Thursday's Top 10: NZ's own debt-fueled rebound; Anatole Kaletsky and the global return to debt-fueled consumption; China's contracting workforce; Dunkin 'Cronut'; Dilbert and 'Weasleable doubt'

Here's my Top 10 links from around the Internet at midday today.

As always, we welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.

See all previous Top 10s here.

My must read today is #8 from Anatole Kaletsky on how governments in the Northern Hemisphere are giving up on austerity and returning to debt-fueled consumption growth as a way to boost growth. Sound familiar? 

1. 'No step change' - Westpac Chief Economist Dominick Stephens has put out a nice quarterly economic overview for New Zealand that pretty much nails the current situation.

He's in the camp that says not much has changed in the New Zealand economy.

A debt-fueled surge in domestic consumption is about to force the Reserve Bank to increase the Official Cash Rate from 2.5% to 5.5% over the next three and a half years. That's way more than the Reserve Bank's own forecasts for a peak around 4% in early 2016.

A 5.5% OCR would lift floating mortgage rates closer to 9%.

Then things would get very interesting. I suspect the economy would really struggle with 9% mortgage rates.

That reaction to the kick in the guts would be more than enough to slow down the Reserve Bank's trajectory. 

Here's Stephens:

The virtuous circle will keep turning for a while yet, but not forever. This is a classic demand cycle, fuelled by the Christchurch rebuild, rising house prices and debt. A slowdown will eventually follow. There hasn’t been a step change in New Zealand’s economic performance.

2. 'There are many ways China could have a crisis' - That's the tone of this excellent FTAlphaville piece from Kate McKenzie about what might happen in China.

Writing in The Diplomat, Pei takes aim at the popular idea that China’s government will not tolerate growth below x per cent (take your pick at the level) because of fears of social unrest.

Pei has a couple of reasons for this. One is that a lot of China’s recent growth hasn’t been labour-intensive, anyway. True, it’s been more capital intensive for some time and this has meant growth hasn’t greatly boosted employment (this was pointed out at least as early as 2007 by IMF’s Jahangir Aziz and Steven Dunaway, h/t Willem Buiter). What few seemed to see coming was China’s labour force demographic peak being reached early — which is Pei’s other reason.

Between the lack of focus on boosting employment through the past few years of growth, and the demography-induced constraints on China’s labour force size, not to mention rising wages, Pei doesn’t rate the growth/employment/social upheaval idea very highly.

So what might China’s leaders be really worried about, if not unemployment? Pei believes they are stressed by the risk of excess credit injection

3. China's contracting workforce - New Zealanders don't hear or think much about the demographic structure of China's population, but we should. Last year for the first time China's workforce contracted, signaling the early end of a demographic dividend. Here's an old but still useful ChinaDaily discussion on this. 

The number of people of working age in China will decrease by almost 30 million before the end of this decade, posing a serious challenge to economic growth, an expert with a top think tank has predicted. According to the World Bank, the country’s demographic dividend — when the largest section of society is of working age and the dependency ratio is low — has contributed more than 30 percent to the country’s rapid economic growth.

However, Cai Fang, director of the Institute of Population and Labor Economics under the Chinese Academy of Social Sciences, said that the dividend reached its peak in 2010. "The number of working-age people has already started to fall," he said.

The last census, carried out in 2010, recorded 940 million people of working age — 15 to 59 — against the total population of 1.34 billion. Cai estimates that by 2020 the number of people of working age will fall by as much as 30 million. He warned that a decrease in the labor force will come with a rising dependency ratio, lower savings ratios and diminishing returns, and eventually, slower economic development. Cai said that, with the end of the demographic dividend, China’s annual economic growth is expected to slow to 7.2 percent between 2011 and 2015, and 6.1 percent between 2016 and 2020. GDP grew at an annual pace of more than 10 percent from 2006 to 2010.

