Big debt, high stakes

It’s a day of meetings, meetings, meetings – and contemplating massive amounts of debt.

China’s inflation numbers this morning show a slowdown in consumer prices, and yet another drop in factory prices. As China contemplates deflation, the stakes are huge. They’re not the only one facing big risks today: as the political manoeuvring continues over Ukraine, Greece and the eurozone are still locked in a game of rooster (or at least, really big chickens).

Good thing economic leaders can talk it all over in person: today is the second day of the G20 meeting in Istanbul with finance ministers and central bankers. There won’t be any economic data out today, but it’s still a busy day for Ottawa: the Bank of Canada’s deputy governor Carolyn Wilkins will give a speech on the labour gap – especially interesting if you’ve been following the latest Canadian jobs numbers – and Angela Merkel will also be in town to meet with Harper. Merkel met with Obama yesterday, which included a high-stakes conversation about the possibility of arming Ukraine. Oil big-wigs are also meeting in London today, at International Petroleum Week, and the International Energy Association will release their monthly oil report.

In the mean time, volatility has been slightly more muted than in recent days. This morning, oil is sitting around $52. Today, we’re also expecting last year’s debt numbers from Tokyo, and later, earnings for Coca-Cola.

The auto battle between Canada and Mexico. Mexico has far outstripped Canada as an auto manufacturing centre. Wages are far cheaper, and, as this story from the Globe points out, Mexico can serve the southern U.S. just as well as Canada can serve the North. The numbers are telling – last year, automakers invested $7 billion in Mexico – to Canada’s $740 million. The other NAFTA member has 19 per cent of output, to Canada’s 14 per cent. This isn’t a brand new trend: Canadian Business has this telling infographic from last summer, which shows which countries are gaining and slowing when it comes to auto manufacturing.

How risky is Chinese deflation? That question has been a central point of debate over the eurozone – which is experiencing deflation – but it has increasingly become a source of hand-wringing for China, as well. Chinese inflation hit a five-year low in January, coming in under expectations with just a 0.8 per cent increase to the Consumer Price Index, which measures consumer price inflation. Even more telling, perhaps, is the drop in Producer Price Index (PPI), which measures factory prices. PPI was pushed down 4.3 per cent year-on-year, which made January the 35th consecutive month with a decrease – that’s almost three years of falling prices, as one part of a broader slowdown in the Chinese economy. Why does it matter? There are lots of reasons: one of the major issues here is a weakening in demand for oil at a time when we’re already seeing a supply glut, and the accompanying drop in oil prices. Another reason is China’s debt levels. When China was growing at a rapid clip, acquiring debt was not such a problem, and doing so was fairly cheap: now, that means there is an awful lot of it. The report I mentioned yesterday, from McKinsey, puts China’s debt to GDP ratio at 282 per cent, a fair notch ahead of Greece’s 175 per cent. Notably, the report predicts that since the financial crisis, two-thirds of the world’s new debt has come from China. This includes very sharp spikes in corporate debt and real estate prices, all within a banking systems that is somewhat less than transparent.

Speaking of debt. Greece’s Grand Tour has kept a hectic pace, as the new prime minister, Alexis Tsipras, said he would not take another bailout, but would take a “bridging loan” instead – something the other eurozone countries are opposed to. Tsipras also promised Greeks he would fulfill campaign promises, from increasing the minimum wage, to rehiring some public workers, to recreating the dismantled public broadcaster and giving some Greeks a pension. His plans for gaining this revenue include getting Germany to pay Second World War reparations to the country, which, needless to say, did not go over well. In response, Greek markets fell to another near-record and bond yields spiked. This all leaves the question: what comes after a game of high-stakes chicken gets even bigger? Playing rooster?

Netflix goes to Cuba. An unexpected result of the U.S.’s warming relations with Havana is the spread of Orange is the New Black. Cubans will now have access to the streaming service, which recently announced plans to expand to 200 countries this year. But the move may be more symbolic than anything: relatively few Cubans have access to American credit cards or strong broadband, which, at around $40 a month, is out of reach for most ordinary people.

Need to Know:
TSX: 15,100 (+16.78), Monday
Loonie: 80.22 (+0.37 cents), Monday
Oil (WTI): $52.06, Tuesday morning (4 a.m.)