domestic demand Archives - the patient investor %

By Zarathustra:

How is it that an economy grows at 7.6% yoy is squeezing corporate profitability so hard? How is it that an economy growing at 7.6% yoy feel like there is not enough demand for all the goods and services being produced?…..The answer, to our mind, is quite simply that China has been investing in too much productive capacity…… The return on investments might be good before the financial crisis, yet the collapse of external demand after the financial crisis and more recently in the persistent Euro Crisis have cut external demand significantly. Meanwhile, domestic demand is not growing quite enough to pick up the slack created by collapse of external demand. Worse still, it is rather clear that domestic demand has been sustained by none other than investment itself. Thus, it should come as very little surprise that IMF’s estimate put China’s capacity utilisation at just about 60%.

via China’s overinvestment: the problem of having too much.

Hat tip to Macrobusiness.com.au

Colin Twiggs

Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.

Zarathustra: The idea of this gamble is simple. With the financial crisis in 2008 hitting the developed world, it naturally affected external demand. The Chinese knew these. At the end of 2007, trade surplus accounted for more than 7.5% of GDP. Currently, the same number is at its low single digit, probably 2% or so. No longer is China’s growth driven by trade. It is now driven largely by domestic demand.

And this is where the gamble lies. The massive stimulus was meant to stimulate domestic demand for a few years, in hope that perhaps the rest of the world will recover, and hence external demand would have recovered. Or else, in hope that domestic demand will become strong enough and sustainable so that the economy no longer depends on the health of the rest of the world…..

via China’s failed gamble for growth.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.