Post by Lin on Oct 8, 2012 8:57:01 GMT 4
S ource: TheStar
EVENTS do develop rapidly in the midst of uncertainty. So I thought it best today to update readers on what’s going on. My recent columns covered a wide variety of subjects ranging from what G20 leaders did in Vladivostok to manipulating the London Interbank Offered Rate; from the snoozing global economy to efforts by the European Central Bank (ECB) and the Fed to stimulate with more quantitative easing; from recession in eurozone to Europeans struggling to save the euro and bring down unemployment. For sure, the course of growth has gone worse. So what else is new?
Global economy snores
The world economy is now at its most fragile since the 2008 financial crisis according to the Organisation for Economic Co-operation and Development (OECD), the Paris-based 34-member rich world’s think-tank. Last week, the World Trade Organisation (WTO) forecast that world trade will grow by a mere 2.5% this year, based on data showing global trade volume rose by just 0.3% in the second quarter (2.1% in the first quarter). Growth is dragged down mainly by Europe to less than half of the previous 20-year average. Its forecasts are based on a consensus 2.1% world growth in 2012 and 2.3% in 2013. Still, many risks remain on the downside. OECD puts the blame squarely on the eurozone. So too is the row between China and Japan over disputed islands in nearby seas. China and Japan are Asia’s largest economies: two-way trade between them rose 14.3% to a record US$345bil in 2011. Merchandise trade slowed in most major global economies in 2Q’12, with outright contractions in all major European nations and in India, Russia and South Africa (key emerging BRICS economies).
OECD’s 40-year long correlation established between trade and growth points to a slackening of world trade being accompanied by a fresh lurch lower for world growth. Its Composite Leading Indicators (CLIs) show that most major economies will continue to slow-down in the coming months. The CLIs (which have a good track record) suggest that it will take many months before global growth recovers. Indeed, they show that the loss of momentum will persist in the coming quarters in most major OECD nations and the rest of the world. Among the developed nations, economic contraction in the eurozone is set to continue. CLIs for the United States and Japan also fell; they were unchanged for China and India, but that for Russia declined. OECD’s CLIs are designed to provide an early warning signal of turning points between expansion and contraction in economic activity.
They are based on a wide range of data that have a history of signalling changes in activity. Overall, OECD concluded that the combined GDP of G20 leading economies rose by only 0.6% in the second quarter, against 0.7% in the first quarter.
The outlook is grim. The policy game of kicking-the-can-down-the-road hasn’t worked as the can gets heavier. Central bank stimulus is not enough to fix the ailing global economy amid a deepening sense of doom. Fiscal measures are needed to boost growth. Since mid-year, financial markets have rallied on the hope that central banks will be there to back-stop adverse developments with new buckets of cash.
In the eurozone, euphoria followed ECB’s Sept 6 readiness to buy unlimited quantities of short-dated government bonds of nations signed up for the rescue. This was followed on Sept 13 with the US Fed agreeing to buy additional US$40bil of mortgage debt securities monthly in a third round of quantitative easing; while the Bank of Japan unexpectedly increased its asset-purchase fund to US$1 trillion on Sept 19. These moves helped to calm markets but they are not a game-changer. I don’t see how the extra stimulus can cancel out downside risks emanating from the persisting euro-crisis, impending fiscal “cliff-hanger” tightening in the United States, and slackening growth in emerging markets. Easy money merely buys time. That’s not enough to resolve deep-rooted problems. Serious downside risks remain.
Both the OECD and International Monetary Fund (IMF) have since scaled back expectations for global growth the outlook have gotten worse since the Vladivostok summit. The United States is notably weaker, emerging economies are visibly weaker, and the eurozone still the weakest of them all. With global trade stalling, prospects have dimmed that exports will help buoy the US economy. Indeed, the trade shift has taken a big toll on the US outlook. What’s needed is for G20 governments to speed up on steps already committed to boost domestic demand, support growth and cut unemployment.
Since then, Italy was forced to raise its budget deficit after revisions to growth forecasts indicated the economy will shrink by 2.4% in 2012, with no recovery in sight in 2013. Spain, despite raising value added tax and freezing pensions, is likely to deepen its recession that began at the end of last year. Finally, there is the ever-present danger of “currency wars,” attendant on rounds of central bank easing. Already Brazil, Turkey and Peru have taken steps to keep easy money from flooding in and driving up their currencies. I understand central banks in Malaysia, South Korea, Thailand, Singapore and the Philippines are closely monitoring developments, ever ready to “smooth out” market movements if capital inflows become disruptive.
