Merry Christmas Economy!
Global Economics Weekly Brief
It is the brief before Christmas and in the UK, house price inflation risks running away in the UK. The US consumer is spending like stink (credit cards/loans/borrowing) and while Germany grew, France continued to shrink rapidly.
China looks stable at present, while others look weaker day by day, as tapering talk makes their prospects look bleaker. And hoping to give readers a lift, there’s economic advice on that great Christmas gift. 2013 had lots of statistical cheer. Merry Christmas to all and a Happy New Year globally! Plus, a Festive Season to others globally.
UK house prices in festive spirits. “There is a history of things shifting in the UK, and of the housing market moving from stall speed to warp speed," said Bank of England (BoE) Governor Carney last week. News from RICS, the surveyors' trade body, will not have lifted his mood. Demand for houses is motoring but estate agents' windows are like a toy store’s at closing time on Christmas Eve: pretty bare. That is pushing prices up faster, with the Halifax recently reporting rises across the UK of 8% y/y. Much more of this and the BoE will want to let the air out of any bubble before it gets too big and bursts. Media and building societies/banks hype to push up prices again, the same as before when it all went very sour! Will not, people learn from history!
Manufacturing rebounded while the trade deficit persisted. Manufacturing output rose 2.6%y/y in October, the fastest increase in two and a half years. Growth was again underpinned by rising vehicle production. Production has a long way to go to get back to pre-crisis levels, but if this rebound continues it will help lay a stronger foundation for the economic recovery. The UK's trade deficit was -£2.6bn in October, the same as September. This was not helped by goods exports drifting lower over the past few months, despite the best efforts to boost them. If the recovery continues to be consumer driven, the prospect of growing imports could mean that the stubbornly high trade deficit remains exactly that. Manufacturing needs to export more before jumping for joy! Plus, imports need to decline otherwise the UK are in big trouble again!
It is the season in the US. Americans opened their pocketbooks wide at the start of the holiday spending season. Retail sales were up a healthy 4.7% y/y in November. Growth for October was revised up from 0.4% m/m to 0.6% m/m. The US consumer's heart barely missed a beat during the Government shutdown and other fiscal shenanigans over the autumn. Numbers like these mean firms are able to sell the stocks they built up in Q3 and that growth in Q4 should be decent. What are the borrowing levels? Do not rejoice just yet!
Solid Chinese data. Chinese exports rose 12.7%y/y in November, driven by a recovery in global demand. Exports to the UK have grown by around 20%y/y on average over the past four months, outstripping shipments to the US, EU, Latin America and even the rest of South East Asia. Meanwhile, industrial production rose 10%y/y in November and investment grew by around 20%y/y. On top of this, retail sales grew just short of 14%y/y, the best showing in almost a year. Economic growth looks stable for now, but will that remain the case as the authorities try to slow credit growth? What are the UK and other countries trying to prove by import vast amounts from China?
What about the rest of the emerging world? Many of the other major emerging markets are going through a `difficult period`. India's economy grew 4.8%y/y in Q3 - it was growing at twice that pace just three years ago. Growth in Turkey more than halved in two years to 4.4%y/y in Q3. Indonesia's growth slowed throughout 2013. These three countries share something in common. Each was hit by the US central bank's talk of reducing the scale of its Quantitative Easing programme ('tapering'). Less QE in the US means less money making its way to emerging markets. It is bound to come sooner or later. Check out below emerging markets that are mostly exposed globally in the future.
Some up, some down in Europe. Eurozone PMIs rose to 52.1 in December. The improvement was led by the manufacturing sector, which posted the strongest rate of expansion in over two and half years. Unfortunately the service sector did not join the end-of-the-year celebrations as the rate of growth eased for the third consecutive month. Most countries will be drinking a toast. German businesses will crack open a few bottles of beer as their output increased again. And Italian and Spanish firms will enjoy a few sips of spumante and cava on improved growth. But the champagne will be left to chill – private sector activity in France continued to decline adding worries of a return to technical recession in Q4. Plus, massive increases in unemployment is the worry in 2014!
The secret of a successful Christmas gift is deceptively simple. A 1993 paper by economist Joel Waldfogel calculated the difference between the cost of a gift and the value it was worth to the recipient. The most generous estimate suggested the recipient would have paid just £9 for a gift costing £10. That seems a lot of wasted money, about £1.6bn this year, based on a YouGov poll suggesting we'll be spending about £16bn on presents. We give because we care but it's hard to know others' wants. The secret to a successful gift is finding out what the person wants, but feels guilty buying for themselves. Receiving gifts removes the guilt-factor. Easy in theory!
Emerging markets that are mostly exposed globally in the future.
It’s time for a business check-up and wake-up for many:
Emerging market vulnerabilities in a world of rising US interest rates that impacts on us all!
Ø Emerging markets have entered a new world. The US appears to be on a path of higher interest rates as the economy gradually recovers (recent debt ceiling issues aside).
Ø Because US monetary policy sets the tone for much of the world, some emerging markets are going to find life a bit/MORE more difficult. Here is an economic health-check of 22 emerging markets to see which are most vulnerable to rising US rates.
