We do not dispute that China will have a hard landing. It is something we have been warning about since 2009 and certain about since 2012. It is heading for 2% GDP growth and possibly lower, not the published 7%. But most people, including RBS, are overestimating the impact of China on the rest of the world. It will have a negligible effect in terms of growth in the developed world. In terms of inflation, it will have profound consequences through lower commodity and oil prices. It will also harm UK and western manufactured exports as China’s goods become cheaper and ultimately force workers in industries that compete with China to accept lower wages. So the government’s march of the makers isn’t going to happen, not that it ever was, but that doesn’t mean growth will do more than slow down.
The start of the year has been characterised by growing fears about the global economy and an associated rise in risk aversion, despite very little in fact changing in terms of the hard economic data. All of the current concerns, from worries about China’s debt to higher US interest rates, the winding down of central bank largesse and collapsing commodity prices, have been nagging away over much of the past year. However, it seems that optimism that the global economy can weather these headwinds is finally giving way. The worry is that this will become a self-fulfilling prophecy as investors rush to the exit doors and businesses and households stop spending and, if a financial market rout feeds through to a new recession, policymakers are seriously lacking in tools to fight the new downturn.
If you look hard enough you can always find somebody telling you markets are about to crash, but they are normally wrong. Historically equities have been the best asset class over the long term – listening to the doom-mongers has been a mistake. Today’s disappointing industrial production figures suggest the [UK] economy slowed toward the end of 2015, and is still heavily reliant on consumer spending. However, growth is steady (if unspectacular), the labour market continues to show encouraging signs and interest rates look unlikely to rise any time soon. Add in the fact that the UK stock market looks fairly valued relative to its history using a price/earnings measure, and the investment climate doesn’t look too bad to me. If anything I find bearish comment from the likes of RBS somewhat reassuring – the time to get really worried is when there is a bullish consensus.
This is a scary warning from RBS but it doesn’t seem sensible to spook investors. As Keynes made clear consumer and business confidence matters – he called them animal spirits. Volatility is high but a great collapse doesn’t seem to be in the air. It doesn’t make sense to talk down markets as that can become self- fulfilling. The year started badly in stock markets around the world as China looked to be in free fall. Things look a little better now. The worry for the UK is that the government failed to fix the roof when the sun was shining over the last five years or so. Even the chancellor has pointed to a cocktail of risks in direct contrast to his position at the autumn statement in November. The concern is that the economy is at a turning point. We shall see. There are tough days ahead but there is no reason to panic. Not yet anyway.
The message from RBS is one of panic, which I don’t think is justified by current events. I’m worried about the outlook for the global economy, but not yet panicked. Sure, the economic indicators point to things being not so good. For instance, a sharp slowdown in China is not good for the UK, the US or Europe, because it puts a drag on growth. In that sense the impact is significant. However, it is not a disaster. But if the current concerns turn into systemic meltdown on financial markets, then all bets are off.