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Deflation and recession spawned in China

Published Monday, August 24th, 2015

The storm clouds have been gathering for a long time and now they are shedding their load. Deflation and recession are back on the agenda. The last recession was spawned in the US via a sub-prime induced financial crisis. The next is being spawned in China via a growth crisis. Friday morning’s disappointing Chinese flash PMI numbers were followed by poor numbers from the US and that was the last straw for the data junkies that drive the world’s stock markets. The result was a widespread price meltdown.

No matter that the numbers may delay a US interest rate rise into next year. Poor to non-existent growth is more negative than a paltry 0.25% increase in interest rates, even though markets have been getting themselves into a paddy about the latter. The prospect of both together is horrifying. What dawned last week is that China’s landing is looking rather hard, the green shoots of growth in Europe are no more than that and could wither away at any moment, emerging market growth has been badly damaged by the commodity price collapse and US growth is anaemic and could easily be knocked off course by what happens elsewhere.

No part of the global economic engine is working satisfactorily. At least last time around there was a fully functioning Chinese motor to limit the damage. After last week’s 11% fall the Shanghai Composite is down another 8% today. Now this motor is not only failing but there is the possibility that the repairs the Chinese government have and will embark on are short terrmist and at the expense of others.

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Posted by David Hufton