Did the world dodge another bullet?

A couple months ago there was concern about the possibility of a global recession. This was based on falling commodity prices, a slowing economy in China, and a weak economy in Europe and Japan.  There were also fears of a September Fed rate increase. Equity markets fell, as did bond yields.

My own view was that the risk of recession (both US and global) was rising modestly, but still far less than 50-50.  I think I mentioned a 20% risk for the US next year.  Now I suspect even that risk has declined a bit.  Here is some data out today:

South Korean GDP rose 1.2 per cent quarter-on-quarter, ahead of economists’ average forecast of 1 per cent and of the 0.3 per cent expansion in the second quarter, when consumer spending was affected by fears around an outbreak of Middle East Respiratory Syndrome. This is the fastest rate of quarterly growth since the second quarter of 2010.

.  .  .

Government figures* show that South Korea’s exports declined 6.6 per cent in dollar terms in the first nine months of this year, with exports to the EU declining 11.2 per cent while those to China – by far South Korea’s biggest trading partner – fell 3.8 per cent.

And from Japan:

Manufacturing activity in Japan rose more than expected in October, with a closely watched PMI survey showing the highest reading in over eighteen months.

The Nikkei/Markit manufacturing PMI reading for October came in at 52.5, compared to expectations of 50.5. This was the highest reading since March 2014, when it was 53.9.

BTW, in a few weeks the media will probably report another Japanese “recession” which will be just as phony as the one last year.  Again, trend Japanese RGDP growth is zero.

Both the Japanese and Korean economies are closely linked with China.  These are not the sorts of numbers you’d expect if China were sliding into recession (even with the weak Korean exports).  Nonetheless the Chinese government is concerned enough about the slowdown to ease policy today:

China’s economy beat expectations in the third quarter but still expanded at its slowest pace since 2009 at 6.9 per cent in inflation-adjusted terms. Growth was even slower in nominal terms at 6.2 per cent, with much of the manufacturing sector suffering from deflation.

“The PBoC’s two-pronged monetary policy action signals an intensification of policy measures intended to combat the economic slowdown in China,” said Eswar Prasad, Cornell University professor and former China head of the International Monetary Fund.

“It heightens concerns that the economy may be losing growth momentum somewhat faster than suggested by the headline official GDP growth rate.”

Analysts say the latest rate cut is aimed at industrial borrowers, who are struggling to service debt that is fixed in nominal terms, even as falling prices decrease their revenue. The cut brings the one-year benchmark deposit rate to 1.5 per cent “” its lowest level on record “” from 1.75 per cent. The required reserve ratio was lowered by 0.5 percentage points to 17.5 per cent.

Weak NGDP growth hurts borrowers with nominal debts—where have we seen that point emphasized?

Just a couple days ago a commenter dared me to produce a recent example of Chinese economic liberalization.  There are lots of such examples, if you bother to pay attention. Here’s one that occurred today:

China scrapped a ceiling on deposit rates, tackling what the central bank has called the “riskiest” part of freeing up the nation’s interest rates.

The move came as the central bank cut benchmark rates and banks’ reserve requirements to support a faltering economy. The changes take effect on Saturday, the People’s Bank of China said in a statement on Friday.

Scrapping interest-rate controls boosts the role of markets in the economy, part of efforts by Premier Li Keqiang to find new engines of growth. While officials must be on guard for any excessive competition for deposits that could increase borrowing costs for companies or lead to lenders going bust, weakness in the economy may be mitigating the risks.

Some people just can’t accept the fact that the “Communist” Chinese are gradually converting to capitalism, and desperately point to the gradually diminishing number of areas that are still statist (such as heavy industry/banking and utility SOEs.)

In the US, long-term interest rates are somewhat higher today, because monetary policy is getting more expansionary, pushing up NGDP growth forecasts.  The ECB is also doing its part, as we saw yesterday.  But eurozone interest rates were lower, as the direct impact of the expected bond purchases overwhelmed the indirect effect of faster growth.  Never reason from an interest rate change.

Over the past 5 years we’ve seen a few global “growth scares”, notably in 2011. Equity markets fell significantly, but then in each case later recovered. That might mean the growth scare was not real, or it might mean that it was real, but policymakers did enough to address growth concerns. Later this month the Fed and BOJ will meet—it will be interesting to see if they help to end the recent global recession scare, or end up reviving the worries.



28 Responses to “Did the world dodge another bullet?”

  1. Gravatar of marcus nunes marcus nunes
    23. October 2015 at 09:47

    Recession worries still present:

  2. Gravatar of Anonymoose Anonymoose
    23. October 2015 at 11:16

    “Some people just can’t accept the fact that the “Communist” Chinese are gradually converting to capitalism, and desperately point to the gradually diminishing number of areas that are still statist (such as heavy industry/banking and utility SOEs.)”

    Absolutely. Just a few hours ago, I heard a talk in which the speaker attributed the fall in poverty in China in the 1990s to the state distribution of land to peasants, and attributed East Asian prosperity in the period to protectionism, nationalization, and the redistribution of income/wealth. For some on the left, China’s liberalization has been reinterpreted as a shining example of socialist/welfarist policies.

