A recession in China remains unlikely because i) Chinese growth is driven by consumption and investment (NOT net exports) and there is no good evidence of a domestic slowdown, and ii) the government will embark upon a new monetary-fiscal stimulus if growth slows (monetary stimulus shades into fiscal stimulus when it is used by local governments to lend to projects that will not pay the capital back). Some have argued that the government has less scope for stimulus this time around, because inflation is high (and perhaps much higher than the official figures); but a) public debt to GDP is still relatively low, b) the current real growth numbers are consistent with electricity production, using a simple regression, which suggests inflation is not hugely understated in the national accounts, and c) if it has to, I think the Chinese government will choose inflation over unemployment, because there is more risk of social unrest from the latter.
The important question, then, is not whether China will enter a recession — it probably will not — but whether growth will deteriorate as a result of a global slowdown (causing net exports to become a drag on GDP). Thus the Chinese question reduces to the big question of the moment — what is happening to global growth/will there be a US recession — and that will remain true unless and until there is some decent evidence of a domestic slowdown in China.
On Europe: Berlusconi to resign, LCH Clearnet raised margin requirements for Italian debt, Greek parties get close to agreeing unity government but are not quite there, mess continues.
As I wrote yesterday, the oil price is up because of fears that Israel might bomb Iran. There have been reports that Netanyahu tried to get his cabinet to approve such action, but Barak has suggested that Israel is not actually close to action. The IAEA report said that Iran’s nuclear work was ongoing but had slowed since 2003, and that its nuclear facilities were spread across a large number of well-protected locations. My scepticism about the likelihood of military action has been reinforced by new stories this morning. Charles Wald, a retired US air-force general, is reported by Bloomberg as having said that it would take over 1000 sorties to disable Iran’s nuclear programme, and analysts have said that Israel lacks the capacity to mount such an operation alone. The US does not want to get drawn into conflict with Iran, so is likely attempting to discourage the Israelis from acting and would certainly not join in with military action. In other words, effective military action against Iran is impractical for Israel and undesirable for the US. I wonder whether I should add to my oil short.
US equities are again out of line with commodities (see copper) and bond yields. Equity investors seem to live in their own bipolar world and at present they are feeling manic; in July, equities caught up with the rest of the markets; there is a good chance that they will do so again in the coming months and I am wondering whether to short the S&P 500.
NIESR UK GDP Est. 0.5%
Japan bank lending still negative YOY but improving. Sep.
Australia home loans 2.2% b.e. Sep.
China CPI 5.5% vs. 5.4%e. Third month of decline. PPI 5% vs. 5.7%e. on falling commodity prices. Retail sales 17.2% vs. 17.5%e. Fixed investment 24.9% a.e. IP 13.2% a.e. All data are, implausibly, for October.
UK goods trade balance widened dramatically in September. However, the balance of trade in goods and services was -£3.9bn, which is on the wide side but a level that the series has touched repeatedly since 2005.
Next 24 hours:
China trade balance
ECB monthly bulletin