Fading Thrill of Global Growth
August 25, 2010
Economic prospects can change in a hurry. Revised growth projections released last month by the International Monetary Fund were quite respectable. The IMF staff was looking for a second straight year of 4%+ global growth in 2011. Emerging and developing nations would expand almost 7%, three times faster than the advanced nations. Within the latter category, growth was penciled in at 4.7% among the Asian NIEs (a.k.a. the tigers), 2.9% in the United States, 2.8% in Canada, 2.1% in Britain, 1.8% in Japan, and 1.3% in the euro area.
One month later, market chatter is full of double-dip recession talk. Concern in the United States is being fed by a run of weaker-than-expected economic indicators.
- Withdrawn incentives for first-time property buyers fostered declines in July of 27.2% in existing home sales, 12.4% in new home sales, and 3.1% in housing permits. The Federal Housing Finance Agency house price index dropped 0.3% in June.
- Weekly chain store sales have struggled to maintain any kind of growth, an ominous sign in this back-to-school shopping season.
- Durable goods orders rose only 0.3% in July and were still 0.5% below their April level. Orders for non-defense, non-aircraft capital goods plunged 8.0% last month, erasing decent gains recorded in the previous two months.
- The Philly Fed manufacturing index showed a stunning 12.8 point adverse swing from +5.1 in July to minus 7.7 in August.
- Slightly more than a year after the recession presumably ended, new jobless insurance claims, which are a gauge of worker layoffs, astonishingly returned to the horrific level of a half million for a single week. Claims averaged 482.5K per week in the four weeks to August 14. The private sector is creating almost no new jobs, and the public sector is under wraps because of deficit fears. The promise of creative destruction remains elusive.
- In neighboring Canada, retail sales in June were 2.6% lower than in March. The sense of faltering North American momentum toward mid-2010 could also be observed in a 0.3% drop in Canadian wholesale turnover during June.
The biggest sources of worry in Japan are the plunge of equity prices and relentless upward grind of the yen. The Nikkei-225 index has lost 9.3% since July 28, 13.6% since June 21, and 22.0% since April 5. The yen is about 60% stronger against the euro than it was some two years ago. Since April 5 when equities turned lower, the yen has climbed roughly 12% on a trade-weighted basis and by 19.5% against the euro. Japan’s monthly all-industry index, a supply-side indication of GDP, posted gains of only 0.1% in both May and June, and customs-clearance exports recorded three straight seasonally adjusted drops in May-through-July totaling 6.6%. On-year export volume growth slowed to 25.5% in July from 33.0% in the second quarter and 43.7% in the first quarter of 2010.
European data have outperformed expectations substantially but with an unevenness that casts doubt upon the matter of sustainability beyond the third and fourth quarters. German GDP rose 9% annualized last quarter, with similar contributions from net exports and investment that collectively accounted for three-quarters of that rapid expansion. Personal consumption, government spending, and inventories also made positive contributions. The euro area’s composite purchasing managers index averaged 56.4 in July-August, suggesting GDP growth this quarter almost as good as last quarter’s pace of 3.9% annualized. Germany’s IFO business climate index averaged 106.5 in July-August versus a 2Q mean reading of 101.7. Consumer confidence in the whole euro area rose 2.3 points to minus 11.7 in August. Greece is in the grip of a pretty severe recession. The Italian services PMI index slid below the break-even level of 50 this month, and Spain and Ireland are other trouble spots to watch.
Europe’s sovereign debt crisis forced governments to impose fiscal medicine prematurely. Britain, where the restraint is even harsher than in the early Thatcher years, will be the proverbial canary in the mine. With the financial system not back at full strength and money and credit growth at very depressed levels in spite of historically low interest rates, it may not be possible to counter-balance fiscal cuts with monetary policy support. There’s been insufficient coordination between fiscal and monetary policymakers and between different countries, but most of all not enough knowledge exists regarding how changing policy will impact real economic activity in these extraordinary times.
2010 turned out much better than imagined a year ago, and hope for 2011 must rest heavily on emerging markets especially in Asia. Growth there, however, seemingly cannot possibly match the spectacular first-half results. The second derivative of activity will be clearly negative with policy encouragement from the governments of China and some others in the region. Two uncertainties are 1) how sharply does Asian growth slow as a result of the weaker prognosis for activity elsewhere and policy restraint at home and 2) whether advanced nation slowdowns can be mitigated by emerging economy resilience.
One thing that is clear, however, is that the world economy will have scant reserve to absorb a fresh unforeseen shock. Public finances are much worse now than three years ago, nominal interest rates remain very low at all maturities, structural flaws in the European monetary system have been exposed, big current account imbalances are returning, and the U.S. jobs deficit of about 29 million workers is still cresting. Emerging markets do not represent a large enough share of the global pie to rejuvenate the ageing advanced economies. Nine years after Al Qaeda set out to destabilize the forward progress of western civilization with a team of nineteen terrorists armed with box cutters, it is mind-boggling how well its strategic plan has succeeded without tactically replicating anything resembling the brazen initial statement.
Copyright Larry Greenberg 2010. All rights reserved. No secondary distribution without express permission.
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