  3. Gravatar of Ben G Ben G
    23. October 2015 at 11:34

    I agree, people are too quick to sound the alarm bells, there’s a recession scare almost annually. I think this business cycle will last a lot longer than people think.

  4. Gravatar of John Hall John Hall
    23. October 2015 at 11:42

    I didn’t think trend Japanese real GDP growth was zero, but was closer than I thought. Since 2000, I get 0.2% for real GDP and 0.8% for per capita GDP (PPP basis).

  5. Gravatar of ssumner ssumner
    23. October 2015 at 12:14

    Marcus, Yes, there is certainly still some risk.

    Anonymoose, I’ve seen stuff like that too.

    Ben, Could be.

    John, But the trend has recently slowed quite a bit—it’s now zero, or even slightly negative. That’s because working age population growth has slowed dramatically in the past few years, even compared to the early 2000s.

  6. Gravatar of Postkey Postkey
    23. October 2015 at 12:55

    “Some people just can’t accept the fact that the “Communist” Chinese are gradually converting to capitalism, . . . ”

    So their ‘success came when they were not ‘capitalist’?

  7. Gravatar of Postkey Postkey
    23. October 2015 at 13:07

    “In sum
    The net is that it’s a mixed bag. An earnings recession is very likely; while an economic recession less so.
    Cornerstone Macro looks at 12 Recession Risk Indicators, and as you can see below, only one points to a recession.
    1. PCE deflator: No
    2. CPI energy: No
    3. Unit labor costs: No
    4. Average hourly earnings: No
    5. Consumer delinquency rate: No
    6. Residential construction% of GDP: No
    7. Total investment % GDP: No
    8. Output gap % potential GDP: No
    9. Domestic corporate profits % GDP: No
    10. Yield curve: No
    11. Global short rates: No
    12. BAA spreads: Yes
    ‘We believe an economic recession remains unlikely near-term, but we are on watch. We are maintaining our more cautious “neutral” rating on US equities, which means investors should not take any additional risk above and beyond their long-term allocation to equities.’ ”

  8. Gravatar of Major.Freedom Major.Freedom
    23. October 2015 at 16:31

    Always enjoy reading claims of market predictions being right, in obviously faux modesty ways, from people whose own pronouncement is that the market cannot be predicted.

  9. Gravatar of benjamin cole benjamin cole
    23. October 2015 at 16:45

    Excellent blogging.
    The Fed will meet. If past is prologue, they will discuss inflation, various aspects of inflation, threats of inflation that can be see mounting, and whether prophylactic measures against even unseen inflation are worthy.

    They might discuss asset bubbles and financial instability caused by low interest rates. There will be also some discussions about institutional credibility and promises made to raise interest rates this year.

  10. Gravatar of Ray Lopez Ray Lopez
    23. October 2015 at 18:16

    Sumner’s headline, with a question mark, reminds one of this classic work of propaganda: “Soviet Communism: A New Civilisation?(1935)”

    Sumner: “That might mean the growth scare was not real, or it might mean that it was real, but policymakers did enough to address growth concerns.” – no, another possibility is that the economy recovered on its own, as money is largely neutral. But that would require Sumner to go out of business. We can’t have that, can we?

  11. Gravatar of sdfc sdfc
    24. October 2015 at 04:14

    Money is neutral in the long run Ray.

    But in the long run we are all dead.

  12. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    24. October 2015 at 05:45

    ‘So their ‘success came when they were not ‘capitalist’?’

    Postkey, you might want to read Ning Wang and Ronald Coase’s ‘How China Became Capitalist.’ Or, at least, watch a video;


  13. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    24. October 2015 at 06:23

    Weren’t we just talking about Venezuela?

    A Venezuelan state prosecutor who helped lead charges against opposition leader Leopoldo Lopez has fled the country and accused the socialist government of pressing him to use false evidence to unfairly condemn Lopez, local media reported.

    News website La Patilla posted a video in which a man who identifies himself as Franklin Nieves says the trial violated the rights of Lopez, who was sentenced to nearly 14 years in September on charges stemming from his role in a wave of protests in 2014.

  14. Gravatar of Ray Lopez Ray Lopez
    24. October 2015 at 06:30

    @sdfc – “Money is neutral in the long run Ray. But in the long run we are all dead.”

    This is the long run, and both Keynes and Friedman are dead.

    The trend now is towards evidence based economics (econometrics). Sumner is “old school”, where he paints word picture models. Friedman was the most famous example of this dying breed. Sumner has as his sidekick the econometrics PhD Mark Sadowski, who tries to prop up Sumner’s creaky edifice of NGDPLT (which btw has NO empirical evidence to support it, as it’s never really been tried). But Sumner is pushing a rock uphill with a string: Google Ben S. Bernanke 2003 FAVAR paper, which shows the Fed’s policy shocks have between 3.2% to 13.2% effect on a variety of variables. That’s close enough to zero for me, though ‘statistically significant’. In short, money is largely neutral in the short run, not just the long run.

  15. Gravatar of TravisV TravisV
    24. October 2015 at 07:24

    Brad DeLong seems to be addressing this new post to Prof. Sumner and Prof. Beckworth…..