Ø There are a number of high profile emerging markets in our most vulnerable grouping, including South Africa, India, Indonesia and Turkey.
Ø Investors should consider the risks that their portfolios are exposed to in this new world. Businesses should understand the consequences of slower growth for their plans and whether their cash flows require new hedging strategies.
A new world for emerging markets
Emerging markets have benefitted from the central bank liquidity deluge (quantitative easing) that has characterised the post-crisis period. This has supported both financial assets and the economies of emerging markets. But emerging markets have entered a new world. As the US economy recovers, the Fed is beginning to think about gradually moving away from the extraordinarily loose monetary policy stance of recent years. Long-term interest rates have already risen. As this process continues, it will pose numerous issues/problems for many emerging markets, ranging from downward pressure on currencies, poorer asset returns and lower economic growth than they have been accustomed to. These issues/problems have already begun to play themselves out in the months since ‘tapering’ was first mentioned in May 2013. Rapid rising interest rates will slow the world economies in the next 10 years!
It’s time to wake-up!
The shift in monetary policy by the US has been a issue/problem for emerging markets in the past. During the 1990s the US began to normalise monetary policy after a period of very low rates. This was a contributing factor to a number of emerging market crises, the most notable of which was the Asian financial crisis that commenced in 1997. To identify which emerging markets are vulnerable this time around it is necessary to perform a type of economic health check. By vulnerable we mean a country’s susceptibility to a sharp falls/volatility in their currency, falls in asset prices and lower economic growth. The emerging market universe is a hugely varied one. Some countries will suffer more than others. Watch out for the following;
Rising US rates – Most Vulnerable EMs
2. South Africa
It’s time for a business check-up and also to wake up to changes in the future that impact upon you: Emerging market vulnerabilities in a world of rising US interest rates
The vulnerable eight. Ukraine emerged as the most vulnerable economy. While this is a relative minnow, the most vulnerable grouping is not short of high-profile emerging markets. It is unsurprising that India and Indonesia appear in this top group. These countries appeared towards the bottom of a recent currency vulnerability ranking. But the analysis shows that Asia’s concerns do not end there. Malaysia and Thailand are also identified as vulnerable. In the main, the countries in this group run current account deficits and therefore rely on external financing. Consequently they have already suffered from a drop in value of their currencies. The Indian rupee lost around 25% of its value against the dollar between the middle of May 2013 (when ‘tapering’ talk began) and the end of August 2013. But as expectations of US Fed tapering have been pushed back, so have pressures on India’s currency. Similarly, Indonesia’s 10-year government bond yield rose 300bps between May and August 2013 as foreign investors sold holdings, only to then partially recover. These are illustrative of the type of changes our vulnerable economies could be expected to experience. Many of the countries in this group will be forced to reduce their reliance on external financing. Often that is achieved through raising interest rates. Some of the countries on the list above have already been tightening monetary policy in the past few months, including India and Indonesia.
Turkey was identified as an attractive market for UK companies to target. From a medium-long term perspective, that remains the case. But this paper makes it clear that Turkey could be subjected to financial volatility and slower growth in the near term, as US interest rates normalise. Watch very closely before investing!
The most important member of this group is China. Plus, it’s concerning that it appears toward the top end of our overall ranking (9th out of 22). But it’s not quite straightforward as that. China is both vulnerable and not vulnerable. It’s supported by the fact that its financial system is not reliant on external funding to any great degree (because it’s largely closed off) and so interest rates are almost entirely determined by domestic factors. So if it’s not vulnerable to higher US rates, why has it appeared so far up this ranking? The answer lies with the pace of credit growth, which has been very strong in recent years. Indeed, it’s similar to what other countries experienced before a financial crisis struck (Japan in the 1980s, South Korea in the 1990s and the UK and the US in the 2000s). There is a growing recognition that China’s financial system faces a reckoning following its recent credit binge. So even if interest rates in the US do not rise, its emerging financial issues/problems will likely still manifest themselves in the shape of slowing growth – both because credit is becoming less effective at delivering growth and because the government appears aware of the risks and will look to cool the pace of credit growth. Russia sits in the middle of our ranking. On the one hand foreign exchange reserves are healthy and it’s not reliant on external financing. But the health of Russia’s government finances has deteriorated sharply in recent years meaning there is less scope to deal with shocks than there was in the pre-crisis period. Watch very closely the activities of these countries before investing?
The Philippines scores particularly well in the assessment (i.e. least vulnerable). Its foreign exchange reserves, credit as a share of GDP, external financing and banking sector capitalisation all look in good shape. After numerous failed development take-offs in recent decades, the Philippines has achieved macroeconomic and political stability and appears set for a period of decent growth. In the first half of the year GDP growth averaged 7.6% - the same as China’s. It may be surprising that Brazil is in this category given that it has recently been grouped by some investors alongside Indonesia, India, Turkey, South Africa in a ‘fragile five’. Although Brazil runs deficits in both its current account and its government budget (normally a bad idea for emerging markets), its external debt position is healthy, the government budget position has been improving and its foreign exchange reserves are sizeable and growing (the other members of the ‘fragile five’ have experienced falling reserves). However, there is no doubt that Brazil is in a tricky spot. Weak economic and productivity growth, high inflation and a lack of international competitiveness are all in evidence. So although Brazil is in the ‘firmer footing’ category, it doesn’t mean it’s immune from financial strains.