Western woes
The eurozone remains at the heart of the persisting slump. ECB’s decision to support distressed economies by purchasing bonds only buys time to implement tough measures needed to resolve the crisis. Policy challenges are daunting amid a deepening recession as front-loaded fiscal austerity takes hold. They just have too much to do: establishing a banking union, fiscal union and economic union, while needing to pursue macroeconomic policies to restore growth, foster external rebalancing and reform to enhance competitiveness.
And to do all these in the midst of monetary “hawks,” worried about open-ended bail-out funding; austerity fatigue in the eurozone periphery; political-social unrest, including resurgence of Spanish Catalan secessionism; and possibly even a Greek exit before Spain and Italy can be appropriately ring-fenced. Recent indicators continue to paint a bleak picture for Europe. Manufacturing activity shrank for the 14th straight month in September, suggesting prospects are slim for a quick return to growth. It’s entering a period of recession, after three quarters of negative or flat growth.
Joblessness in the 17-nation eurozone was 11.4% in August (18.2 million unemployed, highest since euro’s inception in 1999), while 25.5 million were out of work in the wider 27-nation European Union. Joblessness will exceed 19 million by early 2014, or about 12%. Eurozone GDP fell 0.2% in the second quarter and recession is expected to persist in the second half.
According to the European Commission, confidence among eurozone consumers and businesses fell for a 6th straight month in September to its lowest level in three years, while bank credit flows stayed weak. Worse, the data painted an overwhelmingly negative picture even in the “core” countries (Germany, France, the Netherlands, Austria) that had largely withstood the effects of the crisis until recently.
For Germany, there was a 6th successive rise in unemployment (2.91 million) in September (6.8%). Decline in manufacturing activity, however, eased in Germany in September, but steepened markedly in France. Slackening manufacturing, reflecting postponing investments and fiscal austerity, is expected to act as a severe drag on growth in the second half.
US economic growth was much weaker than previously estimated in the second quarter as drought cut into inventories against a backdrop of slowing manufacturing activity. GDP rose by a mere 1.3%, down from previous estimates of 1.7%-2%. It also reflected weaker consumer and business spending. Outlays in residential housing and export growth were also less robust.
Indicators are that the third quarter will show modest improvement despite housing coming out of a 6-year slump and manufacturing expanding surprisingly in September amid slower global demand. However, US CEOs are now as bleak about the outlook as they were in the aftermath of the last recession. Business confidence fell to its lowest point since the third quarter of 2009. In response, the Fed intends to vigorously pursue QE3: “ without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labour market conditions.”
Since interest rates are already so low and for so long, the new move is unlikely to achieve much given the prolonged and disturbing weakness in domestic demand. IMF warned that the United States will move into recession and contract 2% in 2013 if Congress doesn’t avert the “fiscal cliff” of automatic spending cuts and tax increases.
Japan’s prospects for continuing economic recovery was set back with a 1.3% fall in industrial output in August to a 15-month low, reflecting slowing sales to its leading export market (China) and also to crisis-hit Europe. I am now at Keio University and Japanese friends tell me the economic outlook is sombre, despite recent positive retail sales and a slight fall in unemployed. GDP rose 0.2% in quarter two (1.3% in quarter one) and likely to stall for the rest of the year as the boost from reconstruction related demand fizzles, and because of poor European demand, subdued Chinese growth and the strong yen.
For 2012, GDP will rise about 2%, but growth will peter out in 2013 (1.6%) and 2014 (below 1%) in the face of softening manufacturing activity and headwinds from slackening global demand. Manufacturing output hovered at its lowest level in 16 months. Its political dispute with China can only make things worse. For the Japanese (and the Chinese), it’s an emotional issue with deep historical, cultural and people roots. I sense (being physically in Tokyo) that the issue just won’t go away things can get worse before they get better.
