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Balancing act
In spring 2012, the world economy regained somewhat its vigour, notably in the
United States, where the upbeat message of economic indicators is no doubt.
They signal a rally on almost all fronts, from the job market, which is picking up
at a rate of 2.5 million net job creations a year, to consumption, which is keeping
pace with employment, but also benefits from rebound in lending, and corporate
investment, buoyed by high earnings and a rising production capacity utilisation
rate. Real estate, by far the most distressed sector (housing starts have never
been so low since the early 1940s), is also showing signs of exiting the
doldrums (chart 1). The stock of houses available for sale is decreasing, real
estate prices are historically low as a share of disposable household income,
and real interest rates on mortgage loans are extremely attractive, thanks
largely to the Fed's Twist operation. The affordability index, which measures the
financial capacity of consumers to buy a home, has never been so high, while
surveys of real estate developers show they are climbing out of depression
territory.
The rally in the United States is likely to boost the big Asian suppliers first,
namely China and Japan, which together account for a quarter of US imports,
although maybe not as much as one might expect. During recovery phases, it is
normal to see a swelling of net imports from overseas: the world's number one
power steps up international purchases more than sales, and foreign trade
generally makes a negative contribution to growth. This has been the case since
June 2009 (the latest, officially-dated cyclical trough), but only to a limited
extent: the negative contribution has trimmed growth by only 0.6 points out of a
cumulative total of 6.2 points between June 2009 and December 2011. The US
recovery has been rather stingy in terms of imported goods. This can be
attributed to several factors: the recovery has been accompanied by an
unparalleled decline in the household debt ratio (-14 points of disposable
income since June 2009), which has held down consumer spending. It also has
been coupled with a very strong improvement in the competitiveness of "Made
in America". Though rising again, US unit labour costs (what a unit of GDP costs
in terms of wages and benefits) are still 1% lower than at year-end 2008. This is
an exception within the G7, where in a main challenger like Germany, for
example, unit labour costs rose 3.3%. The dollar is also weak. Measured via the
real effective exchange rate, the combination of these two factors (lower labour
costs and exchange rates) resulted in a 20% depreciation of US products in
relative terms since year-end 2008. If there is one sector in which American
products are selling best, it is the automotive industry. Restructured under the
Federal government support, which injected nearly $80bn via TARP, the
Troubled Asset Relief Program, the US automotive industry has regained nearly
10 points of domestic market share over the past three years (chart 2).
Japan's troubles have undoubtedly contributed to the relative improvement in
America's trade position. A year after the Fukushima disaster, only one of
Japan's 54 nuclear power plants is still operating. Plants shut down for
maintenance must undergo stringent resistance tests and can only start up
again after receiving the go ahead from local authorities, who are
understandable being extremely cautious. In the meantime, Japan must import
fossil fuels, and is struggling to restore production to the levels prior to March
2011
China itself is at a turning point. Like the western nations caught up by their
excessive debts, the Middle Kingdom is testing the limits of its growth model
built solely on exports. China's trade surpluses are no longer what they used to
be, even though world production has already surpassed pre-crisis levels. From
nearly $300bn in 2008, its trade surplus fell back to $156bn in 2011 (cumulative
12-month figure, chart 4). In February, China reported a trade deficit for the first
time in a long time.
The erosion of China's trade surplus is not only due to debt reduction by its
major trading partners in Europe and America, which are curbing purchases. It
also reflects the ongoing erosion of the terms of trade. Over the past ten years,
the unit value of Chinese exports has plunged 30% relative to imports. China's
selling prices have increased little in absolute terms, and have declined relative
to its purchases. Its increasingly sophisticated products are increasingly costly in
terms of inputs, notably raw materials, which China lacks. In ten years, its
energy and food bill with the rest of the world has increased 15 fold, generating
an annual deficit of about $300bn, one of the highest in the world as a share of
GDP. The cost of labour is also rising as workers demand their share of the
considerable productivity gains that have accompanied the country's economic
miracle. In 2011, China's minimum wage increased 20%, much more than per
capita GDP. Another 15% increase is planned in 2012. "Made in China" is no
longer as cheap, but in the final marketing phase, the end price is what big
foreign companies look at most. China has reached the point where increasing
the worldwide distribution of its products is no longer as profitable, and certainly
not as easy.
China's next source of growth is China. Its 1.3 billion inhabitants consume only
30% of the wealth they produce, a small share that has constantly eroded over
the past fifteen years. The authorities in Beijing are now determined to reverse
this trend.
In the end, the economic picture that we just painted is generally favourable with
slightly more robust, better balanced world growth (chart 4). But it is still
threatened by a major risk: the deterioration of the sovereign debt crisis in the
eurozone. In southern Europe, financing tensions have reappeared recently,
after the lull triggered by the ECB's €1,000 billion 3-year loans. This is especially
true for Spain, where public protests are growing against a backdrop of
recession and record unemployment. Public deficits, which were already higher
than expected in 2011, are barely budging. Italy's remarkable turnaround in the
first 100 days of the Mario Monti administration has also hit a snag with the
latest -- extremely ambitious -- job market reform, currently being debated in
Parliament.
