China's importance higher than ever?

Is China's slowing growth really something to worry about? 

Financial commentators, economists and journalists have contributed to the fashionable belief that China's prospects aren't as prosperous as two years ago. 

However anyone who believed China's growth would stay at 10% for ever is some what deluded, and this drop off in growth is something that should have been completely expected. 

Structural growth and cyclical growth are two things that are constantly ignored by financial press and commentators. GDP figures are regularly interpreted as being regressed from variables that are exclusive to China's economy, however this is completely wrong. 

Structural growth is something you can only interpret over time in order to factor out business cycles when looking at growth figures. This is easily proved by looking at Chinese GDP growth from 2009-2010. GDP in 2009 was half of 2010's figures. Proving that external factors play a big part, despite the structure and potential of China's economy not changing in the slightest. Cyclical growth is growth, + or - an output gap that is determined by external factors. 

China's growth has slowed to around 7.5%, and according to Jim O'neill, ex chairman of Goldman Sachs, this will be trend growth for the country from now until 2050.
Thus emphasising the fact that China's influence has not decreased due to lower GDP growth, but more the fact it's prospects are the same, but growth has just fallen back to the trend line. 

Quality v Quantity?

In the western world, the chosen path for growth has been quantity. Grow as much as you can, as quick as you can. This can certainly be shown by the current private and public debt to GDP ratios of the worlds major economies.

The 'Spend now, worry about it later' philosophy. 

Policy makers have taken a completely different approach to this, and actually would be concerned when growth becomes too high for what they believe is their stable growth figure. 

They also want fair growth, and want to ensure that inequality does not get out of control. They have done this by sharply increasing wages to try and stay in line with growth, as opposed to leaving all growth to go to corporations which is seen in the western world. Construction growth has increased by over 3x in the last 10 years alone. 


What's next?

With trend growth over the next 36 years to be nearly 8%, more than double of world growth forecasts, you will begin to see China dwarf most other economies around the globe. In PPP terms, China is already larger than the states. 

This will drive pressure on the Chinese to become more involved with world policy making, as opposed to the US having a monopoly. This will make China the place to export to. Along with this you could potentially see world wide corporations emerging from China, along with current firms migrating their for greater talent. 

My advice: 

Don't underestimate China's growth, oh, and learn Mandarin. 

German supremacy slowing?

Germany was one of the least affected countries in the world at the height of the financial crisis. It's economy managed to hold up, and even had enough spare cash to bail out every barista in Spain. 

However is their supremacy at the beginning of the end?   

German growth has been higher than the euro-zone average every quarter apart from one, throughout the whole of the financial crisis, however now faces falling into recession, as it anticipates the 3rd quarter growth data. 

Manufacturing is down nearly 5%, the first time it has done this since the height of the financial crisis. A whole 3x bigger than what analysts anticipated. 

Germany is the pin up boy for the euro-zone project, and was the leading economy politically and economically in the project.
However could this now be coming to an end? 

The euro-zone currently faces a deflation and growth problem, and with fears of a German recession, contagion could kick in with FDI flight from the euro-zone, and could see the euro-zone back to square one. 

Germans rely heavily upon exports, with their strong export business with the likes of BMW, Audi and Mercedes at the forefront of that. With global growth being sluggish, and one of their main export partners China experiencing a stuttering of their economy, this could see exports fall dramatically for the Germans in the future.  

However despite these fears, Chancellor Merkel could look for a supply side policy to shift GDP upwards. Germans often complain about the state of their infrastructure such as their roads, railways, water ways and their airports. Thus you could see some investment coming into them soon to try and ramp up their economy, and stump a recession and contagion before it's too late. 

Where is the UK economy at the moment?

Current Status of the UK

The Economics:

The UK has been one of the top performers in the western world, in response to financial crisis. This is after a very controversial austerity package rolled out by My Osborne.  

GDP is still strongly positive, in Q2 at 0.9%, this is compared with 0.8% from Q1.

Inflation is ticking down from 1.6% in July (annually) to 1.5% in September, this is just shy of the Bank of England's 2% target. This represents the fact that the UK's growth is mainly supply side as opposed to demand side. 

Unemployment is still under the sacred 7% that was talked about by Mark Carney, the governor of the Bank of England. It is down 0.4 percentage points from February-April 2014.
The rate is currently 6.2%. 

Despite this 'strong data', investors are still wary of the rate of growth the UK can produce, as it sees a slow down in construction and exports. The trade deficit narrowed from £3.1bn in July to £1.9bn, which was on the back of poor export data.
Economists believe the underlying trend looked bad for the UK, as it looks to rebalance away from domestic demand to selling more abroad.

Markets:

Sterling continues to strengthen against the Euro, and is up 7% over the last year.
This is due to data continuing to be stronger than the Euro average, and continues to look the same over the next couple of years as Europe continues to struggle with growth and deflation worries. 

Additionally cable is up 11%, this is due to rebounding UK growth, and investors are anticipating a rate rise on the back of some more strong manufacturing date in the summer.
The Bank of England look set to be the first central bank to raise rates in the wake of the financial crisis. 

The FTSE 100 struggled to surpass it's resistance at the 7000 mark, which is the pre-crash high. This is contrary to its US counterpart the S&P 500 which smashed through it months ago. Since hovering around this mark, the FTSE has began to down trend, and has been trending down now for a month.
The current close price of the FTSE 100 is 6,294.

This gilt yield curve shows that yields for all government bonds of all maturity dates, have a lower yield that was priced in a week ago and a month ago.
This suggests that investors are becoming ever more uncertain about the likelihood of a rate hike, that they were in the summer.
This is to do with the recent economic date coming out since the summer.

Conclusion: 

The UK economy is still in a strong position, however growth is starting to slow down, and investors are reacting strongly to this with a large sell off of the stock market, and lower yields.
Investors I believe are wary due to the fact Mark Carney did not deliver on his promise to increase the rate at 7% employment, which ask questions about the real state of the economy.
However when the ever anticipated rate hike does happen, I believe business and consumer confidence will be restored, and we may enter a little boom. 

But don't get your hopes up!