UBS Has Some Very Bad News For The Global Economy

At the end of February we first highlighted something extremely troubling for the global "recovery" narrative: according to UBS the global credit impulse - the second derivative of credit growth and arguably the biggest driver behind economic growth and world GDP - had abruptly stalled, as a result of a sudden and unexpected collapse in said impulse.

As UBS' analyst Arend Kapteyn wrote then, the "global credit impulse (covering 77% of global GDP) has suddenly collapsed" and added that "as the chart below shows the 'global' credit impulse over the last 18 months is essentially mainly China (the green shaded bit), which even now is still creating new credit at an annualized rate of around 30pp of (Chinese) GDP. But the credit impulse is the 'change in the change' in credit and even the Chinese banks could not sustain the recent extraordinary pace of credit acceleration. As a result: whereas back in Jan '16 the global credit impulse was positive to the tune of 3.8% of global GDP (of which China comprised 3.5% of global GDP) it has now fallen back to -0.1% of global GDP (China's contribution is -0.3% of global GDP)."

As we concluded then, "absent a new, and even more gargantuan credit expansion by Beijing - which is not likely to happen at a time when every single day China warns about cutting back on shadow banking and loan growth - the so-called recovery is now assured of fading. It is just a matter of time."

Four months later, the so-called "global coordinated recovery" is on its last, shaky legs, because not only has soft data in the form of PMIs, ISMs and various other sentiment surveys peaked and is now declining, as has consumer confidence, but those all important CPI readings from around the world have posted several consecutive months of disappointing prints, and according to some are jeopardizing the Fed's rate hike intentions (especially if Wednesday's inflation print is a big dud). US GDP is likewise in "stall" territory.

In short, February's collapse in the credit impulse, duly noted here, top-ticked the recent peak of the world economy.

So, fast forwarding just over three months later, where are we now? To answer that question, overnight UBS released its much anticipated update on the current state of the global credit impulse, and it's nothing short of a disaster.

As Kapteyn writes in what may have been the most eagerly awaited report in recent UBS history, "we have been inundated with questions about the chart below, first published in March. Yes, the global credit impulse is still falling. And yes, it matters because the correlation of this global credit impulse with global domestic demand is 0.61."

But it's what follows next that should send shivers down the spine of anyone still clutching to the failed "recovery" narrative:

From peak to trough the deceleration in global credit growth is now approaching that during the global financial crisis (-6% of global GDP), even if the dispersion of the decline is much narrower. Currently 55% of the countries in our sample have experienced a -0.3 standard deviation deterioration in their credit impulse (median over 12 months) compared to 77% of countries in Dec '09 when the median decline was -1.4 stdev."

Here is what the stunning collapse in the credit impulse looks like as of today:

While we urge all readers to get in touch with their friendly UBS sales coverage for the full report, here is a quick primer from UBS on what the current data is telling us, not so much about China where the credit impulse slowdown was discussed previously, but about the world's biggest economy. From UBS:

The credit impulse in the US has also turned down, seemingly on the back of a sharp drop in demand for C&I loans. The slowdown is more visible in the bank loan data than the Flow of Funds data we are using to calculate the credit impulse (the FoF is 3x as broad and includes non-bank credit as well). But the slowdown is nonetheless at odds with confidence being expressed about investment and future borrowing plans. The US credit impulse was running at 0.7% GDP back in September 2016 and by March had fallen to -0.53% GDP (recovering somewhat in April based on bank loan data).

Why does this matter? Because as UBS shows in the chart below, in the US the correlation between activity and the impulse is very strong, and the lack of credit growth could constrain an acceleration in GDP from weak Q1 levels (the credit impulse suggests domestic demand growth should be close to 1% rather than the 2+% which consensus is currently tracking).

UBS' parting words - despite the spun attempt to deliver the gloomy news as painlessly as possible - are very concerning:

Over the last 6 months, the culprits are the US and China (given large GDP weights) but the size of the declines in, Germany, Italy, and Mexico are notable. And the message from the impulse response functions is basically that global IP and import volume growth have peaked.

