That the IMF has slashed its global growth forecasts is not at all surprising, reinforcing the view we have held since last August. The problems facing the global economy – overleveraging and insufficient demand – will not be resolved by monetary policy alone, however unorthodox it may be.
Central banks’ squeeze on interest rates is now exacerbating the situation that it was supposed to ease: it encourages governments to continue borrowing, weighs even more heavily on banks’ profit margins, and increases consumers’ savings requirements instead of providing an incentive to spend. Cruelly, markets would be just as wrong to read in the prospect of Fed’s monetary tightening the signal of burgeoning consumer demand.
As it is, Fed chair Janet Yellen may soon have to admit that the cost of rents and staple products has started to rise in the US, which is all the more unfortunate as it not only fuels inflation, but also erodes purchasing power and therefore darkens the consumer spending horizon.
The debate on the US economy’s resilience clearly continues. US profit margins have dropped from 10.6% at the end of 2011 to 7.6% today, indicating a clear change in the investment cycle, with profit margins the main influencer.
Furthermore, US consumer spending is now starting to slow, and the savings rate is rising. We think the risk of US growth dropping well below the 2% mark in 2016 remains high, all the more so that the Fed – which is now in a monetary tightening phase – can’t intervene by easing its policy. The markets are not prepared for this.
In China, the government’s policy of slowly reducing investment to sustain growth could ultimately worsen the country’s bulging private debt pile, which is already at 240% of GDP compared with 140% in 2008. Credit growth of between 16% and 20% per annum is easily outstripping GDP growth, which stands at 4% to 5% at best.
Aggravating this situation, non-performing loans in the banking sector equate to nearly a third of Chinese GDP by our estimates. This path is therefore untenable – and investors should beware.
We have been warning investors to open their eyes to the unpleasant realities of 2016 for quite some time.
Didier Saint-Georges, managing director and member of the Investment Committee at Carmignac