China
China’s economy continues to soften and domestic investment is unlikely to expand significantly in the fourth quarter. Its GDP rose 7.6% in quarter two (8.1% in quarter one) marking the slowest pace in more than 3 years. The economy continues to “cool,” estimated to rise by 7.4% in the third quarter, reflecting contracting demand in key overseas markets (notably Europe) and sluggish home credit expansion. Manufacturing activity rose slightly in September but remained in “contractionary territory” for the 11th consecutive month, suggesting persistent slowing of the economy. New export orders fell at the fastest rate since March 2009. As a result, the workforce in manufacturing shrank but mildly. Beijing faces mounting pressure to stimulate to rekindle growth. It’s acting cool in order to promote “stable growth.”
As I understand it, new infrastructure projects approved in early September add up to 1 trillion yuan (US$160bil) or 2.1% of 2011 GDP. Government stimulus to cushion the downshift appears to be in train with stepped-up approvals of many “infrastructure projects,” but the pace of implementation is not expected to be as rapid given tight monetary conditions, cautious bank lending and restrained fiscal spending. Besides, rather than exacerbate previous imbalances, China is pushing for a “new normal” to stabilise annual growth at 7%-7.5%, and avoid yet another round of investment fuelled growth. This time, stress would be placed on social housing, social safety-nets and social infrastructure and education. Expectation is for GDP to rise 7.5% in 2012, China’s weakest full-year growth since 1999.
What, then, are we to do?
Recent data highlighted continuing vulnerabilities in East and South-East Asia. Sure, their economies are growing well. So far, at least. They have learnt that impact of the West’s slump can get to be far reaching and their policy responses (more QEs and protectionist moves), potentially damaging. Withdrawal of demand from Asian exports has had profound consequences on growth and employment in China, Indonesia, Taiwan, South Korea, Vietnam, Malaysia and India. So have their easy money flows and protectionist measures.
Asia must learn lessons from past indiscriminate, large-scale stimulus efforts. Governments need to preserve enough firepower just in case the slow-down deepens and persists. The time has come to take out some insurance and err on the side of easier policies. When trying to lift growth, focus on efforts at building social infrastructure and institutions (affordable housing, welfare safety-nets, education, helping people left behind).
Finally, worry also about the revival of “currency wars” following upon the guise of rounds of central bank stimulus cheap and abundant money tends to drive up artificially the value of Asian currencies. The world has become a more dangerous place. Can’t take the eyes off the balls. Protecting the national interest requires policy-makers to be always vigilant.
EVENTS do develop rapidly in the midst of uncertainty. So I thought it best today to update readers on what’s going on. My recent columns covered a wide variety of subjects ranging from what G20 leaders did in Vladivostok to manipulating the London Interbank Offered Rate; from the snoozing global economy to efforts by the European Central Bank (ECB) and the Fed to stimulate with more quantitative easing; from recession in eurozone to Europeans struggling to save the euro and bring down unemployment. For sure, the course of growth has gone worse. So what else is new?
Global economy snores
The world economy is now at its most fragile since the 2008 financial crisis according to the Organisation for Economic Co-operation and Development (OECD), the Paris-based 34-member rich world’s think-tank. Last week, the World Trade Organisation (WTO) forecast that world trade will grow by a mere 2.5% this year, based on data showing global trade volume rose by just 0.3% in the second quarter (2.1% in the first quarter). Growth is dragged down mainly by Europe to less than half of the previous 20-year average. Its forecasts are based on a consensus 2.1% world growth in 2012 and 2.3% in 2013. Still, many risks remain on the downside. OECD puts the blame squarely on the eurozone. So too is the row between China and Japan over disputed islands in nearby seas. China and Japan are Asia’s largest economies: two-way trade between them rose 14.3% to a record US$345bil in 2011. Merchandise trade slowed in most major global economies in 2Q’12, with outright contractions in all major European nations and in India, Russia and South Africa (key emerging BRICS economies).
OECD’s 40-year long correlation established between trade and growth points to a slackening of world trade being accompanied by a fresh lurch lower for world growth. Its Composite Leading Indicators (CLIs) show that most major economies will continue to slow-down in the coming months. The CLIs (which have a good track record) suggest that it will take many months before global growth recovers. Indeed, they show that the loss of momentum will persist in the coming quarters in most major OECD nations and the rest of the world. Among the developed nations, economic contraction in the eurozone is set to continue. CLIs for the United States and Japan also fell; they were unchanged for China and India, but that for Russia declined. OECD’s CLIs are designed to provide an early warning signal of turning points between expansion and contraction in economic activity.
