In our Market Monday Insights, Prosperity Investment Management examines the latest developments across the globe's biggest financial markets - providing you with all the latest information you need to know.
Economists predict Chinese economic output to decline
In a revolutionary turn, China’s rise as an economic superpower is predicted to be reversing. The biggest global story of the past half century may be coming to a close.
Its rise to the peak of the global economy in recent years saw its share of the global economy rise nearly tenfold from below 2% in 1990 to 18.4% in 2021. No nation had ever embarked on a rise so far, so fast in economic history.
Now many are seeing a reversal in this data. In 2022, China’s share of the world economy shrank by a noticeable amount. This year it will shrink more significantly, to 17%. That two-year drop of 1.4% is the largest since the 1960s.
China’s apparent economic decline could have a dramatic effect on world economic order. Since the 1990s, the country’s share of global GDP grew mainly at the expense of Europe and Japan, which have seen their shares hold more or less steady over the past two years.
Now, the gap left by China in the past two years has been filled mainly by the US and by other emerging nations.
Many are predicting the world economy will grow by $8tn in 2022 and 2023 to $105tn. China will account for none of that gain, the US will account for 45%, and other emerging nations for 50%.
China’s GDP is on track to decline in 2023, for the first time since a large devaluation of the renminbi in 1994.
China is one of the few economies suffering from deflation, and it also faces a debt-fuelled property crisis, which typically leads to a devaluation of the local currency as a result.
Investors are now pulling assets out of China at a record pace, adding further to pressure on the renminbi. Foreigners cut investment in Chinese factories and other projects by $12bn in the third quarter — the first such drop since records began.
More expensive services and food prices drive euro zone inflation in October
More expensive services and food prices were the main drivers of consumer price growth in the euro zone in October, data showed on Friday, as the EU's statistics office confirmed year-on-year inflation slowed sharply.
Eurostat said consumer inflation in the 20 countries using the euro decelerated to 2.9% year-on-year in October from 4.3% in September after prices rose 0.1% month-on-month.
Price rises in the services sectors, the biggest part of the euro zone economy, added 1.97 percentage points to the final year-on-year number and more expensive food, alcohol and tobacco added another 1.48 percentage points.
A sharp fall in energy prices subtracted 1.45 points from the final number while non-energy industrial goods added another 0.9 percentage points.
The European Central Bank wants to keep inflation at 2.0% over the medium term and has raised interest rates to record highs to slow down price growth, at the same time slowing euro zone economic growth.
The French government also reported a higher than expected rise in unemployment to its highest level in two years, with younger workers and women disproportionately affected.
However, in Germany there were signs of optimism, from investors at least, who are predicting an economic turnaround is imminent as inflation falls and interest rates stabilise. A collapse in housebuilding however could yet result in wider damage to the EU’s biggest economy and, as in France, danger signs are flashing in its unemployment statistics which continue to raise alarm.
The European Central Bank meanwhile is unlikely to offer relief in the form of interest rate cuts any time soon.
Worries on potential downturn in Canada's economy deepen if US growth fades
Canada's economy is flirting with recession and the downturn could worsen now that a period of rapid growth in the United States is expected to end, generating speculation that the Bank of Canada is shifting to interest rate cuts sooner than previously thought.
The Canadian central bank expects that the economy will avoid a recession, and forecast a growth of 0.8% for both the third and fourth quarters last month.
Since then, preliminary data has indicated a shallow economic contraction for a second straight quarter in the third quarter. Analysts say that if US economic activity slows, then the Canadian economy could shrink in the current quarter as a result.
The Bank of Canada has said it wants to cool the economy just enough to bring down inflation, but it does not want the resulting policy to be so restrictive that it triggers a deep recession as a result.
The Federal Reserve Bank of Atlanta's running estimate of fourth-quarter growth in the United States is at 2%, down from a rapid pace of 4.9% in the third. The BMO also now projects that U.S. growth will slow to 0.9% in the fourth quarter and that Canada's economy will shrink 1%.
The potential for further weakening in the Canadian economy is already evident in money markets. They have moved to price in a rate cut as soon as April after betting just last month that the benchmark rate would not be lowered from its current level of 5%, a 22-year high, before the end of 2024 and that the Bank of Canada may need to tighten further.