ATLANTA — China’s “sloppy” attempt to manage the devaluation of its currency, the renminbi, and the declining demand for Chinese products from the United States and Europe are the main culprits behind the stock market’s woes, says economist Dr. Rajeev Dhawan of Georgia State University (GSU).
“Who got to the stock market bull?” asked Dhawan during the quarterly forecast conference held at GSU on Wed., Feb 24. “Just like in old Chuck Norris movies, the chief villain is the Chinese economy.”
For the second time in six months, China’s attempt to manage the devaluation of its currency sent shockwaves through global equity markets. Year-to-date through Feb. 24, the Dow Jones industrial average was down 940 points, or 5.4 percent.
What would lead China to devalue its currency? Dhawan says that China could be attempting to impress the United Nation’s International Monetary Fund (IMF) with the currency manipulation.
Countries try to devalue their currencies in order to combat trade imbalances, point out industry experts. A weaker currency could help a country like China to boost trade exports, shrink trade deficits and reduce sovereign debt burdens, since a “weaker currency makes debt payments effectively less expensive over time,” according to Investopedia.
Whatever the reasoning, Dhawan called the stock market’s response to the “stalling” Chinese economy an “overreaction.”
“Market participants — hedge funds, you and me — are balling like a 5-year-old who didn’t get a candy fix. The markets aren’t doing well. They’ve got to come to terms with reality, things will settle to a new normal,” says Dhawan, director of the Economic Forecasting Center at GSU’s J. Mack Robinson College of Business.
In addition to the trials with China’s currency devaluation, the demand for products made in China is down. The United States and Europe are the biggest consumers of China-made products. Together, the U.S. and Europe make up roughly 50 percent of world consumption, according to Dhawan. He says that after buying 17.3 million cars and trucks in the United States in 2015, American consumers are more frugal following those big purchases.
“We’re buying new shiny cars and trucks made in Europe, North America and Japan, making us very rational consumers afterward, or un-American,” says Dhawan. “We’re not buying enough couches, TVs and iPhones. The demand slowdown is coming from us.”
Dhawan says that the declining demand for China’s exports has led to China being less of a participant in the global economy.
“If oil prices are dropping, that means someone isn’t buying, and that’s China,” says Dhawan. “China isn’t producing and it shows up in the oil sales. With sales down, prices go down and there’s an over correction and then there’s an impact on the stock markets.”
What Will 2016 Look Like?
Domestically, Dhawan forecasts that the United States will grow its real GDP (adjusted for price changes such as inflation) by 2.2 percent in 2016 following two years of 2.4 percent real GDP growth. Corporate hiring is critical for the U.S. economy to overcome the hiccups in China and the global economy.
“The key factor is that companies, despite the jittery stock market and poor results in earnings last year, will keep hiring,” Dhawan wrote in his quarterly “Forecast of the Nation,” which was released the same day as his presentation.
Housing starts are expected to pick up the pace this year, with roughly 1.2 million housing starts anticipated in 2016. Dhawan forecasts that housing starts will increase in 2017 and 2018 as well because there will be more demand from first- and second-time homebuyers. Dhawan’s forecast calls for 1.25 million housing starts in 2017 and 1.32 million in 2018. Following a strong 2015 in automobile sales, Dhawan expects auto sales to dip to 16.9 million units in 2016.
The veteran economist expects the Chinese economy and oil prices to stabilize this summer, and for the Federal Reserve to react to a positive first quarter in the United States with a rate hike in June. Following the rate increase, the Fed should stand pat through the rest of 2016 until after the presidential election in November.
Dhawan believes that corporate executives are nervous about this year’s presidential election because of a potential massive change in fiscal tax policy depending on who wins. If the race comes down to Bernie Sanders versus Donald Trump, Dhawan says that it’s “guaranteed” fiscal policy will change.
“The corporate side does not like huge changes, they like incremental changes,” explains Dhawan. “One candidate is not amenable to lobbyists, one candidate doesn’t know how to do math. You figure out which one is which.”
— John Nelson