That is polite way of saying the credit dynamo behind global growth has not only stopped, but is now fully in reverse mode. And, as a reminder, as UBS admitted earlier, "from peak to trough the deceleration in global credit growth is now approaching that during the global financial crisis." Only this time there is no global financial crisis.

More importantly, back in 2009, not only China, but the Fed and other central banks unleashed the biggest injection of credit, i.e. liquidity, the world has ever seen resulting in the biggest asset bubble the world has ever seen. And, this time around, the Fed is set to hike for the third time in the past year, even as the ECB and BOJ are forced to soon taper as they run out of eligible bonds to monetize. All this comes at a time when US loan growth is weeks away from turning negative.

As such, what "kickstarts" the next spike in the credit impulse is unclear. What is clear is that if the traditional 3-6 month lag between credit inflection points, i.e. impulse, and economic growth is maintained, the global economy is set for a dramatic collapse some time in the second half.


Endgame Napoleon JRobby Mon, 06/12/2017 - 15:44 Permalink

On the graph, the current dip looks similar in size to the .com collapse dip, as opposed to the '08 housing collapse dip. I still had my shop when the .com bubble burst, and my customers were almost entirely rich people, including most of the bankers in town and a couple in the closest big city. I did not see much decline in sales, none really, but then Bush gave a huge tax cut, including to my wealthy customers.

As a childless couple struggling to pay a business loan, two rents, operating expenses, our personal expenses and twice-as-high SS taxes, we did not make much in terms of net income, anyway, and got hardly anything in the tax cut, a laughable amount, but we survived in the business, living on the income from the shop alone, even though we were in tiny town with 5 other shops competing for a very narrow niche market. We were able to pay the loan back.

Although bankers pay low interest on your savings account, due to my experience in a little Main Street shop, I can't help but like bankers. Bankers are some of the best customers I have seen. They pay on time. They pay ahead of time, not just leaving the required deposit. They do not ask for discounts, sometimes even telling you not to give them one so that you will make more money on the sales. Bankers send you business, telling all their friends about your store. They are not snobby.

Bankers are math people, and if you are not tabulating their order on a computer, they will have the math calucuated and the check written before you can get it done by hand, even from the other side of the design counter. I think bankers are the kind of people who make their decisions based mostly on the math, but will help you when they can.

The only problem I have with them is that they are not really lending much for things like businesses that can generate more money, not even to people with good credit and a history of paying business loans back in the required time frame. They want to loan to people with collateral or a spousal second income.

Perhaps, they focus too much on lending for consumer purposes or lending for education, thinking that moves the economy. Perhaps, the government side of that -- the SBA -- focuses too much on "community advantage" loans with a social-engineering theme, like loans for mommas to start daycare centers for working moms, contingent upon living in the community so that targeted EEOC groups benefit. Everyone does not want to start that business, nor is that a business where many have deep experience and know-how. But, I understand that it is a family-friendly system, like all the workplaces with their crony-absenteeism cliques.

Perhaps, you Z-Hedgers should consider that Trump's infrastructure spending might be risky in a time of debt, but also might generate some growth here in the good ol' USA, employing a lot of underemployed males and also adding some money circulation in the financial services, including in all of the many offices full of bully-momma absenteeism cliques. That should provide some incentive. I can assure you that most of their employees have reproduced, meeting the main concern of all
politicians and many businesspeople as well, as they can pay those employees less due to:

1) monthly welfare and yearly taxfare checks of up to $6,269 that cover their major household bills, allowing them to work for less

2) a spousal income that covers their major bills

3) a child support check that covers rent

In reply to by JRobby

Not Too Important Endgame Napoleon Mon, 06/12/2017 - 15:59 Permalink

Rather than 'infrastructure spending', I agree with a previous poster that it all seems like everyone at the top is just grabbing what they can before they all just walk away.Lots of talk, no action. Just barely enough to 'keep the dream alive' while everyone that can is liquidating everything not nailed down and getting out.We've been warned. Who's listening?h/t ZH.

