China also succumbs. The second world economy shows signs of weakness, and its central bank came to the rescue yesterday with a cut in interest rates that seeks to stimulate consumption and investment after the disappointing data on retail sales, industrial production and investment for the month of July, increased due to the confinement of large nuclei to contain the covid. In response, and in a move that surprised the market, the central bank cut by ten basis points, to 2%, the rate applied to reverse repurchase operations (repos) maturing in seven days, while it placed at 2 .75% interest applied to medium-term loans maturing in one year.
Accompanied by new injections of liquidity, the central bank thus carried out its first rate cut in eight months in the face of worsening prospects. The official GDP growth target remains at 5.5%, but in practice it is considered lost and, according to the average of the economists consulted by Bloomberg, China will not grow more than 3.8% this year.
The Chinese slowdown follows the patterns of the classic overheating of an economy, with weak domestic demand that feels the impact of runaway prices in real estate and investment by companies that cannot keep up due to the over-indebtedness to which they are subjected . For this reason, the rate cut will have, according to experts, a relative effect, at least in the short term. Some investment banks, such as Japan's Nomura, believe that China will grow 3.3% in 2022. And others, such as TD Securities, are not even confident that it will reach 3% despite the new stimulus.
The puncture of China is added to the brake or the setback of other large global economies. The United States has chained two quarters of contraction – what is considered a technical recession, despite its full employment – and the eurozone points to a fall in GDP in the third quarter, according to data from purchasing managers (PMI) of July. The very high inflation, which has forced the central banks to abandon their ultra-expansive monetary policy, will begin to subside as the economy loses strength.
Oil, a classic leading indicator, fell 4% yesterday near the close to $94 a barrel for Brent and after reaching $92. In March, not so long ago, the price shot up to $130, and It is clear that the withdrawal has not had much to do with the insignificant changes in the supply of crude oil.
The markets reacted yesterday to the new Chinese uncertainty discounting the future consequences. With a slowdown or recession heavily priced in by analysts, stock markets barely flinched yesterday. The slight declines of the first hours were soon exchanged for moderate gains.
Without China pumping more gasoline into the world, inflation will falter sooner, and that may slow down rate hikes or bring forward future cuts. This is what was reflected in the bond market. Those from the United States, where bets continue to be placed on new interest rate hikes in September, became more attractive, and the purchases caused a rise in prices and a drop in profitability.
