Global deflation: Alter your strategy

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GLOBAL INFLATION

Dave Deruytter sums up the state of play world-wide as global deflation appears to be keeping a grip of the economy.

Should we be prepared for a prolonged state of global deflation, including negative interest rates? How should this alter your investment strategy?

The Chinese solution
The Chinese government’s new five-year plan foresees a minimum of 6.5% net GDP growth per year, an extra focus on the service industry and ‘green’ initiatives. Given the strong grip of the Chinese communist party over the country, there is a good chance that those targets will be met. Though 6.5% growth is low in comparison with the figures over the past quarter of a century, it is a very healthy growth since the country nowadays cannot keep on growing at higher rates without creating bubbles in the real estate and financial markets.

Further, given the steady increase in wages, industrial production is partly shifting from China to lower cost neighbours, such as Vietnam and other ASEAN countries. The aim of the Chinese plan is that the extra focus on the service sector and the environment should compensate for the loss of growth in the industry. With heavy air pollution, particularly in the Beijing region, and regular health scares linked with water contamination, and hygiene issues in food processing factories, the extra focus on ‘green’ is equally essential for the quality of life of the Chinese people.

This lower Chinese net GDP growth of 6.5% will still contribute as much to the world GDP in money terms than the US and the EU growth combined – three times more than India, a country of about the same population as China. China should always be at the basis of any analysis on the state of the global macro-economic situation. And the Chinese picture for the next five years is not inflationary because of lower growth and the shift away from industry.

Meanwhile in Europe
At the same time, the US and the EU keep on feeling the deflationary pressure of the internet and the related disintermediation in almost all economic sectors. The travel sector is an example where almost all sales have moved online, cutting out the middle men (travel agencies). The percentage of digital sales is increasing in all economic sectors, led by highly visible companies such as Uber and Airbnb. Even the highly-regulated financial sector is feeling the cold wind due to online savings and investment platforms, crowd funding and payment apps.

The macro level
Brazil is almost not growing at all, and likewise for Russia and Japan. No surprise then that crude oil and almost all raw materials are very cheap, limiting the economic growth in countries such as Australia, Canada and South Africa too. Furthermore, as the growth of the US is hindered by the fact that new jobs created are mostly low-pay jobs, and that the EU has structural issues like mass migration, Greece and Brexit, higher global economic growth will not come easy, if at all.

The ageing of sections of the population in developed countries could have been a bright spot for global growth, given that this generation needs extra spending on services to keep on leading a qualitative life. But such development is hindered by the fact that the governments of the countries involved have serious issues with their debt situation and fiscal balance. There is no room for higher pensions or social security payouts.