In reply to by Endgame Napoleon

OpenThePodBayDoorHAL BennyBoy Mon, 06/12/2017 - 16:05 Permalink

Chart interpretation for dummies:"Credit impulse" (Standard money creation) has stalled. That's because money with no "time preference" (interest to be earned for loaning money over time) is zero because rates are at zero. However: "New money creation" is faster than ever. This not based on lending but on central banks buying assets. Summary: if you are an asset holder you're doing great. Everyone else is screwed.Back to your regularly scheduled programming.

In reply to by BennyBoy

Croesus GatorMcClusky Mon, 06/12/2017 - 15:16 Permalink

The "people" who are doing this to the world, are counting on the ignorance of their victims, in order to fulfill their goals.

They haven't fooled everybody, but we're going to have a hell of a mess on our hands. I just hope enough of "the right people" survive, so when these psychopaths come out of their little hidey-holes, they walk right into a firing line.

In reply to by GatorMcClusky

Endgame Napoleon Croesus Mon, 06/12/2017 - 16:04 Permalink

Well, maybe, Trump will show that we can have a strong economy by focusing on generating business here, in conjunction with a few trading partners who are more equal to us in terms of economic development, or, to be more precise, in terms of wages.

China is an ancient country that was the first to develop many things. They were there before the West, creating things like ink, paper and the finest porcelain. But after that, Western economies developed on a different trajectory -- wage wise -- and it has destroyed the U.S. middle class to try to integrate our economy with countries where laws are so different, and wages are so much lower.

It is one thing that has ripped the middle class to shreds, not the only thing. Mass immigration that is taxpayer-subsidized is another. Fake feminism and the mass entrance of women in the workforce, including the taxpayer-subsidized mommas and the wealth concentration from assortative mating at the top, probably did just as much, if not more, damage to the middle class than either of those. And now, automation is gonna finish the job off.

Trump [BatMan] needs to kick into action. But the Swamp Congress will not let him. I do hope Swamp Congress blocks more womb-based freebies to rig the economy even more for "work"ing moms, though. Only a handful of non RINOS in Swamp Congress have the fortitude to do it, namely Cruz and Paul. Otherwise, I wonder what you Z-Hedgers think will work beyond some of these proposals by Trump to get some industry in gear in this country.

We need the corporate tax cut, but it needs to be targeted to those who plan to invest more in their own country. If they bring some production back here, a tax cut will offset some of their costs. A new factory costs billions to build. They have to justify the cost to their shareholders.

In reply to by Croesus

chubbar Dutti Mon, 06/12/2017 - 15:09 Permalink

OT, not sure who has seen this but I think this is a war crime. Hillary has an email stating the Syrian war was started by the US to aid Israel. I know this isn't a newsflash for most of us but I think that this should get another look by this administration. At any rate, whatever Trump does, it won't be legitimate if it goes against Syria!

In reply to by Dutti

gatorengineer Mon, 06/12/2017 - 14:29 Permalink

keep in mind that as of today we are past all global elections that mean anything.  GB, Germany, France, and USSA.....  so any concern if there was ever one for the proletariat is gone.

chubbyjjfong Mon, 06/12/2017 - 14:41 Permalink

I swapped a bunch of funny money for quality old tools over the past year. Having something real in my hands with which to make genuine crafts, not made in China, feels most pleasant. Tis a grand morning.

Ricki13th Mon, 06/12/2017 - 14:45 Permalink

So the plot thickens, all the central banks know full well what is happening. Yet the fed still wants to raise interest rates to trigger another financial crisis and the MSM can blame it all on Trump. We are being set up by this market rally so that the elites can perform their wealth transfer.

Ben A Drill Mon, 06/12/2017 - 14:47 Permalink

Just buy a lottery ticket. Go to the casino. Loan your realitives money. Play the stock market. Pick your poison. I went fishing instead. Caught a nice rainbow trout, 1 lb 2 oz. 15 inches long. My wife enjoyed it very much.

I don't eat fish after watching the movie "plastic ocean".