Category Archives: Macroeconomy

Latin American growth: A sting in the tail for Argentina

The slowdown in the global economy is starting to bite from one end of Latin America to the other. The OECD forecasts that growth in the region in 2012 will slow to 3.2% from 4.4% last year. That would be the first deceleration in a decade. Just last week Argentina reported that its GDP growth in September was only one tenth of a percentage point higher than in the same month last year. Far to the north, Mexico said its third-quarter growth, at one half of a percentage point over the previous quarter had been its lowest since the first quarter of last year. Mexico, Latin America’s second largest economy, can at least comfort itself with the fact that its growth for the full year is likely to come in at 4%. Brazil, is looking at 2% growth for 2012, if it is lucky.

Mexico’s policy makers will have to wrestle with balancing cuts in interest rates to stimulate a sluggish economy with the risk of stoking inflation. That is a classic central banker’s dilemma, at least. Argentina, the region’s third largest economy after the other two, is facing problems as much of its own making as of the global slowdown’s. A poor grain harvest may have been outside the government’s control, but high inflation and import and currency controls on investment were not. The country’s long boom has come to an abrupt and ugly end this year.

The government’s newly lowered forecast of 3.4% growth for the year now looks optimistic. Private economists say 2% would be more realistic. If that is so, it would be a huge problem for Buenos Aires. Annual growth falling to 3.26% triggers $4 billion worth of payments next year to holders of Argentina’s GDP-growth-linked debt. Already embroiled in one international row over the accuracy of the country’s official inflation figures, another one on the GDP numbers now looks to be on the cards.

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Central Banks Move Slowly And Fearfully

With politicians in the U.S. and Europe abrogating responsibility for getting their zones of the world economy growing again, the task falls by default to central bankers. Yet they are standing pat for fear of being left spent in the event the feared second dip of recession materializes.

Economists have been cutting their global and national economic growth forecasts in recent months, but leading central banks have taken only relatively modest steps to stimulate economies. To deploy a cliche, they may have been talking the talk. They are not walking the walk. This week:

  • the ECB left its benchmark interest rate unchanged at 0.75%. Last week, its president, Mario Draghi, promised to do “whatever it takes” to preserve the euro;
  • the Bank of England, which last month announced an increase of £50 billion ($78 billion) in its quantitative easing (QE) program, held its benchmark interest rate at 0.5%;
  • The U.S. Federal Reserve confirmed that it would keep keep its extremely low interest rates (0.0-0.25%) until late 2014.

Meanwhile, in the world of factory floors and customers, the JP Morgan Global Manufacturing Purchasing Managers’ Index (PMI) fell to 48.4 in July from 49.1 in June–edging even further away from the dividing line of 50 that separates contraction from expansion. Like central bankers in China, those in Europe and the U.S. are holding out the hope that the policy actions they have already taken will kick-in in time.  That they are now keeping the last of their policy powder dry suggests that they are hoping against all hope.

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Filed under Macroeconomy, Monetary Policy

Will Europe’s Politicians Let The Courts Make Fiscal Policy?

One overlooked aspect of the agreement struck by the member nations of the European Union over fiscal and budgetary alignment is the matter of enforcement. The failure to incorporate the proposed agreement into the EU’s basic treaty, the Lisbon Treaty, means that neither the European Commission nor the European Court of Justice will have standing to deal with recalcitrants. Both institutions’ writ runs only to treaty matters, not those covered by intra-EU sub-agreements and those between national governments, as this latest deal will be structured in the face of opposition by non-euro-using countries, notably the UK.

That is one reason that the agreement envisions the new fiscal and budgetary constraints being baked into national constitutions, and the European Court of Justice being given new powers to adjudicate on whether countries are baking in the Brussels-approved manner. This is a conscious attempt to put the governance of national fiscal policy under greater judicial and less political sway, just as the EU has used the courts to enforce central directives in other areas.