They are based on a wide range of data that have a history of signalling changes in activity. Overall, OECD concluded that the combined GDP of G20 leading economies rose by only 0.6% in the second quarter, against 0.7% in the first quarter.
The outlook is grim. The policy game of kicking-the-can-down-the-road hasn’t worked as the can gets heavier. Central bank stimulus is not enough to fix the ailing global economy amid a deepening sense of doom. Fiscal measures are needed to boost growth. Since mid-year, financial markets have rallied on the hope that central banks will be there to back-stop adverse developments with new buckets of cash.
In the eurozone, euphoria followed ECB’s Sept 6 readiness to buy unlimited quantities of short-dated government bonds of nations signed up for the rescue. This was followed on Sept 13 with the US Fed agreeing to buy additional US$40bil of mortgage debt securities monthly in a third round of quantitative easing; while the Bank of Japan unexpectedly increased its asset-purchase fund to US$1 trillion on Sept 19. These moves helped to calm markets but they are not a game-changer. I don’t see how the extra stimulus can cancel out downside risks emanating from the persisting euro-crisis, impending fiscal “cliff-hanger” tightening in the United States, and slackening growth in emerging markets. Easy money merely buys time. That’s not enough to resolve deep-rooted problems. Serious downside risks remain.
Both the OECD and International Monetary Fund (IMF) have since scaled back expectations for global growth the outlook have gotten worse since the Vladivostok summit. The United States is notably weaker, emerging economies are visibly weaker, and the eurozone still the weakest of them all. With global trade stalling, prospects have dimmed that exports will help buoy the US economy. Indeed, the trade shift has taken a big toll on the US outlook. What’s needed is for G20 governments to speed up on steps already committed to boost domestic demand, support growth and cut unemployment.
Since then, Italy was forced to raise its budget deficit after revisions to growth forecasts indicated the economy will shrink by 2.4% in 2012, with no recovery in sight in 2013. Spain, despite raising value added tax and freezing pensions, is likely to deepen its recession that began at the end of last year. Finally, there is the ever-present danger of “currency wars,” attendant on rounds of central bank easing. Already Brazil, Turkey and Peru have taken steps to keep easy money from flooding in and driving up their currencies. I understand central banks in Malaysia, South Korea, Thailand, Singapore and the Philippines are closely monitoring developments, ever ready to “smooth out” market movements if capital inflows become disruptive.
Western woes
The eurozone remains at the heart of the persisting slump. ECB’s decision to support distressed economies by purchasing bonds only buys time to implement tough measures needed to resolve the crisis. Policy challenges are daunting amid a deepening recession as front-loaded fiscal austerity takes hold. They just have too much to do: establishing a banking union, fiscal union and economic union, while needing to pursue macroeconomic policies to restore growth, foster external rebalancing and reform to enhance competitiveness.
And to do all these in the midst of monetary “hawks,” worried about open-ended bail-out funding; austerity fatigue in the eurozone periphery; political-social unrest, including resurgence of Spanish Catalan secessionism; and possibly even a Greek exit before Spain and Italy can be appropriately ring-fenced. Recent indicators continue to paint a bleak picture for Europe. Manufacturing activity shrank for the 14th straight month in September, suggesting prospects are slim for a quick return to growth. It’s entering a period of recession, after three quarters of negative or flat growth.
Joblessness in the 17-nation eurozone was 11.4% in August (18.2 million unemployed, highest since euro’s inception in 1999), while 25.5 million were out of work in the wider 27-nation European Union. Joblessness will exceed 19 million by early 2014, or about 12%. Eurozone GDP fell 0.2% in the second quarter and recession is expected to persist in the second half.
According to the European Commission, confidence among eurozone consumers and businesses fell for a 6th straight month in September to its lowest level in three years, while bank credit flows stayed weak. Worse, the data painted an overwhelmingly negative picture even in the “core” countries (Germany, France, the Netherlands, Austria) that had largely withstood the effects of the crisis until recently.
For Germany, there was a 6th successive rise in unemployment (2.91 million) in September (6.8%). Decline in manufacturing activity, however, eased in Germany in September, but steepened markedly in France. Slackening manufacturing, reflecting postponing investments and fiscal austerity, is expected to act as a severe drag on growth in the second half.
