economies rely on to survive.
As a result, investors and their capital are getting out of dodge. The US dollar is now stronger against emerging market currencies than it has been since the depths of the Great Recession (which means that emerging market currencies are falling in value). The resulting flight, which has manifested primarily in a reduction of available capital and cheap debt to emerging market manufacturers, has made the situation dire.
Brazil, one of the hardest hit economies as of late, is losing jobs at a rate of 150,000 per month and is on course to shrink by up to 2 percent this year. For comparison, Brazil added 2 million jobs in 2010 and watched its economy grow at a rate of 7.6 percent.
Are there signs of trouble at home?
Emerging markets aren’t the only economies that are heavily reliant on oil and commodities. This week, news broke that the Canadian economy has officially slipped into a recession, which means that its Gross Domestic Product (GDP) has declined for two straight quarters. Canada’s last recession occurred in the aftermath of the 2008 financial crisis.
Further south and closer to home, some officials are beginning to ring alarm bells that the United States may be soon slipping into a recession of its own. Recent comments by Eric Rosengren, the president of the Boston Federal Reserve, suggest that even though the U.S. economy seems to be on track to grow, concerns about the global economy will keep economists on their toes.
That’s bigger news than it may initially sound like. You may have heard recently that the Federal Reserve has been considering a hike in interest rates, which have remained at near-zero since the Great Recession hit. Low interest rates set by the central bank make borrowing money cheaper, which in turn, bankers hope will drive growth and prosperity.
By all counts, the Federal Reserve was all set to raise rates in the middle of September. However, as stocks in the United States have also plunged, most recently wiping out the gains that they’ve made over the year to-date, many people are skeptical that the Bank will do anything that may upset investors.
Not So Fast
Before you start your doomsday preparations, realize that this is all pretty natural. The market naturally cycles through periods of growth and contraction and, by all accounts, we were due for a bit of a correction after the way the economy — and especially the stock market — has surged back to life, setting records in the process.
Not reassuring enough? Understandable. Let’s look on the bright side then. For our neighbors up north, that means the fact that it’s not even clear that Canada is currently in a recession, as quarterly estimates are often revised as new data comes to light. Even if the data isn’t revised upward, it’s likely that the factors causing Canada’s economic dampening are already clearing away: economic indicators such as employment aren’t signaling a recession as strongly as one may think.
Close to home, U.S. manufacturing data fell for the month of August and the oil industry has continued to hemorrhage cash thanks to low oil prices. That’s not unexpected, though. Manufacturing is highly susceptible to external pressures – a fall in international spending, coupled with a strong U.S. dollar in relation to foreign currencies are likely to blame for the recent softening.
Many are optimistic, however. A recent Federal Reserve report on business conditions indicates economic growth for 11 out of 12 regions across the country, buoyed by strong housing and auto sales.
Still not convinced? Stay tuned this week for the Bureau of Labor Statistics’ “Jobs Report,” for a strong indicator of what to expect in the coming months. There’s more reason for optimism: the ADP private sector jobs report, a precursor to the Jobs Report, shows that job growth remained steady through the month of August.
Compared with the United States, the last remaining variable, China, may have less to be hopeful about. The country is entering a transition phase, in which its production and growth are likely to slow dramatically as its economy liberalizes and its standard of living rises.
As Bill Connerly over at Forbes has written, “China has many years of growth ahead of it, until it hits a limit based on the quality of economic policy.” The recent shocks to its markets (see below) should be read as a much-needed correction, rather than a harbinger of doom.
Source: FinancialTimes
It’s easy to be nervous as the world’s economy coughs and sputters, but remember that it’s better for things to self-correct now rather than continuing to grow unsustainably and crashing in the future. If you’re still not reassured, remember this: regardless of what happens, there isn’t much that you can do to prevent a recession or market crash. Just like in the best of times, the only thing that you can do is hold on, live within your means, save for a rainy day and work hard.