April 2012
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Balancing act
In spring 2012, the world economy regained somewhat its vigour, notably in the
United States, where the upbeat message of economic indicators is no doubt.
They signal a rally on almost all fronts, from the job market, which is picking up
at a rate of 2.5 million net job creations a year, to consumption, which is keeping
pace with employment, but also benefits from rebound in lending, and corporate
investment, buoyed by high earnings and a rising production capacity utilisation
rate. Real estate, by far the most distressed sector (housing starts have never
been so low since the early 1940s), is also showing signs of exiting the
doldrums (chart 1). The stock of houses available for sale is decreasing, real
estate prices are historically low as a share of disposable household income,
and real interest rates on mortgage loans are extremely attractive, thanks
largely to the Fed's Twist operation. The affordability index, which measures the
financial capacity of consumers to buy a home, has never been so high, while
surveys of real estate developers show they are climbing out of depression
territory.
The rally in the United States is likely to boost the big Asian suppliers first,
namely China and Japan, which together account for a quarter of US imports,
although maybe not as much as one might expect. During recovery phases, it is
normal to see a swelling of net imports from overseas: the world's number one
power steps up international purchases more than sales, and foreign trade
generally makes a negative contribution to growth. This has been the case since
June 2009 (the latest, officially-dated cyclical trough), but only to a limited
extent: the negative contribution has trimmed growth by only 0.6 points out of a
cumulative total of 6.2 points between June 2009 and December 2011. The US
recovery has been rather stingy in terms of imported goods. This can be
attributed to several factors: the recovery has been accompanied by an
unparalleled decline in the household debt ratio (-14 points of disposable
income since June 2009), which has held down consumer spending. It also has
been coupled with a very strong improvement in the competitiveness of "Made
in America". Though rising again, US unit labour costs (what a unit of GDP costs
in terms of wages and benefits) are still 1% lower than at year-end 2008. This is
an exception within the G7, where in a main challenger like Germany, for
example, unit labour costs rose 3.3%. The dollar is also weak. Measured via the
real effective exchange rate, the combination of these two factors (lower labour
costs and exchange rates) resulted in a 20% depreciation of US products in
relative terms since year-end 2008. If there is one sector in which American
products are selling best, it is the automotive industry. Restructured under the
Federal government support, which injected nearly $80bn via TARP, the
Troubled Asset Relief Program, the US automotive industry has regained nearly
10 points of domestic market share over the past three years (chart 2).
Japan's troubles have undoubtedly contributed to the relative improvement in
America's trade position. A year after the Fukushima disaster, only one of
Japan's 54 nuclear power plants is still operating. Plants shut down for
maintenance must undergo stringent resistance tests and can only start up
again after receiving the go ahead from local authorities, who are
understandable being extremely cautious. In the meantime, Japan must import
fossil fuels, and is struggling to restore production to the levels prior to March
2011
China itself is at a turning point. Like the western nations caught up by their
excessive debts, the Middle Kingdom is testing the limits of its growth model
built solely on exports. China's trade surpluses are no longer what they used to
be, even though world production has already surpassed pre-crisis levels. From
nearly $300bn in 2008, its trade surplus fell back to $156bn in 2011 (cumulative
12-month figure, chart 4). In February, China reported a trade deficit for the first
time in a long time.
The erosion of China's trade surplus is not only due to debt reduction by its
major trading partners in Europe and America, which are curbing purchases. It
also reflects the ongoing erosion of the terms of trade. Over the past ten years,
the unit value of Chinese exports has plunged 30% relative to imports. China's
selling prices have increased little in absolute terms, and have declined relative
to its purchases. Its increasingly sophisticated products are increasingly costly in
terms of inputs, notably raw materials, which China lacks. In ten years, its
energy and food bill with the rest of the world has increased 15 fold, generating
an annual deficit of about $300bn, one of the highest in the world as a share of
GDP. The cost of labour is also rising as workers demand their share of the
considerable productivity gains that have accompanied the country's economic
miracle. In 2011, China's minimum wage increased 20%, much more than per
capita GDP. Another 15% increase is planned in 2012. "Made in China" is no
longer as cheap, but in the final marketing phase, the end price is what big
foreign companies look at most. China has reached the point where increasing
the worldwide distribution of its products is no longer as profitable, and certainly
not as easy.
China's next source of growth is China. Its 1.3 billion inhabitants consume only
30% of the wealth they produce, a small share that has constantly eroded over
the past fifteen years. The authorities in Beijing are now determined to reverse
this trend.
In the end, the economic picture that we just painted is generally favourable with
slightly more robust, better balanced world growth (chart 4). But it is still
threatened by a major risk: the deterioration of the sovereign debt crisis in the
eurozone. In southern Europe, financing tensions have reappeared recently,
after the lull triggered by the ECB's €1,000 billion 3-year loans. This is especially
true for Spain, where public protests are growing against a backdrop of
recession and record unemployment. Public deficits, which were already higher
than expected in 2011, are barely budging. Italy's remarkable turnaround in the
first 100 days of the Mario Monti administration has also hit a snag with the
latest -- extremely ambitious -- job market reform, currently being debated in
Parliament.
April 2012
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