One of the failures of the Maastricht agreement that launched the euro 10 years ago was that countries’ compliance with the economic conditions for membership – holding budget deficits to no more than 3% of GDP was one of them, remember – was entirely in the hands of national politicians. For all the goodwill being expressed towards greater fiscal integration in the heat of the euro debt crisis, national politicians are not going to give up their power of economic policy making willingly. Many will see this as the judicial Trojan Horse that will lead to a Federal EU with full economic and political integration. National politics is going to continue to shape Europe’s fiscal integration, and markets will have to learn to live with all the uncertainty that implies.

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Filed under Fiscal Policy, Macroeconomy

PMIs Top Up Glass To Half-Full

China’s Purchasing Managers’ Index (PMI), an indicator of the outlook for manufacturing, showed an uptick for September, reversing the mostly downward trend of much of the year. As ever, we caution reading too much into a single month’s figures, but the official numbers, released early after a leak of the HSBC version, stand in contrast to much of the bearish sentiment about China’s economy seen over the past week as investors have been swept up in a global glumness that the world economy is heading for a double-dip recession.

The glass half-full is that if the slowdown in China’s growth is stabilizing, even temporarily, it provides some hope that it can sustain some global growth at least for a while. And when we peer deeply into the glass, we see that HSBC’s input-price sub index showed a slight increase, to 59.5 from 55.9, suggesting a possible brake to the decline in global commodity prices seen since April as demand has weakened. The glass half-empty is that manufacturing usually increases in September in preparation for the Golden Week holiday.

September PMIs from around the world, though sending mixed signals, follow other indicators that show that, even if a double-dip recession can be avoided, the slowdown in growth worldwide is becoming entrenched. Matters haven’t slid back to the nadir of the 2008-09 slump, but they are not far off.

The danger is that protectionist pressures will force those two points closer. In the U.S. Senate, legislation is being discussed that would make it easier for punitive tariffs to be imposed on countries deemed to being manipulating their currencies, for which read China. World leaders did well to get through the 2008-09 slump by collectively agreeing not to go down that beggar-thy-neighbor road. That consensus is considerably more fragile today.

This post was first published on China Bystander.

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Twisting In The Wind

In the card game 21s, a player can ‘twist’ to get another card from the dealer in the hope of reaching an aggregate face value of his hand of exactly 21. More often it is done in hope rather than expectation. So with the U.S. Federal Reserve’s latest attempt at stimulating the U.S. economy, Operation Twist. Banish the thought that this could be called QE3. After all, the Fed’s second round of quantitative easing did not achieve much in the way of generating additional demand to get the U.S. economy growing at anything but the most sluggish pace. It faces the same uphill battle with Operation Twist, intended to nudge down long-term interest rates as QE2 was intended to push down short-term ones. (Historic footnote: when the Fed tried the same tactic in 1961 it was originally called Operation Nudge)

Operation Twist will work like this: Between now and the end of June next year, the Fed will buy $400 billion dollars in Treasury bonds with maturities of 6-30 years. It will finance these purchases by selling an equal amount of debt with maturity of 3 years or less. In this way it will lengthen the average maturity of its debt holdings but does not need to expand its balance sheet to do so. Creating demand for longer-term bonds should drive down their yield.

Yet the U.S. economy already has very low interest rates by historic standards, and has, by now, had them for some time. It is not the cost of credit that is the issue but the demand for it. Large companies are awash with cash. They have neither the need to borrow, however cheaply, nor, more importantly, for as long as they see no increase in final demand for their goods and services, the appetite to invest that would require borrowings. Similarly with individuals. Mortgages, which are tied to long-term interest rates, are already cheap, for those who can get them, or want them. The housing market in the U.S. is not only battered but frozen. The lack of consumer confidence under the long dark shadow of persistent high unemployment is keeping it so. So neither companies nor individuals are prepared to commit the spending needed for a sounder recovery. Easier monetary conditions won’t make any significant impact on that.

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Filed under Fiscal Policy, Interest Rates, Macroeconomy, Monetary Policy

History Lessons For Job Creation

Regardless of what President Obama proposes in his jobs speech, history says that more of the same, be it tax cuts or repaving highways, is not the long-term answer to restoring good jobs to America.

