The past week saw important updates on several key economies. First up is US GDP figures, showing an acceleration of the inventory cycle and stimulus led recovery. Then we look at a far slower recovery in the UK (if you can even call it a recovery), then review some much stronger figures from one of the Asian tigers. Then we look at Japan; considering how this week's trade, inflation, and employment data feed into the current picture and outlook for Japan.
The theme to take from the GDP numbers is that the recovery is generally gathering pace, but boosted in large part by the inventory cycle and stimulus measures. Following that, globally, international trade is starting to pick up, and there are signs of self-reinforced growth in activity. However at this point there are still many things that could derail the recovery, the simplest one is whether demand takes over when the inventory cycle runs through, and stimulus measures wear off.
1. US GDP - Accelerating Artificial Recovery
US GDP rose 1.4% q/q in the 4th quarter of 2009(not annualising it, out of principle), versus expectations of 1.1%, and a revised Q3 gain of 0.6%. On a year-on -year basis growth turned positive, just, with 0.1% (versus -2.6% in Q3). The result was mostly driven by what we've already been talking about, i.e. inventory cycle and stimulus. Indeed much of the gain can be explained by inventory buying. Improving net exports also helped, but this is because of falling imports (lower demand, lower prices). Direct government spending contributed far less than in Q3, but you can probably attribute some of the gains in personal consumption and investment to government stimulus programs.
The IMF released its update to the World Economic Outlook - a respected, useful and comprehensive report on the progress and prospects of the global economy. This article provides a brief analysis of some of the key points of the update in the usual Econ Grapher fashion.
Before looking at the charts, it's worth noting the title "a policy-driven, multispeed recovery". This is an adroit description of how things are unfolding. For example, emerging markets versus developed economies; and within developed economies there's even different paces e.g. UK (slow, and subdued) vs Australia (relatively unscathed, and recovering faster).
1. Global GDP Growth
The first chart in the report is the old global growth outlook chart. On GDP growth, the IMF revised it's forecast for the global economy to 3.9% in 2010, vs a previously forecast 3.1%. There really isn't anything surprising about it for those who've been paying attention.
The advanced economies took the biggest hit, and will return to growth eventually, albeit potentially lower then the average prior to the crisis. Then there's the emerging markets who did take a hit to a greater or lesser extent, but are set to recover back to high growth levels.
"In most advanced economies, the recovery is expected to remain sluggish by past standards, whereas in many emerging and developing economies, activity is expected to be relatively vigorous, largely driven by buoyant internal demand." [more]
The past week was reasonably quiet on the economic data front outside of China's big statistics release. As such this week's issue is less power packed than usual, but still contains a few gems. First up we look at how US PPI figures point to inflation, UK consumer spending's gradual recovery, UK inflation risks, New Zealand consumer spending trends, and the inflation outlook for New Zealand. If there were two main themes it would be that inflation is ticking along but not yet significantly, and that consumer spending is slowly recovering but well below trend.
1. US Inflation - Producer Price Index
US headline PPI came in at 4.7% year on year (2.7% in November), Core was also up but less so at a 0.9% annual increase. On a monthly basis it was slightly above consensus at 0.2%, and core was unchanged. Much of the increase was driven by food prices, and of course the high year on year % change being boosted by a lower comparison figure. All up the message is that prices have been tracking up, and it's unsurprising to see producer prices rise in the context of the level that the prices index of the ISM PMI has been at. This adds to the overall inflation picture for the US that says inflationary pressures are slowly simmering under the surface, but have yet to truly boil over...
2. UK Consumer Spending
The UK saw a monthly increase in retail sales for December of 0.3%, below an expected 1.1%. On an annual basis for December retail sales were up 2.1%. The biggest contributor to the gains were sales in "predominantly food" stores. The UK will be the first G7 country to announce its Q4 GDP result on the 26th of January. With retail sales figures for the December quarter up vs the September quarter consumer spending is likely to contribute. Consensus is for about 0.4% quarter on quarter growth.
