Growth remains below SuperCycle trend, whilst debt is building

Economic growth

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EU GDP Oct13

Whisper it quietly, so as not to disturb policymakers’ dreams.  But the charts above from the Financial Times confirm, as if proof were needed, that their policies of the past 5 years haven’t worked.

The charts compare trends in economic growth in the world’s two largest economies, the Eurozone and the USA.   As the arrows indicate, both are well below the SuperCycle trend (blue line):

  • Eurozone GDP (red line) is actually 3% below its previous peak and 13% below the pre-crisis trend
  • US GDP is marginally higher than its previous peak, but still 15% below the pre-crisis trend

Together, these two economies are 40% of global GDP.  And if we add Japan, which has been in a similar situation since its bubble burst in 1989, the total becomes half of the global economy .

This creates a major problem, of course, in terms of repaying the debt that has been built up by the central banks.  For example, US Federal Reserve debt is now $3.91tn – or $12,500 for every US citizen.  How will this money ever be repaid?

  • Ageing populations mean we now face a surplus of supply, not demand, as in the SuperCycle
  • In turn, as the blog has long argued, this means there is no threat of inflation
  • Instead, the debt will actually increase in real terms as we head into deflation 

This matters enormously, as policymakers had assumed we were following the 1970s playbook, where inflation would reduce the real value of the debt.  Instead, we therefore face a rising risk of default as the lack of growth means the debt simply cannot be repaid:

  • Either investors who have lent to central banks will not be repaid – the most likely outcome
  • Or social spending and pensions will suffer major cuts – less likely to be acceptable in democracies

It also means that today’s volatility may prove only a foretaste of what lies ahead of us.  It is simply the early tremor trying to warn us that current policies risk creating a political, social and economic earthquake.

Latest benchmark price movements since January 2013 are below with ICIS pricing comments:

PTA China, down 16%. “Weak buying sentiment because of a generally downbeat market outlook”
Benzene Europe, down 10%. ”Market moved up following gains in the US and the explosion at Total’s Antwerp site. Nevertheless, seasonally weak derivative offtake kept buyers resistant to the upward movement”
Brent crude oil, down 4%
Naphtha Europe, up 3%. “BASF bought two cargoes from BP, confirming that domestic petrochemical demand has indeed gone up because of a rise in propane values.” 
HDPE USA export, up 13%. “Prices remained fairly stable and expected to remain fairly steady in the next few weeks”
US$: yen, up 15%
S&P 500 stock market index, up 23%

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