Politicians in Washington are driven to fix the jobs numbers to the beat of the electoral cycle, but readily sacrifice quality for quantity in doing so. The lessons of the two devastating economic downturns that preceded our own era’s Great Recession — the Long Depression of the 1870s and the Great Depression of the 1930s — are, first, that when prosperity returns, it takes a long time to come back and, second, it, labor markets and society look a lot different from how they were before. Yet it is those changes that create the next generation of good jobs in new industries.

The process was similar both times, though taking different forms. Capital moved from financial speculation — bubbles in railroad stocks (1870s), Florida land grabs (1930s), sub-prime mortgages (2000s) — to the real economy via a wrenching deleveraging. That spurred a spurt of innovation, followed by a round of systems innovation that enabled the individual innovations to become more than the sum of their parts.

In the late 1800s, electricity remade factories, businesses, homes and cities with inventions from the telephone to the light bulb, AC motors, power generators and phonographs. New technologies expanded what could be done with iron and steel. Automation, assembly lines and managerial capitalism, even subways and shift work, were systems innovations that allowed new industrial economies of scale that revitalized the economy.

After the Great Depression a huge increase in R&D spending in the 1930s, overwhelmingly by companies and private universities, not the public sector, led to advances in radio, computing, astronomy, plastics, fluorescent lighting, electronic keyboards, speech synthesizers, air-conditioning, commercial television, airline travel, color film and supermarkets. Suburbanization, interstate highways and decentralized, professional management that enabled complex, dispersed, national and transnational corporations and their emerging supply chains to develop turned these innovations into the consumption-driven prosperity of the 1950s, and the new jobs, both blue- and white-collar, that came with it.

Along with the innovation and systems innovation, there is a step change in communications and transportation, increasing the velocity at which people, goods and ideas can move — the telegraph, telephone and railways (1870s), radio and automobiles (1930s), the internet and something still to be determined in our own time (2000s).

That something may be high-speed inter-city rail. Yet, as Europe and now China has found, the economics are challenging without huge state subsidies, for which Washington has little appetite right now. I would hazard that that something is intra-urban transport so creative people and industries can cluster in cities. It may even be the revitalized city itself, the inverse of suburbanization.

In short, the lessons of both recoveries are that policies to restore the old world were irrelevant to the new economies that eventually followed the downturn. Today Washington should waste neither time nor money anymore on conventional fiscal and monetary remedies such as QE3, tax cuts or near-zero interest rates or by propping up old industries. Government policy should be directed towards fostering the innovation and systems innovation that will eventually restore prosperity. That does not mean picking industrial winners. Not all innovations pan out. A wide range of innovators have to be encouraged.

It also means investing in long-term urban infrastructure and education. The new higher-paying jobs will be in the knowledge, professional and creative industries. Government needs to both support their growth and ensure that more workers are prepared for them. Both the Long Recession and Great Depression saw large scale expansions of mass education. And if the future is knowledge economies, and thus creative people and industries will need to cluster to stimulate innovation, America needs to rebuild its cities to be livable in a sustainable way. There are plenty of short-term ‘shovel-ready’ jobs in that undertaking, too.

It also means getting government and vested interests out of the way of local entrepreneurship, activities and projects. They, and new classes of innovators such as social entrepreneurs, social media businesses and environmental technologists, will be the ones that will design the engines of growth for tomorrow, and thus the new good jobs. Grand, big-idea infrastructure projects won’t.

There will inevitably be, in the words of English essayist J.B. Priestley, writing during the Great Depression, a “dreadful lag between man the inventor and man the distributor.” It is already proving painful for so many Americans. Government’s optimal role is to make that lag short. Politicians with barely a year to go to a general election understandably focus on the short-term, and propose what feels familiar to them and voters. History suggests it provides a false comfort.

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Dollar’s Rise Rebuffs U.S. Fed’s Critics

One international criticism of the U.S Federal Reserve’s second round of quantitative easing announced at the beginning of last month was that it would weaken the dollar, and that that was the intention of the Fed to boost the U.S.’s international competitiveness. In the event, the dollar has strengthened over the past month, by 5.2% on the Dollar Index. The economic data out of the U.S. has been more positive and sovereign-debt concerns in Europe have undermined the euro, a key component of the Index. Fed officials, if not American exporters, must be feeling quite chuffed.

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