  16. Gravatar of TravisV TravisV
    24. October 2015 at 07:24

    Brad DeLong: “Central Banks Are Not Agricultural Marketing Boards: Depression Economics, Inflation Economics and the Unsustainability of Friedmanism”

  17. Gravatar of Ray Lopez Ray Lopez
    24. October 2015 at 07:37

    @TravisV – thanks, but going through the DeLong post, as is common with DeLong, you see an intellectual chess matching going on with DeLong arguing against his supposed adversaries. But what is interesting is DeLong’s priors: he’s drunk the monetarist Kool-Aid, and believes in money non-neutrality being significant, when in fact it’s not that important.

  18. Gravatar of Postkey Postkey
    24. October 2015 at 07:41

    Are they ‘capitalist, or are they ‘gradually converting’ to capitalism?

  19. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    24. October 2015 at 08:19

    Thanks Travis, when Brad is good, he is very, very good (too bad about all the times he is horrid–another story, for another time). I found this most interesting;

    ‘And let me offer all kudos to those like David Beckworth, Scott Sumner, and Jim Pethokoukis who are trying to convince their political allies of these points that I regard as basic and Wicksellian-cutting-edge macro from 125 years ago.’

    Including Pethokoukis in that must have ‘tasted like vinegar’.

  20. Gravatar of Brian Donohue Brian Donohue
    24. October 2015 at 10:41

    Great post. Two thoughts:

    1. Short-term. ‘Dodging a bullet’ seems like the wrong metaphor. It’s more like ‘avoiding stepping in dogshit’, which requires less athleticism. We are seeing a kind of competitive easing around the globe, which is good for the global economy.

    2. Long-term. For almost all of human history, what we would consider grinding poverty has been the overwhelming rule. This was the case when this country was founded. It was the case when Marx offered his critique.

    The developed world has now seen a couple generations where this is not the case. It’s easy for us to not know that poverty is still the human rule, and that the past 40 years (bemoaned as The Great Stagnation in rich countries) has seen maybe 500 million people claw their way out of poverty.

    The rise of Asia is generally framed as a threat, but Look! As people prosper, they become consumers.

  21. Gravatar of Ray Lopez Ray Lopez
    24. October 2015 at 18:00

    Arnold Kling in his latest blog: “Scott Sumner, who claims to be the intellectual heir of Milton Friedman, says that the Fed’s big mistake was too tight monetary policy during the financial crisis and that the Fed is too tight now…John Cochrane, who claims to be the intellectual heir of Milton Friedman, seems to be saying that these days the Fed is impotent. I do not claim to be the intellectual heir of Milton Friedman. My views happen to be closest to Cochrane’s.”

    Great minds think alike: Cochrane, Kling, Lopez. Yet if you read Sumner’s replies towards me, you’d think I was the village idiot.

  22. Gravatar of Postkey Postkey
    25. October 2015 at 01:47

    “The World Bank said Sunday that, for the first time, fewer than 10 percent of the world’s population will be living in extreme poverty by the year’s end. Using a new income figure of $1.90 per day to define “extreme poverty,” which is up from $1.25, the bank said the proportion of the world’s population in this category falls from 12.8 percent in 2012 to 9.6 percent. However, half of the world’s poor remain in sub-Saharan Africa, which remains “of great concern.” The organization said the drop was due to strong growth rates in developing countries and investments in education, health, and social safety nets. ”

  23. Gravatar of TravisV TravisV
    25. October 2015 at 08:00

    I feel like Steve Sailer misses a lot of contributing factors here……


    “The Great Northern California v. Southern California Debate”

  24. Gravatar of TravisV TravisV
    25. October 2015 at 08:57

    I hope Alex Tabarrok says something about Matt Ridley’s new discussion of patents here…….


  25. Gravatar of ssumner ssumner
    25. October 2015 at 17:02

    Brian, Good points.

    Ray, You said:

    “Yet if you read Sumner’s replies towards me, you’d think I was the village idiot.”

    No, you’d think that by reading YOUR comments.

    Postkey, The big story is the reduction of poverty in China, and to a lesser extent other developing countries.

    Travis, That’s a very interesting piece on California, but I have a more optimistic take on the changes he describes.

  26. Gravatar of collin collin
    26. October 2015 at 05:46

    There really is an expectation that the two largest economies China and the US are going to collapse any minute. In reality the real collapse is happening with the oil producing nations (Russia, Saudia Arabia) that accelerating their economic pain by starting wars with really poor nations in the Middle East. As long as commodities stay low neither China nor the US will fall.

    In terms of the Northern-Southern Californian discussion (as well the Democrat conversion of 1992), the SoCal economy grew tremendously with the increase Defense spending of 1950-1990. (Which got cut and spread across the nation.) So California was ‘Richard Nixon’ conservative that was focused on Bigger Government Defense Spending.

  27. Gravatar of Postkey Postkey
    26. October 2015 at 07:59

    Thanks for that.

  28. Gravatar of TravisV TravisV
    26. October 2015 at 14:52

    Prof. Sumner,

    Thanks, glad you thought it was interesting.

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