Bleak China outlook bad news

Three red flags indicate the global economy is in even worse shape than expected, leaving Australia well and truly exposed.

In recent weeks, there has been widespread panic about the US debt ceiling crisis, with the world’s biggest economy running out of cash – fast.

Tense negotiations are currently under way in Congress regarding the US debt ceiling, which now sits at $US31.4 trillion ($A46.8 trillion).

Democrats want it to be raised immediately, while Republicans are pushing for a range of conditions such as spending cuts to be met before agreeing to lift the self-imposed borrowing cap.

If a deal to raise the debt ceiling is not reached soon, America could default – for the first time ever – as soon as June 1, according to Treasury Secretary Janet Yellen, who said it would cause “an economic catastrophe” both in the US and across the planet.

At the same time, the International Monetary Fund (IMF) this week revealed economic powerhouse Germany will battle muted growth in the near term, as a result of tighter monetary conditions and energy price shock.

The IMF predicts growth in Germany’s gross domestic product will remain around zero this year, before gradually strengthening in the years ahead.

But there are many challenges on the horizon as well thanks to the nation’s ageing population and no likely boosts in productivity or labour on the table.

And grim news has also come out of China this week, with data from April revealing weaker than expected retail sales growth and industrial output from the world’s second largest economy, alongside a drop in property investment and average daily coal production and aluminium and crude steel output.

“As disappointment kicks in, we see a rising risk of downward spiral, resulting in weaker activity data, rising unemployment, persistent disinflation, falling market interest rates and a weaker currency,” Nomura economists told Reuters.

IG Markets analyst Tony Sycamore told news.com.au the news out of the US was “interesting” as over the past 48 hours, there has finally been signs of progress around the debt ceiling debacle.

“President Joe Biden’s announcement that he will cut short his trip to Asia is viewed as a sign of his commitment towards making a deal,” he said.

“The second was the decision to narrow the number of staff on the negotiating team, evidence that talks have moved to a more advanced stage.”