China exports deflation to the West

Economic growth

SHARE THIS STORY

China PPI Mar15

Unfortunately, the European Central Bank (ECB) does not read the blog, or yet subscribe to ‘The pH Report’.  If it did, it would have been forewarned back in August that a collapse in oil prices was potentially about to provide the catalyst for the arrival of deflation.

Instead, as the Minutes of its critical January meeting highlight, it was caught off-guard, suddenly realising that the region faced the risk:

 “Of too prolonged a period of too low inflation.  This, in turn, raised the possibility of deflationary forces setting in.”

Of course, the ECB was not alone in making this mistake.   Many companies and investors also fell victim to the illusion of “anchoring”, first identified by Nobel Prize winner Daniel Kahneman.  They believed prices would remain at $100/bbl, because they had been at that level since 2011.

Sadly, the ECB then compounded its error by increasing the size of its quantitative easing (QE) programme, arguing:

 “Purchases of sovereign debt appeared to be the only remaining instrument of sufficient scope to provide the necessary monetary stimulus to deliver on the ECB’s price stability objective”

Yet common sense tells us that printing money is not the same as printing babies.  And only babies can create long-term demand, not monetary policy.

One problem for the ECB, and other Western central banks, is that China’s President Xi has realised that stimulus is the equivalent of ‘pushing on a string’ in terms of creating long-term demand.  His ‘New Normal’ policy means it is now exporting deflation to the West, as the chart highlights:

  • China’s producer price index has been falling for nearly 3 years, and is now at -4.3% (red line)
  • China’s role as ‘manufacturing capital of the world’ means its lower prices add to deflationary pressure in the West
  • Eurozone (blue) and US Consumer Price Indexes (green) are now negative as both regions enter deflation.

A second problem is closer to home.  Today’s ageing Western BabyBoomer populations already own most of what they need, and their incomes are declining as they enter retirement.  So growth is inevitably slowing.

Slow growth and deflation create a toxic combination for debt

We analyse these issues in more detail in the latest edition of ‘The pH Report’:

  • It highlights key elements of the Great Unwinding of policymaker stimulus now underway – China and oil prices
  • And it suggests 5 Critical Success Factors for companies and investors who wish to survive and prosper in today’s New Normal world

Please do contact me at phodges@iec.eu.com if you would like details on how to subscribe.

PREVIOUS POST

Japan's government debt now $100k per person

03/03/2015

Debt, debt, glorious debt,      Nothing quite like it for cooling the blood...

Learn more
NEXT POST

Oil prices have further to fall as US inventory hits new records

05/03/2015

Another week, and another record high for US oil inventories.  Oil prices cle...

Learn more
More posts
The New Normal for global industry
31/05/2020

The global chemical industry is the third largest sector in the world behind agriculture and energy,...

Read
Debt, deflation, demographics and Brexit set to challenge London house prices
17/05/2020

London property websites haven’t used the word “reduced” for many years. But it...

Read
The bill for two decades of doomed stimulus measures is due
03/05/2020

The Financial Times kindly made my letter on the risks now associated with central bank stimulus the...

Read
Local supply chains replace global trade as world starts to “do more with less”
26/04/2020

Something quite dramatic is happening in the global economy.  Of course, Wall Street analysts still...

Read
Financial markets enter their Convulsion phase
19/04/2020

Many companies and investors are still comparing today’s downturn to the 9-month hiccups seen afte...

Read
World risks moving from Denial into Anger as the Paradigm of Loss moves forward
12/04/2020

The head of the IMF has warned again on the likely scale of the economic depression ahead: “Gl...

Read
The world has wasted 3 months – there is little time now left to avoid a Covid-19 catastrophe
05/04/2020

It is now 3 months since China’s state television broadcast the first news of the Wuhan virus,...

Read
A new recession era to emerge
22/03/2020

Contingency planning has become mission-critical. The longer the coronavirus pandemic continues, the...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more