3. UK Inflation
Keeping with the UK, the inflation story unfolding there had a some easily misleading additions in December. The annual rate of inflation measure by CPI was 2.9% (vs 1.9% in November). The biggest driver of this was the reduction of the VAT tax in 2008 to 15% from 17.5%. It was also boosted by a sharp fall in oil prices around December 2008, and Christmas sales pushing down prices. Overall the situation is inflationary in the UK, there are elements in the system like quantitative easing, that bar a severe downturn, will likely trickle through into higher real inflation. This will particularly be the case should activity in the UK begin to pick up further, as the recovery unfolds in the UK, the Bank of England will indeed face a dilemma and a challenge.
4. New Zealand Consumer Spending
New Zealand recorded a 4th month of monthly growth in retail sales in November with 0.8%, and 0.8% for core (less autos). On an annual basis headline was up 1.7%, and core was up 3.6%. As can be seen in the chart below core retail sales have been tracking up and have not been too significantly impacted by the recession, however headline retail sales are clearly growing below trend. Overall it is a positive figure and suggests the positive (albeit small) GDP growth figures recorded in Q2 and Q3 may be developing momentum. December quarter retail sales are due out next week and will give a fuller picture as to how the consumption component of GDP is tracking, likewise international trade figures are also due for December next week.
5. New Zealand Inflation
New Zealand also released its inflation figures last week, revealing reasonably subdued inflation. The figure came in at 2% year on year (-0.2% on a quarterly basis) for Q4 (vs 1.7% in Q3); in the middle of the 1-3% inflation target band of the RBNZ (New Zealand's central bank). On components, transport prices were a contributor, while food prices (esp. vegetables) fell the most. Non-tradeables (core) continued to decelerate with 2.3% vs 3% in Q3. The outlook is for reasonably stable inflation over the medium term, but with potential to pick up as house prices recover and the economy picks up pace. The RBNZ is likely to hike rates from 2.5% (having lowered from 8.5%) sometime around the middle of this year.
The main takeaways from this article are that inflation is present in the US, but it is still largely bubbling away below the surface - so the growth-inflation trade off is set to become increasingly important in the US. On the UK, inflation seems to be a bigger risk than in the US, particularly given that consumer spending; while not growing rapidly by any means, is beginning a slow recovery - against the backdrop of quantitative easing and broadly loose fiscal and monetary policy conditions. While in New Zealand consumer spending is tracking upwards, yet below trend, and tentatively indicating a pick up in momentum of the recovery there. At the same time New Zealand isn't facing any significant inflationary pressure just yet, and while Australia has started tightening monetary policy; New Zealand probably wont until at least the middle of this year.
1. US Bureau of Labour and Statistics http://www.bls.gov
2. UK Office for National Statistics http://www.statistics.gov.uk
3. UK Office for National Statistics http://www.statistics.gov.uk
4. Statistics New Zealand http://stats.govt.nz
5. Statistics New Zealand http://stats.govt.nz
Article Source: http://econgrapher.site1.net.nz/top5graphs23jan.html [more]
I was pondering the other day about the economy, unemployment, recession-recovery, and it got me thinking about a topic I think is very important. This post takes a very different track from the usual analysis – in fact I will issue you a challenge.
In this time of high unemployment I think it is important to focus on the foundations of the economy, i.e. businesses. It is in these times that it is more important than ever for people to embrace the entrepreneurial spirit.
Especially for youth unemployment, where the rate is particularly high, those just out of college/university are particularly well placed to get into business. They will have built up knowledge and picked up skills, they would have made a lot of contacts, and probably have an extra affinity for new trends and mediums. It’s basically this; if you can’t find a job out of college, then make one.
The case is equally compelling for those that have been in the workforce for some time. They will have built up skills and talents, specialized knowledge, industry contacts, and have an awareness of businesses and opportunities.
