Unsurprising Revelations

According to the EU’s statistics office, eurozone Q3 flash GDP fell 0.1% point from Q2’s -0.2% post, returning the EU to recession by one common definition. That outcome shouldn’t surprise most folks, though, given the eurozone’s exhibited economic weakness for much of the past nearly four years. On the contrary, upon deeper analysis, what might surprise is the eurozone’s relative resilience.

Results from France and Germany, which make up a little over 50% of eurozone GDP, were resilient and offset weaker results elsewhere, each rising 0.2% q/q. Likewise, Italy bested expectations for a 0.5% decline, posting only a 0.2% drop—a rather encouraging improvement over the country’s -0.7% Q2 result. Spain logged a 0.3% drop, matching its result from Q2 and expectations. Portugal and Greece aren’t included in flash estimates of eurozone GDP, so the monetary union’s dip into recessionary territory on this reading wasn’t driven by the weaker periphery, but largely by the Netherlands, which dropped 1.1% q/q in Q3. By some accounts, the Dutch economy’s dip was driven in part by weaker consumer spending tied to new tax measures that limit the deductibility of mortgage interest.

To be sure, it’s still hard to argue the eurozone’s in rosy shape. Looking forward, it’s likely eurozone weakness persists as officials continue to work on solving their myriad debt and economic competitiveness issues. And data releases—especially flash releases—are often subject to revision, so Thursday’s reading is anything but final. But at the very least, it should help put the extent of the eurozone’s weakness to date in perspective by showing how shallow the overall eurozone’s downturn has been (despite the headlines) and weakens the argument “contagion” is spreading imminently to Europe’s stronger economies.

China’s leadership transition was the other major story Thursday. After some back-room brokering between two factions of the Communist party, the 18^th National Party Congress closed mostly as expected. Current Vice President Xi Jinping took the Communist Party’s top role as General Secretary of the Central Committee and likely successor to the presidency in 2013. Xi is widely seen as a protégé of former President Jiang Zemin.

Likewise, Vice Premier Li Keqiang, a protégé of current President Hu Jintao, remained on the country’s Central Politburo Standing Committee (PSC) and likely becomes premier and chief steward of the country’s economy next year.

Other changes to the composition of the PSC—the de facto highest and most powerful decision-making body in China—were somewhat surprising. Officials reduced the PSC headcount from nine members to seven, introducing five new members (in addition to current members Xi and Li). The move reverses Hu’s decision in 2002 to expand the PSC to nine members—the result of a horse trade with Jiang to keep Jiang’s supporters from dominating the PSC (Jiang’s picks made it, but Hu got two extra seats for his people). Of the new members, three, like Xi, hail from Jiang’s Shanghai faction (also known as the princelings since many members are high-profile children of the original party elite)—the party’s hardline conservative wing. The other two, like Li, rose from the party’s Youth League, which is more open to economic reform.

In another surprising move, Hu stepped down from his position as head of the powerful Central Military Commission, which controls the armed forces. Xi replaces Hu as the head—marking the first time a Communist Chinese leader has ceded all formal powers without bloodshed, purges or political unrest.

Looking forward, despite the leadership shuffle, it’s likely very little changes in China in the short term. Xi may be Jiang’s disciple, but he has some reform credentials, and another of Jiang’s picks, Zhang Gaoli, is known as an economic reformer. So while Jiang may have won the behind-the-scenes arm wrestling match, the committee’s fairly split ideologically, rendering big changes of the statist or market-oriented sort equally unlikely. Plus, the Communist Party probably sticks closely to its long-term plans and enacts change at a largely glacial pace, requiring consensus among the PSC and larger Politburo and even consultation with previous leaders. The current five-year plan calls for continued economic liberalization, so reform measures likely continue in limited and incremental areas with many fits and starts between.

Near term, efforts to stoke growth in the world’s second-largest economy likely also continue as the Communist Party seeks to avoid social discontent in this period of leadership transition—it’s likely no coincidence the government cut fuel prices the same day the new leadership was revealed. With recent stimulus starting to hit the broader economy and low inflation allowing for further monetary loosening as needed, a Chinese reacceleration appears increasingly likely.