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Thursday, July 10, 2008

Rounding It Up

A very interesting Bloomberg column on the Chinese moves. China is, as always, somewhat impenetrable. They do seem to be going through some sort of a paradigm shift, however. When I look at things like the aluminum deal to cut production, it seems pretty clear that they are going to have to rebalance their economy. China's exports have been showing a steady drop over the last few months, causing some agitation:
``The government should slow the pace of the yuan's appreciation to buy more time for exporters to adjust,'' said Shen Minggao, a Beijing-based economist at Citigroup Inc. ``The profit squeeze on a massive number of companies could lead to closures and a drastic economic slowdown.''
It's tough times for most of Asia, relatively speaking. I was surprised that Singapore's GDP came in at 1.9% growth over the last year. This is a sudden slowdown:
The economy shrank an annualized 6.6 percent in the three months to June, contracting for the second time in three quarters. It grew a revised 15.6 percent in the first quarter.
...
The island's manufacturing industry contracted 5.6 percent last quarter from a year earlier, compared with a revised 12.7 percent gain in the first three months of the year. Electronics exports have declined for 16 consecutive months, and pharmaceutical shipments slumped in April and May.
Pharmaceutical plants are probably one of the industries with considerable global overcapacity. Singapore let its currency rise to control inflation, which of course is placing pressure on exports, which of course will in turn limit its currency's ability to rise further. These figures are preliminary and may be revised upward next month.

Japan is normally not grouped with the rest of Asia, but Japan's current-account surplus is slowly dropping, and the price pressure on producers is very real. This will be a tough year for Japan. It is import dependent and sensitive to pricing changes in those imports. My guess is that many of these companies will have to buy out into other markets, which may place considerable pressure on the yen. The Ranbaxy deal in India may be the first of many.

I would group some of the eastern European countries more with several of the Asian economies. Europe's slowdown is going to place more pressure on them. The Czech Republic has a much more balanced economy than most, so I'm watching it for the upper bound of the effect. Poland is also impacted; as with Singapore, letting its currency rise has a sharp downside in a time of globally slowing demand. When you start out with a current account deficit....

Europe is really slowing now. The UK ECB is set to make another decision on rates (it sat), but it has no good way out now. The UK is clearly either in the beginning of a recession or heading into one. It has very high household debt and employment is slowing, the wealth effect is a now a net negative, and home prices, at least, will continue to fall for a while. French and Italian industrial production is now falling:
Output at French factories and utilities fell 2.6 percent from the previous month, the biggest decline since October 2005, the Paris-based statistics office said today. Italian production declined 1.4 percent from April, almost three times the drop forecast by economists in a Bloomberg News survey.
...
``We now have a brutal slowdown in activity,'' said Rene Defossez, a strategist at Natixis in Paris. ``There have been a series of indicators that have come in worse than expected.''
...
German production fell three times more than economists expected in May and shipments from Europe's biggest economy dropped the most in almost four years. French exports decreased 1.7 percent last month,
In short, pain. Italy's banks have been warned to increase reserves. The Italian infrastructure companies are really being hurt by the slowdown in the boom economies of Europe. Ireland and Spain had very large housing booms and are taking a corresponding economic wallop. If you are an Asian country, you really can't hope to make up for less enthusiastic American consumers in Europe any more. Spain appears to be taking a header:
BBVA, Spain's second-biggest bank, said in a recent study that figures released in recent weeks regarding economic activity, private consumption and unemployment "show an abrupt deterioration in the economy during the second quarter".

It estimated Spanish gross domestic product (GDP) expanded by 2.0 percent in the second quarter on an annual basis from 2.7 percent in the first quarter.

Quarterly growth likely fell to nearly zero percent from 0.3 percent, the bank said.
...
New car sales plunged 31 percent in June, retail sales fell 5.3 percent in May while unemployment hit 9.9 percent that month, the highest rate in the eurozone according to European Union statistics agency Eurostat.
The factor coordinating the global credit crisis with global real economies is oil and, to a lesser extent, other energy prices. The US is in recession and has been since about the third quarter of 2007, and the US isn't going to be climbing out any time soon. However, the US also isn't seeing anything like Europe's about to encounter, and the bottom for the US might be second quarter 2009.

The ECB has been profoundly off on monetary policy. What Europe needs to do to save itself is cut energy taxes sharply. It can afford to cut rates if they cut energy taxes, which are profoundly inflationary. This is the first test of the EU's overall financial stability, and right now the verdict is - relatively good fundamentals, insane public policy. It makes me want to cheer when Ireland refused to go with the new EU Constitution. The governmental institutions are too out of touch.


Comments:
What do you think of Eastern Europe in general? Seems to me that to the extent high fuel prices drive costs for ocean shipping, EE should be increasingly attractive as a manufacturing location for EU countries. Especially to the extent that there is infrastructure to support rail shipping--possibly Danube barge as an alternative for some products.
 
Well, it's been heavily invested already and I am afraid there is a lot of bad credit out there in some areas.

I noticed the Czech president said they wouldn't be going Euro on his watch. Those countries mostly have had high inflation in their booms, and with Europe slowing they are due to take a downturn.
 
M.O.M.

I disagree that the EU has poor current monetary policy. I think they are wisely parting from the U.S. foolishness. Total money growth in the EU region has been soaring for years. That will clearly lead to a bust. I think it's prudent to target money growth. The EU should have acted sooner. Acting now will lessen the future pain, but not eliminate it. Excess money does not lead to increased output. The opposite is true.

Greenspan & Bernanke like free market booms, but not the resulting busts. As a result, we have had poor growth, excessive speculation, excessive debt and wealth concentration.

Free money is not free. And if it is believed to be so, the currency is history. Where is the U.S. currency heading?????
 
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