4. 'Probably no collapse' - Michael Pettis is always well worth reading on the issue of China's economic slowdown, its reblancing and the risk of some sort of crisis. He says a slowdown may not be a bad thing for household income, which would be good for New Zealand. Our exports to China are consumed by people. Australia's exports are consumed by buildings and motorways.

Growth rates during the administration of President Xi Jinping are unlikely to exceed 3% to 4% on average if the economic rebalancing is managed well.

Will the slower growth rate be a disaster for China? Certainly, it would be huge departure from the growth rate of roughly 10% a year for nearly three decades. Would much lower growth rates create high unemployment and huge dislocations for the economy? Some are worried about such scenarios. But the Chinese economy has so far shown a lot of resilience despite passing storms such as the global financial crisis.

Beijing has huge challenges ahead. China's growth has been a boon to large businesses, the state, the powerful and the wealthy elite. What the Chinese government needs to do is recalibrate growth so that average household incomes can rise and consumers have more money to spend.

This will not be easy to pull off, but there are positive signs. Xi's government seems determined to make the necessary changes, even at the expense of much slower growth. Even if GDP growth declines but average Chinese household income grows at 5% to 6% a year, it would put China in the right direction.

5. A new Greek black hole - Surprise, surprise. There's another one, as The Guardian reports.

The International Monetary Fund warned the eurozone yesterday that it may be forced to write off a chunk of Greece's debt after identifying an US$11bn black hole in the finances of the recession-stricken country.

In its regular update on the programme of financial austerity and structural change agreed to by Athens in return for financial help, the Washington-based IMF said weak growth and a sluggish pace of reform had opened up a funding gap in both 2014 and 2015.

6. Renminbi normalisation - This will be one of the themes of years to come. Here's a nice discussion via Euromoney.

7. Expect mini rather than maxi stimulus from China - So says Bill Bishop in his always excellent Dealbook column. Subscribe to his Sinocism daily email too and make sure you donate. He's a gem.

Beijing continues to resist a new large fiscal stimulus package, despite a report last week that the nation’s manufacturing sector had contracted in July at its fastest pace since last summer. Instead, the government announced a “mini stimulus” that included a tax cut for small companies, a reduction of red tape and costs for exporters, and the opening of investment in railroad construction to private capital.

8. So much for austerity - All around Europe and the rest of the Northern Hemisphere the pro-austerity mood is changing, says Anatole Kaletsky at Reuters. 

Politicians and business leaders around the world are giving up hope of export-led growth, powered by manufacturing. Instead they are gradually reverting to pre-crisis economic models, where growth and job creation are powered by consumer spending. From this, several conclusions follow that will seem shocking after the austerity economics of the past five years.

Stronger consumption will need to be financed by credit creation, at least until the point is reached when employment and incomes grow rapidly enough to create self-sustaining economic recoveries around the world. This means that household or government debts will have to stop falling and preferably that leverage will start to rise again. Debt levels that were considered unsustainable until recently, both for governments and households, will have to be accepted as the new normal. And finally, to create this new credit and support consumption growth, some of the regulatory restrictions on banks will have to be loosened rather than tightened further in the years ahead.

9. Totally Dunkin' 'Cronut' - What do you get when you cross a croissant with a donut? Apart from a whole lot of carbs, you get either a 'cronut' or a 'dosant'. It's a fat-filled bread that's fried in fat. Yay. 

It's the latest thing. Quartz has the story.

In case you needed more proof of the quickening pace of globalization, look no further than the “cronut.” Within two months, the hybrid pastry created in New York City as a cross between a croissant and a donut has spread around the world.

Bakers and pastry shops are offering imitations and adaptations of the cronut, launched in May by the Dominique Ansel Bakery in downtown Manhattan, in Japan, the Philippines, Australia, Spain, China and the UK, among others. (Because Ansel has filed a trademark for the term “cronut,” imitators use other names. For example, one bakery in London calls its version the “dosant.”)

10. Totally John Oliver on the new Pope speaking Frankly. Couldn't resist. It's the best news for gay catholics since someone made a musical about a nun.