26 January 2016

A deflationary dragon?

Asian markets have been having an uneasy time of it recently, though the FTSE 100 Share Index is developing a steadier tone after a relatively poor start to the year.


In the first two and a half weeks of 2016 it had lost nearly 7.5%, despite a comparatively quiet period for company news. Indeed, about the only news available has been from retailers, many of which reported a better Christmas season than had been fea red. Not that this positive outcome prevented shares from slipping back.

The backdrop to this investor uncertainty is the state of the Chinese economy and the fall in the price of oil, which saw Brent crude down to $28 a barrel recently. The news that sanctions against Iran were to end has hardly helped, given that they have been prevented from selling their oil on the open market for many years. This will add to the chronic oversupply situation, though there are signs that some producers are making plans to cut back.

China has continued to see shares slipping back, with the fall in the main index now approaching 20% since the start of the year. Economic growth there has been reported at less than 7% for 2015, down on the previous year and the lowest in a quarter of a century, though there are likely to be further revisions to this figure in the weeks ahead. While this slowdown was expected, it probably encouraged the International Monetary Fund to further reduce its global growth forecasts for the coming year.

The IMF’s main concern, however, is the state of many emerging countries’ economies. Those that prospered at the time when China was consuming vast quantities of raw materials are finding the going particularly tough. And the Chinese economy is now of sufficient size that the slowdown there will impinge upon the overall numbers generated. Add to that a more subdued US economy, if the latest figures for spending and output are to be believed, and you could be forgiven for expecting further downward revisions on global growth.

The start to this year has hardly been propitious for investors. The worry is that the global economy is heading for a deflationary slump. In part China could be blamed for this, given the amount of excess capacity it built up through the years of over investment when double digit economic expansion was the norm. Little wonder we are seeing steel production and jobs cut in thi s country. It is to be hoped that policy makers will do all in their power to head off such a scenario, but in the meantime it is unsurprising investors are cautious.


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