Rising US Rates – EMs on a firmer footing
21. Saudi Arabia
Rising US Rates – the EM midtablers
10. Czech Republic
14. South Korea
It’s time for a business check-up and a wake up to many: Emerging market vulnerabilities in a world of rising US interest rates. Rising US Rates and Vulnerable Emerging Market Economies – Explaining the Links
The post-crisis period has been marked by very low interest rates as developed world central banks have sought to ignite an economic recovery. Money-printing by central banks (quantitative easing) has led to a surge in global liquidity. With low US rates, mobile investor capital scours the landscape for a higher yield. Emerging market assets are often targeted due to offering the prospect of very attractive investment returns relative to the US. Increased demand for those assets (equities and bonds) pushes up their prices. Countries with current account deficits (i.e. those who invest more than they save) have no issue/problem in attracting willing funders of their deficits. Bank lending in the recipient emerging markets rises because their interest rates are pushed lower. In other words, the post-crisis policies of developed world central banks have helped create very favourable economic growth conditions for many emerging markets. So when the Fed announced that it was considering tapering its asset purchase programme in May 2013, financial markets started to build in expectations of reduced money creation and eventual increases in interest rates in the developed world. In response, long-term interest rates started to rise. It was bad news for many emerging markets. Assets were sold off and many countries saw sharp downward moves in their currencies. Some investors will have sold on the expectation that other investors would also sell. A self-reinforcing cycle can quickly ensue that can eventually result in a financial crisis. While a crisis reminiscent of that seen in the 1980s in Latin America and Asia in the 1990s have been avoided (and may never appear) there are sizeable concerns. So not only have the policies of developed world central banks created the impetus for short-term growth, they have also been storing up financial vulnerabilities that are now beginning to emerge. Below is a summarise of the main channels through which higher US rates can impact emerging markets:
Ø Asset returns – as the relative attractiveness of emerging market assets declines (owing to rising US rates) emerging market assets are sold off. As the Fed’s move to more normal looking policy will likely be a stop-start affair, it is likely to create volatility around asset prices.
Ø Currency pressures – when a country’s assets are sold by foreign investors, local currencies are also sold as investors head for the exits. This puts downward pressure on the currency. Similar to assets, currencies are also likely to experience increased volatility.
Ø Economic growth – falling currencies raise the price of imports. This has two impacts. It makes current account deficits wider and pushes up inflation. To offset this effect, countries are forced to raise rates to attract capital back and cool inflationary pressures. Often these interest rate hikes are not what the economy needs in terms of growth. In other words, it can reinforce a slowing growth rate.
Ø Current Account – the difference between a country’s savings and investment rate. A current account deficit requires external funding. The larger the deficit the greater the vulnerability. We also considered the dynamics of the current account over recent years – has it been improving or deteriorating?
Ø Government Budget Balance – if the government is running a deficit, financing it can become a issue/problem if foreign investors turn against that country.
Ø External debt – foreign currency denominated debt can quickly become a problem when your own currency falls sharply in value against the currency that the debt is denominated in. This is a problem that afflicted many Eastern European countries during the financial crisis and has often been the source of emerging market crises.
Ø Reserves – foreign currency reserves offer a buffer against external debt shocks. The larger they are as a share of GDP the greater the safety net. Similar to the current account and the government budget balance, recent trends in reserves are also considered.
Ø Credit and the banking sector – how much has credit grown in recent years? If it has been high it’s more than likely it has given considerable support to growth. So tighter credit conditions going forward likely means lower growth.
Ø Currency – how overvalued or undervalued is the currency? An overvalued currency could mean a downward correction is approaching.
Again, the global future depends on the US activities with their $17 trillion debt and rising rapidly plus, the possible/probably rising interest rates that will rocket the world soon!
Merry Christmas to all and a Happy New Year globally! Plus, a Festive Season to others globally. Wishing you a prosperous 2014.
* Europe as a very serious issue with unemployment especially with the youth in `every` country!
European Youth Unemployment = 24% and rising rapidly
UK Youth Unemployment = 20% and rising rapidly
400,000 Graduates came on to the market last year in Europe
960,000 = Under 25`s are unemployed in the UK
Only one in ten school leaves takes up an apprenticeship in the UK
European Youth Unemployment to rise by another 10% + over the next 10 years
Watch 2014 globally very closely!
Global Economic Outlook for 2013 revealed - United Nations ...
* `10-Step Double-Dip Recession Survival Guide` - click on the connection below for comprehensive information.
http://newsusa.myfeedportal.com/i/double-dip-recession-survival-guide<br>Global Economic Crisis
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Merry Christmas Economy