China has become an integral part of the global economy, and it is a fact that but for the growth in China over the last few years, the global economy would have gone into an even worse meltdown, writes Jim Power
Timing is absolutely everything. In this column last week, I wrote about the stellar performance of equity markets since 2009 and pointed out how investors need to have a clear understanding of their time horizon and if they are long-term investors they should be prepared for periodic corrections and not be scared away by market noise.
At the end of the article I posed the question if the markets will continue to go ahead in the near term, given the magnitude of the gains made since 2009.
My non-answer was that I wish I knew the answer and I stated that I had concerns, but pointed out that back in January I also had concerns but had been proven totally wrong to that point.
On the morning the article appeared in this paper, very weak manufacturing data had been released in China, seriously compounding the nervousness and fear generated by the recent currency devaluation by the authorities.
A market bloodbath ensued over the next couple of trading days; prompting the Chinese authorities to take desperate measures, which, to date, have not proved very effective.
Markets remain in a state of extreme nervousness.
There was a time when economic and financial developments in China would barely register on the global horizon.
Times have changed, however. China has become an integral part of the global economy, and it is a fact that but for the growth in China over the last few years, the global economy would have gone into an even worse meltdown.
Now, with clear signs that the Chinese economy is in a marked slowdown, markets are taking fright.
The Chinese equity market itself has fallen heavily, despite interest rate cuts and the use of pension fund money to support it.
The dollar has weakened against the euro, as has sterling.
The logic here is that the US economy is more exposed to China than is Europe.
As a consequence, economic difficulties in China pose a significant risk to US growth.
Hence the likelihood of a US interest rate increase next month, which the markets had pretty much discounted in recent months, has lessened considerably.
Given the still fragile nature of the global economy and the threats posed by China, the US authorities would be mad to increase interest rates in September.
They should be mindful of the interest rate mistakes made in 1936, which prolonged the Great Depression.
Meanwhile, the markets remain very nervous and pretty vulnerable. How one reacts to the dangers should be guided by one’s investment time horizon.
For Ireland, it is not terribly clear how all of this will impact.
The country has limited direct trading links with China, but has significant indirect links. A lot of countries that Ireland trades heavily with have a lot of trade with China.
That does make Ireland vulnerable to a marked slowdown in the Chinese economy.
The world has become a much smaller place thanks to globalisation and the inter-dependencies have increased significantly.
In the midst of this global nervousness, the latest employment data for Ireland, this week, provide a positive insight into how the economy is doing.
In the second quarter of the year, the number of people at work in the economy stood at 1.96m, which represents an increase of 57,100 over the past year, equivalent to a growth rate of 3%.
Total employment in the economy is now 133,700 higher than the low point in 2012. Just over 99% of the increase in employment over the past year was in full-time jobs.
Employment increased in 11 of the 14 sectors.
Employment in construction increased by 18.5%, but it is a source of concern that the accommodation and food services sector experienced a decline of some 1,000.
This shows the continued vulnerability of consumer spending and should highlight the need to maintain the lower rate of Vat in that sector.
The Government will be pleased with the latest employment numbers and they can certainly be highlighted as a key success metric in the run-up to the general election.
It is just a pity that this positive news is being overshadowed by a frightening level of incompetence and stupidity in relation to Irish Water.
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