China discontinues reporting of key housing indicator, risk of a downturn

 As analyzed in a Strategy Special , there are sources of risk, which have the potential to result in a slowdown of global growth and possibly a recession towards the end of this year or early 2018. A key driver is the reemergence of global deflationary pressure due to a potential downturn in China, a spillover of lower growth and inflation to the rest of the world, and the negative impact of likely protectionist policies in the US on growth. 

As shown in the attached chart, the history of inventory cycles in the US since 1998 shows how inventory changes with world trade activity indicators such as commodity and dry shipment price indexes. One can see pricing exaggerations late in the business cycle and during recovery. As also shown, the inventory cycle in the US has already turned down in 2015. This is important, because a downturn in inventories has a great track record as a recession indicator. Based on the strategy‘s view, the upcoming reemergence of China as an exporter of deflation will outweigh any potential reflationary impact of new policies in the US, even if they are sensible, during the next two years. As shown in the chart, house price growth in China has most likely already reached its peak after a period of exaggeration. 

As of today, two independent indices of property prices have ceased reporting, further curtailing the set of credible economic indicators in China. However, absent credible information investors will be more inclined, not less, to rely on word of mouth instead of statistics. The potential result is herding behavior, which can reinforce a potential downturn.

Martin Rossner is Founder and Managing Director of TYG ( www.third-year.com ). mjr@third-year.com