The state of the global economy left the financial markets feeling rather glum last week and as far as the UK is concerned this was as a result of the prospect of deflation in the Eurozone.
Growth in the Chinese economy is expected to fall to 7% this year. Having benefited from double digit growth for a number of years it was always expected that growth would fall to more moderate levels. The biggest issue in China is that the property market has become overheated as a result of the availability of debt, which in turn will result in an increase of non-performing loans – something that we in the UK know only too well.
The impact of the Chinese economy to the UK should be negligible as our exports to China are relatively small. Much more significant is our exports to the Eurozone, which means that the continued weak Eurozone economy is of more concern.
Mario Draghi continues to talk about a Quantitative Easing programme, however having talked about this for so long it remains to be seen whether this would have the desired effect. Consequently this might result in the need for government bonds to be purchased, which Germany are firmly opposed to and will need some clever political manoeuvring.
There are a number of economic releases from the Eurozone this week, including the latest inflation figures, which will put the relative strength of the Eurozone economy into sharp focus. There is some concern over deflation, however this seems to stem from a fall in energy prices, which are hardly bad for the economy.
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