In both cases you start from your strengths, and think about what sorts of opportunities can be created or exploited with your unique set of skills, knowledge, contacts, and experience. Then you look at your resources, your own labour, family/friends who can help, your own capital, and then that of others. You identify your weaknesses – maybe you don’t know much about how to run a business; but you probably know someone who does… or know someone who knows someone…
I don’t want to make it sound easier than it is, starting a business from scratch is one of the hardest, yet most rewarding things you can do. I have done it twice, and accomplished a lot, learnt a lot, and gained a lot in terms of character and fulfillment.
You might not succeed on the first try, but you will learn a lot, and you will take your destiny into your own hands. Of course you could also end up making a lot of money, or at least setting yourself up with a steady income stream and building a valuable asset.
Now here’s the challenge for you the reader (and no it’s not to get out there and start a business – but maybe that is a good idea for you?). Most of you reading this will probably have some knowledge and experience about running a business, or have capital or connections…
I call upon you to do what you can to help out an entrepreneur:
-Give someone who’s thinking about starting a business some encouragement
-Suggest starting a business to someone who’s out of a job and doesn’t know what to do
-Offer someone starting in business some advice and ideas
-Provide capital backing to those with sound business ideas
-Use your connections to introduce them to the right people
-Give them some business
You can do a lot or a little, it may have no impact but then it could make a huge difference. It could even payoff financially. You may not agree with all that I’ve written but your help could help someone help themselves. So why not give it a shot?
Article Source: http://econgrapher.site1.net.nz/entrepreneur.html [more]
China today released its 2009 economic data smorgasbord, revealing a continually accelerating economy. This edition looks at 5 charts; economic growth - acceleration, CPI - inflation drivers pushing through, Consumer spending - domestic demand on the rise, Industrial production - still going strong, and International trade - still very important. The analysis shows implications for China's growth outlook, the evolution of its economic structure, and it's role in the global economy.
1. Economic Growth - GDP
Economic growth came in at 10.7% year on year, against estimates of 10.9%, and the Q3 result of 8.9%. Simply put, this is a good figure, the drivers are obvious though. For the full year it was 8.7% (above the targeted 8%) from 2008 to 2009, against 9.6% for the year 2008. The drivers of this phenomenal growth include the large stimulus package, rapid loan and money supply growth, a pick up in consumer spending, strong investment figures (related to stimulus), and a recovery in international trade.
2. Inflation - CPI
Chinese inflation for December came in at 1.9% year on year against expectations of about 1.5% and up off 0.6% in November. Part of this is the commodity cycle, but there are fundamental factors that make a case for accelerating inflation - basically the same mentioned in the GDP growth drivers, but add to that surging asset prices and a recovery in commodities. It's no surprise that the PBOC has begun a gradual tightening e.g. lifting the reserve ration for banks by 0.5%, gradually creeping the rate up a few basis points for bond issues, and generally warning banks not to lend excessively without adequate capital.
3. Consumer Spending - Retail Sales
In a very promising trend retail sales picked up further showing a year on year growth rate of 17.5% vs 16.4% expected. The chart below shows that we're not just seeing the low comparator effect, there is a real trend for increasing consumer spending. This is a promising sign for the Chinese economy in terms of the need for it to rebalance growth so that more economic activity is driven from internal/domestic demand, rather than relying primarily on an export led strategy. To complete though, a certain portion of this must be chalked up to stimulus, but this is a trend to watch!
4. Manufacturing - Industrial Production
Industrial production pulled back slightly to 18.5% in december from 19.2% in November, and below an expected 20%. On a full year basis it was up 11% in 2009. While slightly weaker it shows the manufacturing sector still going strong, in spite of a recovery in commodity prices, and with the PMI at 56.6 it's no surprise. This is probably driven mostly by stimulus and internal demand, but increasingly also international demand as trade has recovered - driven in part by the inventory cycle.
