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Normally I don’t pay much attention to warnings of potential financial woes on the horizon, largely because there is always someone prophesying global gloom and doom. But when Citigroup’s chief economist warns, it is not only something I regard as newsworthy, it is something I regard as significant. Willem Buiter doesn’t do this sort of thing often. In fact, I am not certain that he has ever issued a warning like the one he did today, when he candidly stated that, “The world appears to be at material and rising risk of entering a recession, led by EMs and in particular by China.”
Whether he is an outlier or not is completely irrelevant to his observations and conclusions.
And he is taking a beating by numerous sources that keep harping that, “Buiter is a frequent outlier.” Whether he is an outlier or not is completely irrelevant to his observations and conclusions. Six of the articles that I have written over the past month have, at least in some way, dealt with the effect of the Chinese economy on the world at large, and how some major companies are preparing now for a potentially rough time ahead. That would be the same rough time that Mr. Buiter calculates “appears to be at a material and rising risk.”
The concerns of Buiter and Citibank center on China, the country with the largest population and the second largest economy on the planet. It does not take an expert to understand that the larger the economy, the greater potential impact it has on all other economies and the aggregate global economy. I wouldn’t call Greece a large economy, but it is certainly making a significant impact on the EU and others.
It does not take an expert to understand that the larger the economy, the greater potential impact it has on all other economies and the aggregate global economy.
Equity markets have enjoyed unparalleled, record-setting performances over the past several years. Much of that success has come either directly or indirectly from China’s growth and demand as a global consumer and supplier. Most of the consumption of products from outside the country has been for infrastructure development. It is as if China has been on steroids since the turn of the century.
Infrastructure is expensive to maintain. Even the might United States does not have adequate funding to properly maintain its highways, bridges, water delivery and sanitation systems. Apparently my father was right about money not growing on trees.
The Chinese economy is not growing by the seven percent that had been forecast. In fact, at its current four percent, its growth rate is closing in on half of economic expectations. Leading companies, like Glencore (LSE:GLEN) are doing some preparatory belt-tightening for what seems to be inevitable as Chinese growth grinds to a snails pace.
Wisdom (and the Boy Scout motto) say, “Be prepared.”
The result of less infrastructure demand is not simply a disproportionate supply of raw materials. The supply remains abundant (a fact that flies in the face of the politically correct view of scarcity of global raw material). The problem is that, if those materials are in less demand, then there is less reason to recover them. Mining and energy companies have less reason explore and produce. Plants close. People lose their jobs. Companies fail to meet expectations. Shareholders look for some other place to put their money – or they leave it where it is and end up with less of it.
I am always averse to panic. Planning and preparation are better options. I am equally averse to the kind of ignorance that leads people to believe that good times last forever. Buiter said, “Economists seldom call recessions, downturn, recoveries or periods of boom, unless they are staring them in the face. We (Citi) believe this may be one of those times.” Right or wrong, wisdom (and the Boy Scout motto) say, “Be prepared.”
