the US and China ..., the Trump administration’s methods aren’t helping. They seem not to grasp that intentionally weakening an economy so tied to our own risks weakening the US as well.
...China is still subject to the law of large numbers. They can’t maintain 6% or higher GDP growth indefinitely.
The gap between US and China GDP growth has been shrinking over the last decade.
It now appears the eventual Chinese landing could be harder than expected.
...The uncomfortable fact is that a great deal of world growth is directly tied to Chinese growth. And not just absolute current growth, but expected future growth. Business has built 6% Chinese growth, compounded forever, into its models.
...Here’s a chart of China’s importance to top US semiconductor companies.
Note this is the percentage of sales, not earnings.
...A significant part of US growth last year came from a rise in US inventories. ... Those inventories are going to be sold in 2019 and often not replaced. A large part of the slowing economy in 2019 will simply be a reduction of inventories. The apparent robust growth of the last half of 2018 was essentially pulling production forward from 2019.
...Last month in European Threats, I quoted Victor Hill saying “a disorderly Brexit will be that spark that sets the Eurozone tinderbox aflame.” The fire is still ready to light and, if no deal emerges before the March deadline, could certainly erupt in flames, metaphorically speaking.
...The euro currency effectively gave Germany a stranglehold over the zone’s smaller players who bought German exports with German loans. We saw how that worked with Greece. Now a similar dynamic is unfolding in much-larger Italy—which, for its part, has some unique problems, too.
Yet with all this going on, the European Central Bank is still intent on ending its asset purchases in the coming year, even as it keeps interest rates negative. That is a formula for a wildly distorted economy, at the very least, and possibly much worse.
...Imagine what will happen if (when) the EU economy turns seriously south, unemployment shoots even higher than it already is, governments can’t afford their safety nets, and the population can’t afford higher taxes. It could get ugly and not just in France. Remember, many EU countries are parliamentary systems whose governments can fall anytime.
...what could change Europe’s trajectory
...1. A favorable Brexit deal. Since the UK’s 2016 referendum, eurozone shipments to the single currency bloc’s second-biggest export market have stagnated. If the clouds clear in the coming months, with a no-deal Brexit avoided, then risk premiums will diminish, sterling will rally and eurozone exports to the UK are likely to pick up.
...2. Improved US-China trade relations. A deal to avert tariff increases would remove one major uncertainty hanging over the global economy. Again, risk premiums would fall.
3. A stabilization or acceleration in Chinese growth, ... However, there is little probability of a stimulus effort on the scale of 2009’s, so the effect on Europe’s economy and markets of Chinese policy easing is likely to be muted.
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