5. Trade Surplus - Annual Exports & Imports
China recorded a trade surplus of about US$198 billion in 2009. Exports were down 16% for the full year, while imports were only down 11%. In recent times the trend for this data has been clearly upwards since bottoming out in early 2009. This is surely only a temporary pullback but it is promising to see that imports didn't drop that much. What will be interesting over time is to track import growth - how far off until we see imports higher than exports would be very interesting to know in terms of China's role in the Global economy. For now international trade is still a key component of China's economic growth.
Overall, very interesting to add this data to the picture of the Chinese economy. It confirms views on strong and accelerating growth there, and as to be expected, raises concerns about potential for overheating. It also raises questions, but gives clues, as to where the Chinese economy is going, in terms of economic activity (probably still strong for now), changes in the structure of its economy (signs of a gradual shift emerging), and it's role in the global economy (getting stronger by the day). Above all it can only add to the view of strong long term growth prospects, and interesting times for all who live in China's ever growing shadow.
1. National Bureau of Statistics http://www.stats.gov.cn/english
2. National Bureau of Statistics http://www.stats.gov.cn/english
3. National Bureau of Statistics http://www.stats.gov.cn/english
4. Trading Economics http://www.tradingeconomics.com/Economics/Industrial-Production.aspx?Symbol=CNY
5. Trading Economics http://www.tradingeconomics.com/Economics/Exports.aspx?Symbol=CNY
Article Source: http://econgrapher.site1.net.nz/chinagraphs21jan.html [more]
In banking Too Big To Fail (TBTF) has become an implicit policy i.e. when a bank that is deemed to be too big, or too significant, to fail it is provided with government support of some manner in order to prevent its demise. The premise is: were it not for government intervention the bank would fail (whichever form that takes), and the cost of failure would in essence be the impact on the financial system.
The costs could come in the form of mild to extreme disruption of the payment system, and/or realization of counterparty risks (derivatives, interbank loans, FX transactions, etc). There would also be wider costs from the contagion effects e.g. market panic causes asset price falls and loss of liquidity, possibly filtering through to a bank panic.
In short you risk serious damage to the payment system and the banking system, as well as the wider financial and capital markets. This would then logically flow through to the real economy as credit and liquidity dries up and prevents businesses from being able to rollover loans or secure working capital finance. Also the disruption of the payments system would have obvious detrimental effects on the real economy.
Thus in order to avoid this, regulators/governments will generally opt for assistance/intervention to prevent, or as some central banks suggest “manage”, the failure of the institution in question. The consequences of this are:
1. The financial costs of supporting/unwinding/nationalizing the institution; and
2. The impact on the behaviour of participants in the sector.
The second point is arguably the more costly, it is also known as moral hazard; which roughly means if you know you have an implicit government guarantee on the downside then you’re basically operating a giant complex call option. Or in other words you don’t need to worry too much about failing, thus you can engage in more risky activity than you otherwise would.
I learnt about the above well before the GFC when I was studying for a masters degree, but the pernicious and pervasive realities of the banking crisis has spurred me to think more on this topic.
This is a thought starter and ultimately a suggestion to policy makers.
Instead of holding an implicit TBTF policy, governments should adopt an explicit policy and recognize the costs.
The US government made some steps towards this when Obama proposed charging banks a 0.15% fee on total liabilities (less deposits) over the next 10 years as a means of paying back the government for the bailout.
I suggest taking this a step further, and recognize that when a large financial institution fails the impact on the financial system and real economy can be little short of catastrophic (e.g. http://www.imf.org/external/pubs/ft/weo/2009/02/pdf/c4.pdf ).
So make it absolutely clear that stability of the financial system will not be compromised and banks beyond a certain size will be charged a risk premium by the government that goes towards a fund for “managing” failures of TBTF institutions.
Another alternative is to change the capital ratio rules such that it steps up based on the size of the institution e.g. a small bank may have a minimum capital ratio of 8%, whereas a large bank may have a minimum capital ratio of 10%+. Note: the capital ratio is the ratio of equity to total assets and is one of the key metrics in the Basel rules.
The options are limitless, the key is to intervene so that either moral hazard is adjusted through mandating risk limits (e.g. capital ratios), or that the direct costs of bailout are pre-paid as part of a cost of business for those in the sector.
