Monday, August 16, 2010
UK housing
The evidence is that the recovery in the UK housing sector is now petering out. Given the inability of the banks to lend and the persistent overvaluation of the UK housing stock, it is hard to be bullish. Whilst bad news for the perennial geared up bulls, whose ‘house is their pension’, it is largely irrelevant for the long term health of the economy. What the economy needs is not another bout of house price inflation but rather a long-term structural improvement in the external sector.
The yen versus the dollar
At just under Y86 to the $, the yen remains close to its recent high of Y84.7, the highest it has been in 15 years. Surprisingly some economists are forecasting a further rise despite attempts by Japanese officials to talk the currency down last week. This morning’s 2Q GDP figures showed minimal real growth and another fall in nominal GDP. The last thing the Japanese economy needs is a further rise in the currency. Sadly, what is driving these forecasts is analysts’ bearishness on the U$ and resulting predictions for a fall in the dollar. What they fail to see is that Japan needs a fall in the yen far more than the US needs a fall in the $.
Gloom and doom is the order of the day for the US economy. Whether that is justified is another matter. The ECRI weekly leading index, which correctly forecast the current slowdown in the economy, reached its low point in early July and has now turned up again. This is not to say that the US economy is out of the woods, but it does suggest that the bearishness on the dollar is overdone.
Gloom and doom is the order of the day for the US economy. Whether that is justified is another matter. The ECRI weekly leading index, which correctly forecast the current slowdown in the economy, reached its low point in early July and has now turned up again. This is not to say that the US economy is out of the woods, but it does suggest that the bearishness on the dollar is overdone.
Wednesday, August 4, 2010
Deflation risks in the US
The bearishness over the outlook for the US economy is increasing with concerns over deflation with falling wages and prices. The dollar is very weak hitting new recent lows against the yen and sterling. I remain of the view that this is overdone. A weaker dollar will boost exports if nothing else.
Falling prices is not quite the end of the world. The real killer is a fall in nominal GDP. This is the situation in Japan where there has been no growth in nominal GDP in the last twenty years. Debt repayment is impossible in this environment. The good news for the United States is that nominal GDP has grown by over 4% in the last four quarters and is now higher than its previous peak in September 2008. The bad news is that this is only the first step in the right direction. Japan’s nominal GDP did grow by just over 1% pa from 1990 to 1997, whereupon it then fell back again to 1992’s level in 2001. It grew again until 2007 and then fell back yet again to 1992’s level in 2009.
Was this inevitable? I think Japan fell into the trap of trying to grow the economy out of its debt trap but at the same time manage the exchange rate. Japan was always under pressure by the Americans to keep the yen high so as to not achieve an unfair trade advantage. Unfortunately for Japan it needed to inflate its way out of trouble, not so much to achieve ‘real’ growth but rather to achieve ‘nominal’ growth. This implies a much weaker yen, something that was ruled out by politics. Deflation has been the consequence.
The lesson for the United States is to let the dollar weaken, particularly against emerging market currencies. Now whether this will happen is debateable and for another post but economic logic says it has to happen.
Falling prices is not quite the end of the world. The real killer is a fall in nominal GDP. This is the situation in Japan where there has been no growth in nominal GDP in the last twenty years. Debt repayment is impossible in this environment. The good news for the United States is that nominal GDP has grown by over 4% in the last four quarters and is now higher than its previous peak in September 2008. The bad news is that this is only the first step in the right direction. Japan’s nominal GDP did grow by just over 1% pa from 1990 to 1997, whereupon it then fell back again to 1992’s level in 2001. It grew again until 2007 and then fell back yet again to 1992’s level in 2009.
Was this inevitable? I think Japan fell into the trap of trying to grow the economy out of its debt trap but at the same time manage the exchange rate. Japan was always under pressure by the Americans to keep the yen high so as to not achieve an unfair trade advantage. Unfortunately for Japan it needed to inflate its way out of trouble, not so much to achieve ‘real’ growth but rather to achieve ‘nominal’ growth. This implies a much weaker yen, something that was ruled out by politics. Deflation has been the consequence.
The lesson for the United States is to let the dollar weaken, particularly against emerging market currencies. Now whether this will happen is debateable and for another post but economic logic says it has to happen.
Monday, August 2, 2010
US 2nd quarter growth
On Friday, the US reported 2nd quarter growth of 2.4% at an annualised rate, a little less than the expected 2.7%. This perceived ‘disappointing’ figure is in addition to other evidence of a slowing economy. Whether or not the report was quite as bad as some make it out to be, there are a couple of very valid negative points. The first is that the recovery is not as vigorous as previous recoveries, and the second is that the US still faces a huge output gap. This will intensify deflationary pressures increasing the similarities with Japan of the 1990s.
Looking at the detail, the figures are rather more encouraging. It is clear that consumption expenditure remains weak, growing at a rate of 1.6%. This is inevitable; one cannot expect the US consumer to be an engine of growth. Investment expenditure is recovering at a rate of 4%, led by equipment growing at 9%. That is the truly positive news. Much is made of the increase in the trade deficit. One needs to treat this with care. Exports are still growing rapidly; it is that imports have been growing even more rapidly. This is because industry has been restocking. The first phase of the recovery in 2009 saw inventories contributing to growth through the slightly bizarre fact of a slowdown in the rate of reduction in inventories. The first half of 2010 has seen actual inventory rebuilding met by an increase in imports. As long as the rest of the world continues to recover, it is likely that export growth will overtake import growth again such that the external sector will again be a net contributor to growth.
I believe it is a mistake to focus too much on the bad news in this GDP report. Whilst economic growth has slipped in the second quarter in the US and China has been aggressive in tightening policy, there is still enough growth momentum elsewhere to keep global growth intact.
Looking at the detail, the figures are rather more encouraging. It is clear that consumption expenditure remains weak, growing at a rate of 1.6%. This is inevitable; one cannot expect the US consumer to be an engine of growth. Investment expenditure is recovering at a rate of 4%, led by equipment growing at 9%. That is the truly positive news. Much is made of the increase in the trade deficit. One needs to treat this with care. Exports are still growing rapidly; it is that imports have been growing even more rapidly. This is because industry has been restocking. The first phase of the recovery in 2009 saw inventories contributing to growth through the slightly bizarre fact of a slowdown in the rate of reduction in inventories. The first half of 2010 has seen actual inventory rebuilding met by an increase in imports. As long as the rest of the world continues to recover, it is likely that export growth will overtake import growth again such that the external sector will again be a net contributor to growth.
I believe it is a mistake to focus too much on the bad news in this GDP report. Whilst economic growth has slipped in the second quarter in the US and China has been aggressive in tightening policy, there is still enough growth momentum elsewhere to keep global growth intact.
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