Contours of Growth
Monday 7 August 2023
Damaged by the restrictive policies of Premier Xi, China’s economy continues to slow. GDP growth in the second quarter of this year came in at an extremely low 0.8%, extending a multi-year post-pandemic period in which growth never really recovered sustainably despite a one year bounce in 2021. China used to grow at very high rates of 6.0%-8.0% per year. Economists now think China risks failing to achieve 5.0% in 2023. International investment flows also reveal a declining lack of interest in sending capital to work in China. The failure to launch has frustrated macro observers and commodity traders in particular who expected China’s comeback to drive prices of oil and industrial metals much higher.
At the same time, China’s adoption of electric vehicles and clean power is running at the very high rate we more typically associate with China’s historical growth. Forecasters now predict the country’s petrol demand will peak sooner than expected, by next year, as sales of internal-combustion engine (ICE) vehicles continue to be crushed by the EV tidal wave. China’s solar growth, in particular, is completely off the hook and the country is expected in 2023 to deploy more new capacity in one year (157 GW) than the total solar capacity of the US (113 GW at year end 2022).
If you are surprised to learn that China road fuel is near a peak, consider that China’s total mix of new EV, aging ICE, and the year in which ICE sales peaked, is starting to line up with California—the first region in the US to actually experience a decline in gasoline demand after many years stuck on a plateau. California ICE sales peaked in 2015. In China, 2017. California EV sales are on pace to reach 21% market share this year. In China, EV are on pace to reach a 28% market share. Interestingly, as recently as 2019, California’s EV market share was higher, at 6.7% vs China’s 5.4%.
Notice how China’s slowdown has seemingly capped annual vehicle sales on a total basis around the 26 million unit level, again leaving all marginal growth to EV. The effect is amplified however because total sales have actually fallen from the highs last decade, while at the same time EV sales have soared from 1.2 million in 2019 to 7.5 million (expected) this year.
The Gregor Letter frequently points out that declines do not follow peaks as quickly as most assume. But in the case of China, with ICE sales now starting to collapse, it’s actually possible that next year’s peak in petrol demand may indeed convert more quickly to a decline. While it’s certainly not intentional, the contours of China’s economy right now are what you might get under a policy of moderate de-growth: one that suppresses consumption and output, but keeps the pedal to the metal on decarbonization.
We’re waiting to learn if the recently announced advance in superconductivity, the synthetic substance known as LK-99, is real. Named after Sukbae Lee and Ji-Hoon Kim, LK-99 would be transformational in myriad applications, from transportation to power transmission, if the claim that it’s operational at room temperature can be proven. Presently, superconductivity can only be achieved at extreme low temperatures, making broad deployment basically impossible. A breakthrough would also have positive implications for the development of quantum computing.
Most tech and business publications are covering the story, from The Verge to Scientific American. Unsurprisingly, the US Department of Energy also maintains a superconductivity explainer page. Teams around the world are understandably busy, racing even, as they try to replicate the findings. Results so far are mixed, at best.
Inflation is falling and the US economy is booming as the nation embarks on a course correction to an ongoing, forty year error. Because tax cuts and deregulation were so successful in the early 1980’s, it set up an expectation this formula could be called upon repeatedly in the future, to goose the economy. The thesis was partly right: tax cuts did continue to goose the economy, but with increasingly diminishing returns. By the time we got into the current century, the US needed an entirely different set of policies: mainly, detaching healthcare from employment (partly accomplished during the Obama administration) and now the domestic investment boom that’s drawing in foreign money too, in a kind of multiplier effect. When President Biden remarked on Twitter last week that CEO’s told him that “for them to invest, they needed to see the US government invest,” he was exactly right. Foreign and domestic investors have been waiting decades for the US government to kick start long overdue investment, especially in infrastructure, to which they could join. This is clearly part of the reason why a year’s worth of rate hikes from the Federal Reserve, which have started to suppress housing and consumption, have had less of an effect on employment in the aggregate. The recession everyone expected never arrived, and perhaps it won’t—anytime soon. With several lines of investment, each stretching out for a decade or more, it’s possible the US has engineered for itself an ongoing, countercyclical growth component that will press onward, recession or not. I don’t know about you, but if the US government is going to “spend money” it seems better to use that money to build useful things, keeping unemployment low, especially if it attracts other capital. We are not repeating the mistake, therefore, of the aftermath of the great recession, when we slumped for too long, nearly entered another recession in 2011, and spent alot of money on social safety net programs. This time around, we’re getting right back on the long term growth path. What’s not to like?
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