On the surface such ideas are likely to be less burdensome on the real economy than simply letting a large bank fail to deliver the message about moral hazard – the impact on the real economy is just too great; you only need to look at the collapse of Lehmans to see how bad things can get.
Another argument is to simply chop up banks that get too big or restrict activities that banks can engage in (e.g. Glass Steagall). This is also valid, but there are arguments for size benefits – but this is another argument altogether.
In summary, out of the options of:
1. Charge a premium for an explicit TBTF policy and/or install risk limits that mitigate moral hazard; or
2. Let them fail (no bank is TBTF, costs of financial system damage and economic recession/depression are absorbed by all, but at least there’s no more moral hazard)
3. Break them up (cut TBTF institutions down to size, at the risk of limiting any economies of scale and other market distortions)
4. Restrict activities (keep banks boring and simple, but this doesn’t prevent incidences of Long Term Capital Management’s)
It seems that no.1 is an interesting and viable alternative to the problem of TBTF institutions. However it must be acknowledged that none of these solutions are perfect, but it seems this is the least imperfect. Also this list is –not- exhaustive, I’m sure anyone could think of many more ideas. And ultimately if the first option was taken it would need to be implemented in a way that would allow swift yet transparent circumvention of any loopholes or engineering that the banks might engage in to avoid it.
So there you go, for what it’s worth, a potential solution to the TBTF problem. I now invite you to tear my work apart.
Oh and I realize I didn't put any graphs in as is characteristic of my usual articles so here's a piece on US bank lending.
Article Source: http://econgrapher.site1.net.nz/codifytbtf.html [more]
In response to some discussion in my recent "Top 5 Graphs of the Week" article, I have decided to do a little piece that drills deeper into the details on Australian employment stats.
First up, the graph that started it: [more]
This week we look at US inflation, European inflation, US retail sales, Chinese international trade, and the Australian employment situation. The quick summary is that US inflation is picking up for a few key reasons, European inflation is slowly turning up but without any significant near term pressure, the recovery in US retail sales adds to an interesting picture for the US consumer. Meanwhile in China imports and exports are showing a clear recovery with some interesting implications, and the strong Australian economy seems the place to be in the developed world for jobs.
1. US Inflation: ticking up
The US showed further signs of a pick up in inflation with the release of the December figures. Headline inflation (in part boosted by a lower base period i.e. because it's an annual % change) was recorded at 2.7% while core firmed up it's turnaround with an upward move of 1.8% vs 1.7% previously. The drivers of this turnaround in inflation are probably a number things, first of all back when the crisis was at its peak a lot of retailers would have had to cut prices to boost sales - so some part of it is normalisation of prices. Another aspect is the recovery of commodity prices, such as energy (impacting on headline inflation). Then there's the loose monetary and fiscal conditions; some may suggest that these aren't working through yet as easy money conditions aren't expressing as new loans, whether or not this is true will play-out on the chart below during this year. [more]
In this week's edition there are some key updates from around the globe. First up is a look at US consumer credit, followed by an update on EU unemployment, we then look at some data from the ISM PMI before noting recent policy settings of the Bank of England, and to finish it up there's a review of international trade data for New Zealand and Australia.
While there's no bridging theme for this edition some key points are; credit growth remains weighed down by challenging economic conditions and deleveraging; unemployment is still a problem though it may improve in the near term; activity is picking up in some areas thanks to the inventory cycle; monetary conditions are still very/historically loose, and developed nations are only very slowly seeing a turnaround in trade.
1. US Consumer Credit
The US consumer credit boom continued to unwind in November, dropping off by a record $17.5 billion in November. The drivers of this are likely to be a combination of attrition (due to consumers paying off debt and not replacing it and/or being unable to replace it due to credit availability and tightening of criteria -and- of course the ugly side where the consumer can't/wont repay and the loan gets written off) and falling credit quality/capacity (consumers facing little to no wage growth, higher unemployment, find it difficult to obtain new credit). I suspect the main driver is the attrition factor, driven a lot by the whole "deleveraging" phase as people look to restore balance sheets, and by the bad-debt element. Looking at the chart below, I think it's also interesting to note the proportion of revolving/non revolving loans over time.
