One of the world’s most bearish analysts, Société Générale’s Albert Edwards, is gloomier than ever. His latest note warns that markets entranced by the US Federal Reserve’s “dovish tone’ have missed the big picture: the latest data from China “significantly increases” the odds of the global economy slipping into a deflationary slump.
China is “sliding inexorably” into deflation, says Edwards. Producer prices have now dropped for 25 months in a row. True, consumer prices (CPI) are still rising by around 2% a year. But the GDP deflator – a wider gauge of inflation than CPI as it includes investment goods, housing and exports rather than just consumer goods and services – has slumped to just 0.4% year-on-year.
Note that in 1990s Japan, the GDP deflator gave a much more accurate picture of the “deflationary hurricane” that was raging at the time than CPI. “Let’s not make that mistake for China.”
The worry is that China will respond to possible deflation at home by devaluing the yuan. The move would export deflation by lowering the prices of Chinese products overseas. Meanwhile, “we shall find that this fragile recovery is unable to tolerate minimal monetary tightening”, while financial market bubbles are in danger of bursting.
All this means that with the eurozone already perilously close to deflation, and the US also closer than the inflation data suggest, there is a danger of much of the world economy succumbing to falling prices.
Edwards fears global deflation in the next six to 18 months; this will spur yet more money printing, leading to a rapid rise in inflation on a three-five-year view.
That will be good news for gold, while government bonds will “prove to be a toxic investment” on that timescale. This is an extremely depressing picture; no wonder, he says, that “the markets prefer to look elsewhere”.