With China’s Q2 data showing the economy is at its weakest in 3 years with investment slowing and demand in key markets of the US and Europe falling, it’s clear the world is in for a tough time. China accounts for a fifth of global growth and it doesn’t help that the US, which accounts for around 10% of global growth, could see 2013 growth fall by around half the earlier projection with no political resolution on the horizon to have more expansionary fiscal policies. China’s central bank has been ahead of the curve, cutting policy rates quite aggressively but economists argue China’s problems are too deep-seated to be resolved easily. Whether the new stimulus which is on the cards will be anything more than a temporary palliative, however, remains to be seen.
Even more worrying is what’s happening in Europe. While Spanish bond yields had returned to the near-7% danger level within a week of the miracle summit, Italy was downgraded two notches by Moody’s on Friday on account of the likely contagion effects emanating from Greece and Spain. While Italy is still two notches above junk level, it’s 1.9 trillion euro debt makes it frightening since Moody’s has warned it may yet downgrade Italy again if things don’t get better. Spain, with its 730 billion euro debt, and just one notch above junk, is also a pressure point since many bondholders are not allowed to stay invested in junk securities. Little else could be expected on Friday the 13th.