The theme for this edition's top 5 graphs is US lending. I sourced some data from the US Federal Reserve on Aggregate lending by US commercial banks over the last 30-odd years, the data is seasonally adjusted, and is originally on a weekly basis. It is useful to look at this information to see how loan growth has unfolded over time; has it changed in composition? has it changed in patterns? how has it tracked recently?
It is particularly interesting to look at this information now for two reasons; 1. The recession we are in/were in (glass half empty/half full) was triggered by a banking crisis, and 2. A sure sign of a strengthening economy will be loan growth (businesses borrowing to invest, and/or consumers feeling more confident/having greater capacity take on new loans. It also says something about availability of credit, business cycles, composition of the economy, and key exposures for the banking sector.
1. US Aggregate Lending Over the Years
This chart shows total lending by US commercial banks over the past 37 years by components. Just by eyeballing this chart you can see that Real Estate loans have taken up a greater proportion of the loan book through time (particularly relative to commercial & industrial).
In this article we deviate from the usual single-minded focus on macro-economic analysis and shift more towards the financial market aspects with a look at an investment idea. What spurred me to write on this topic was comments around a New Zealand analysis article, another way to benefit from the development and overall level of economic (and financial market) activity of a country is to invest in listed stock exchanges.
The reasoning goes that as an economy becomes more prosperous, more and larger companies will grow and develop. A portion of these companies will list securities on a public exchange...
Value driver no. 1: listings revenue
Most exchanges derive a decent chunk of earnings from annual and initial listing fees. This provides a stream of almost annuity-like income for the exchange (as long as it has a compelling listing franchise). It will also provide new income as new companies list and existing companies list additional securities e.g. rights issues, convertible notes, different classes of shares etc.
Flowing on from that, as more companies list securities on the exchange, and as people in the country become wealthier (and as growth prospects improve-thereby attracting international flow), more and more trading activity occurs. As more trading activity occurs and as financial markets and participants develop and become more sophisticated demand for exchange traded derivatives e.g. futures and options, also grows...
Value driver no. 2: trading revenue
A significant earner (about 50% according to the WFE) for exchanges is the fees that they charge for providing the market infrastructure. This does vary by exchange e.g. value based fees, transaction based fees, volume based fees, maker-taker pricing, etc. And depending on the exchange may also include post-trade 'clearing' and 'settlement' fees (if the exchange has that infrastructure).
As more and more market activity goes on, the demand for services such as market data and IT services grows.
Value driver no. 3: services revenue
Another earner for exchanges is the revenue they generate from charging for access to market data. They will also generate income from services like IT, software, and market operations, investor relations services, and so-on.
So basically it all stems from companies listing their securities on a public exchange. This lays the foundation for trading activity and market development, which drives demand for other services such as data and software.
And (sorry to repeat) as an economy grows; as will demand for, and size of, listings; as will demand for trading of securities and derivatives; as will demand for related services. To illustrate the impact of economic prospects (or specifically, investor expectations thereof), you need only look at the Hong Kong exchange (see below), whose stock price is up about 2000% since 2000 (clearly linked to the remarkable growth and growth prospects of greater China).
With that, let's have a very brief look at some of the listed Asia-Pacific region exchanges.
1. Hong Kong
Hong Kong Exchanges and Clearing Limited (HKEX), is uniquely positioned as the gateway to China. You can see in the stock chart the impact of market activity as the stock price surged around the 2007 boom and bust (sure this is also a product of valuations, but the point of growth prospects remains). Going forward the economic growth prospects story for the HKEX is probably strong given the growth prospects of greater China. However HKEX may face pressure from the growing (and retail flow driven) Shanghai Stock Exchange and Shenzhen Stock Exchanges.