Economic Compass: Dwelling on China’s Housing Risks
An in-depth analysis of the sustainability of China’s precarious-looking housing market and the impact it has on the country’s economic growth.
Eric Lascelles discusses whether the worries about a housing bubble in China are warranted and provides his outlook for Chinese housing.
- China’s housing market generates a remarkable 19% of the country’s economic output, and has been the subject of bubble worries.
- It merits close examination given stress testing that shows even a moderate housing correction would halt the country’s economic progress.
- The near-term outlook is fairly benign, with the pace of home building arguably running slightly below steady-state demand.
- Medium-term risks are quite negative, revolving around the fact that 29% of China’s housing stock is vacant.
- In contrast, long-term risks are more positive given what appears to be an inadequate number of homes relative to the number of urban households.
- Affordability is atrocious on the surface, but much more nuanced beneath it.
- Overall, Chinese housing still warrants a place in our pantheon of risks, but in a location of slightly diminished prominence relative to our prior assumptions.
Economic Compass: The Future of Productivity and Innovation
- Global productivity growth has slowed since the financial crisis, worrying many.
- Much of this productivity deceleration represents an inevitable slippage after a period of unusually rapid gains. But some also reflects temporary cyclical depressants that have taken hold since the crisis.
- Looking forward, productivity growth should manage a gradual revival as the rate of innovation accelerates across a range of sectors.
- However, unusually fast productivity growth is unlikely given slightly less help from capital investment, labour quality and technological diffusion.
- As part of this exploration, we evaluate new technologies and their potential effects by sector.
- We also consider whether productivity growth is being mismeasured, whether the world is shifting toward a “capital light” economy, and whether there might be significantly more structural unemployment in an increasingly automated world.
Economic Compass: Vetting Debt Hot Spots
- As Fed tightening nears, the prospect of higher interest rates demands a closer inspection of the world's debt hot spots.
- In the near term, the risks are "high" for Chinese credit, exuberant housing markets in a scattering of countries, and Greek public debt.
- Meanwhile, the risks are "elevated" - but somewhat lower than we had feared - for the world's external, corporate and oil-oriented debt.
- Over a longer timeframe, these risks fade, only to be supplanted by mounting concerns over the developed world's public debt - due more to untenable demographics than rising borrowing costs. Japan is an extreme example.
- Going forward, rising interest rates will undoubtedly ignite a debt brushfire somewhere in the world, but an inferno is less likely.
Economic Compass: Dissecting Deflation
- Developed-world inflation has declined for three straight years, to the extent that the Eurozone, U.S. and U.K. now flirt with deflation.
- The threat is clearly greatest for the Eurozone given the breadth of the group's deflationary impulse along both geographic and price basket lines.
- Fortunately, any economic damage from deflation in the Eurozone should be more limited than commonly imagined, as a mere 41% of the deflationary impulse is rooted in "bad" causes, and 59% comes from temporary rather than persistent forces. The figures are even better for the other countries.
- We construct five inflation forecasting techniques whose collective wisdom argues that total inflation should be higher next year in the Eurozone, U.S., U.K. and Canada.
Economic Compass: Seeking New Growth
- Emerging-market economies have recently suffered a bout of decelerating growth.
- As a silver lining, this slowdown provides the motivation and recent elections provide the opportunity to deliver a major new round of growth-enhancing structural reforms.
- Accordingly, we anticipate a broadly-based surge in reforms over the coming five years, with 14 of the 20 countries examined in this report set to accelerate their actions.
- India tops the charts, both as the country set to deliver the most reforms and as the one set to accelerate its reforms the most.
- Furthermore, we estimate the theoretical stock market benefit tat each nation will enjoy through these reforms, with potential returns as high as 30%.