US economic growth was much weaker than previously estimated in the second quarter as drought cut into inventories against a backdrop of slowing manufacturing activity. GDP rose by a mere 1.3%, down from previous estimates of 1.7%-2%. It also reflected weaker consumer and business spending. Outlays in residential housing and export growth were also less robust.
Indicators are that the third quarter will show modest improvement despite housing coming out of a 6-year slump and manufacturing expanding surprisingly in September amid slower global demand. However, US CEOs are now as bleak about the outlook as they were in the aftermath of the last recession. Business confidence fell to its lowest point since the third quarter of 2009. In response, the Fed intends to vigorously pursue QE3: “ without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labour market conditions.”
Since interest rates are already so low and for so long, the new move is unlikely to achieve much given the prolonged and disturbing weakness in domestic demand. IMF warned that the United States will move into recession and contract 2% in 2013 if Congress doesn’t avert the “fiscal cliff” of automatic spending cuts and tax increases.
Japan’s prospects for continuing economic recovery was set back with a 1.3% fall in industrial output in August to a 15-month low, reflecting slowing sales to its leading export market (China) and also to crisis-hit Europe. I am now at Keio University and Japanese friends tell me the economic outlook is sombre, despite recent positive retail sales and a slight fall in unemployed. GDP rose 0.2% in quarter two (1.3% in quarter one) and likely to stall for the rest of the year as the boost from reconstruction related demand fizzles, and because of poor European demand, subdued Chinese growth and the strong yen.
For 2012, GDP will rise about 2%, but growth will peter out in 2013 (1.6%) and 2014 (below 1%) in the face of softening manufacturing activity and headwinds from slackening global demand. Manufacturing output hovered at its lowest level in 16 months. Its political dispute with China can only make things worse. For the Japanese (and the Chinese), it’s an emotional issue with deep historical, cultural and people roots. I sense (being physically in Tokyo) that the issue just won’t go away things can get worse before they get better.
China
China’s economy continues to soften and domestic investment is unlikely to expand significantly in the fourth quarter. Its GDP rose 7.6% in quarter two (8.1% in quarter one) marking the slowest pace in more than 3 years. The economy continues to “cool,” estimated to rise by 7.4% in the third quarter, reflecting contracting demand in key overseas markets (notably Europe) and sluggish home credit expansion. Manufacturing activity rose slightly in September but remained in “contractionary territory” for the 11th consecutive month, suggesting persistent slowing of the economy. New export orders fell at the fastest rate since March 2009. As a result, the workforce in manufacturing shrank but mildly. Beijing faces mounting pressure to stimulate to rekindle growth. It’s acting cool in order to promote “stable growth.”
As I understand it, new infrastructure projects approved in early September add up to 1 trillion yuan (US$160bil) or 2.1% of 2011 GDP. Government stimulus to cushion the downshift appears to be in train with stepped-up approvals of many “infrastructure projects,” but the pace of implementation is not expected to be as rapid given tight monetary conditions, cautious bank lending and restrained fiscal spending. Besides, rather than exacerbate previous imbalances, China is pushing for a “new normal” to stabilise annual growth at 7%-7.5%, and avoid yet another round of investment fuelled growth. This time, stress would be placed on social housing, social safety-nets and social infrastructure and education. Expectation is for GDP to rise 7.5% in 2012, China’s weakest full-year growth since 1999.
What, then, are we to do?
Recent data highlighted continuing vulnerabilities in East and South-East Asia. Sure, their economies are growing well. So far, at least. They have learnt that impact of the West’s slump can get to be far reaching and their policy responses (more QEs and protectionist moves), potentially damaging. Withdrawal of demand from Asian exports has had profound consequences on growth and employment in China, Indonesia, Taiwan, South Korea, Vietnam, Malaysia and India. So have their easy money flows and protectionist measures.
Asia must learn lessons from past indiscriminate, large-scale stimulus efforts. Governments need to preserve enough firepower just in case the slow-down deepens and persists. The time has come to take out some insurance and err on the side of easier policies. When trying to lift growth, focus on efforts at building social infrastructure and institutions (affordable housing, welfare safety-nets, education, helping people left behind).
Finally, worry also about the revival of “currency wars” following upon the guise of rounds of central bank stimulus cheap and abundant money tends to drive up artificially the value of Asian currencies. The world has become a more dangerous place. Can’t take the eyes off the balls. Protecting the national interest requires policy-makers to be always vigilant.