Wednesday, May 06, 2009
the fake recovery
The only reasonably convincing evidence of ‘green shoots’ comes from China. That, however, is unlikely to be sustainable, as it is very much the result of a ’same-as-it-ever-was’ package of fiscal, monetary and credit policy measures by the Chinese authorities. The export- and heavy-industry led expansion they have successfully engineered is the way of the past. It will go nowhere, unless China transforms the composition of both production and demand in the directions that are unavoidable (and also desirable) for a country at its level of economic development. Apart from China, the only green shoots I have seen were in the salad bar of the hotel I am staying at.
so what of china?
CBI China, an authoritative source on Chinese commodity import and exports, shows for one that China is suffering from the same product overhang affecting the rest of the world, and mainly the US.
Gasoline demand may still be firm, but gasoil (aka heating oil) demand — mostly used in industry — fell 12.6 per cent in the first quarter of 2009. Prospects for May, meanwhile, look equally weak.
As CBI write (emphasis ours):Most players expected bearish gasoil market in may amid weaker speculative demand and increased supplies. Speculative demand will probably plunge if the market gains no more support in may, but end-user demand is not likely to grow much amid gloomy economy. Meanwhile, oversupply will probably remain as supplies grow. When supplies from PetroChina and Sinopec are not seen to change, CNOOC Huizhou refinery is estimated to supply 200,000-300,000mt of gasoil to East and South China per month. Without much support from international crude, PetroChina and Sinopec may cut prices to promote sales in some regions, where they failed to fulfill their sales targets in April.
There is little possibility for China to import any gasoil in May in view of negative import margin and weak demand from the domestic market. Meanwhile, Sinopec’s and PetroChina’s gasoil exports may be little changed from the previous three months, about 200,000-300,000mt altogether.
Sean Corrigan, chief investment strategist over at Diapason Commodities, also points to a continuing slide in China’s overall electricity consumption:Indeed, as we have noted before, China’s own electric power generation which at a 13.4% CAR had closely tracked industrial output growth of 13.7% for a decade - dipped again in April to leave the total for the last seven months a sizeable 8.5% below that for the equivalent period in 2007-08.
Power consumption, of course, can be seen as a good proxy for the overall state of the manufacturing sector and ties neatly with the above reports of continued collapse in industrial demand for gasoil — particularly in the industrious south of the country.
remember how worries about electricity production in china, first expressed to my knowledge by vitaliy katsenelson, prefigured the collapse in chinese economic growth.
on top of this, one can point this morning to a record drop in march retail sales in europe. i fear the global repercussions of the maastricht treaty are going to be felt throughout this year. the american fiscal stimulus package itself is already too little to fill the american output gap for 2009 -- far too much of treasury debt financing is going to support wealth transfers to banks who could just as well be ignored for the time being, with government backstops in place -- and this is my primary reason for suspecting that, in spite of a pickup in consumer optimism, the united states remains set for GDP disappointments looking forward (particularly in contrast to official proclamations of a second-half recovery). unemployment feedback with net negative loan demand and household retrenchment will very likely keep the united states economy weak.
if this macroeconomic weakness in the united states is further amplified -- as it appears to be set to -- by an insufficient fiscal response and therefore deepening depression in europe and/or china, the shock waves could make for a very rocky ride.
green shoots at your own risk.