December 18, 2007 | posted by Michael Baxter in IABN | comments (0) |

Decoupling is one of those words that has being doing the rounds of late. It describes how these days the global economy can carry on growing, even if the US gets laid up in bed. Thanks to China and the ilk, the world can do perfectly well without Uncle Sam, thank you very much, or so goes the idea.

As for the US itself, the hope is that as its consumers take the foot off the pedal, its exporters can take up the slack and, benefiting from the falling dollar, and then sell, sell and sell.

We have been a tad cynical about this decoupling idea. The US still remains central to the global economy, and China exports rather a lot of its goods into the US. So a slowing US will mean Chinese growth will slow, leading to a knock-on effect elsewhere. The US deficit on its current account is simply huge, and to believe this can start shrinking, without there being serious repercussions for the rest us, seems a tad naive.

And yet, maybe the naivety is paying off. The deficit on the US current account fell to a two-year low in the third quarter. It dropped from $188.9bn in Q2, or 5.5 per cent of US GDP, to $178.5bn in Q3. That’s 5.1 per cent of GDP.

The really good news, however, lies in how the shrinking deficit came about. Exports were up; the rest of the world, it appears, want to buy goods made in the US after all.

Now, one swallow does not make a summer, and the deficit is still massive: even so, it is a promising sign.

There is another interesting aspect to the latest figures on the US balance of payments. It appears the flow of money to and from the US for the purchase of assets dropped like a stone. According to Capital Economics, “Net foreign purchases of US assets dropped to $249bn, from $619bn, while net purchases of foreign assets by US residents dropped to $155.7bn, from $465.5bn.”

December 17, 2007 | posted by Michael Baxter in IABN | comments (0) |

At face value the latest report from the CBI is pretty worrying - but actually when you think about it, it’s not so bad. The real worry lies in the possibility the CBI is wrong.

The employers’ organization reckons the UK’s growth will slow to 2 per cent next year. This is pretty much in line with what a number of others are forecasting, and slightly worse than the Treasury’s estimate of 2 to 2.5 per cent.

Of more concern is the time the CBI thinks it will take before things are back to normal. It thinks that things will hit bottom in the last quarter of next year - at which point annualised growth will be just 1.6 per cent, and that even in 2009 growth will be just 2.1 per cent.

That growth rate is not good, but it’s not especially-bad either. Ian McCafferty, chief economic adviser at the CBI said: “Whilst the 2008 slowdown may appear dramatic set against this year’s strong growth, the fundamentals of our economy remain sound and talk of a full-blown recession is overstated”.

More worrying, however, the CBI has now downgraded its projections for next year’s growth three times in a row. If it changes its mind downwards many more times, then its projections will be looking more-alarming.

Mr McCafferty said, “Uncertainty surrounds the extent to which current credit conditions will affect both business and consumer confidence, and how far the property markets will suffer.”

The real concern lies with that word Uncertain. Up to now, economic forecasters have repeatedly erred on the optimistic side. Every recent report, whether it is from the CBI, IMF, OECD or others, seems to downgrade its previous estimate. There is no longer much scope for further downgrades, without, that is, forecasting recession.

December 17, 2007 | posted by Michael Baxter in IABN | comments (0) |

The only surprising thing in Friday’s news on US inflation is that people were surprised. The annual rate of Us inflation shot up in November, from a worrying 3.5 per cent, to a very distressing 4.3 per cent. Markets in the US did another one of their big falls on the news, and once again inflation is making the headlines.

Even Capital Economics, which previously predicted a rise in inflation to 5 per cent, called the figures surprising.

Of course, much of the rise was down to a jump in energy costs. In fact, energy costs were up a staggering 5.7 per cent, but even costs with food and energy taken out were up. Take a look at the graph below, and focus on the bottom, pink graph. In the month inflation, with energy and food taken out, was, 0.3 per cent in November. The annual rate, at 2.3 per cent, is not too bad, but if November’s rise starts being repeated, the annual rate will soon go over 3 per cent, and that is unacceptable.

In fact, November also saw a 0.2 per cent fall in the volatility of hotel room rates, and if it wasn’t for that the figures would have been even worse.

Right now, opinion in the economics world seems divided by those who see inflation as building, and those who see the recent jumps as one-offs.

Perhaps the most optimistic economist in the world is David Smith, economics editor for The Sunday Times. This weekend, after firstly arguing that the current price of oil is just temporary and is bound to fall back soon, he said that those who believe it is a mistake to cut interest rates because of rising inflation pressures “fail to understand the process through which monetary policy affects inflation - through demand. If inflation were very high” he argued “you might need a recession to get it out of the system. That is plainly not the case now.”

And yet, writing in the Telegraph, Liam Halligan seemed to argue the opposite. “It’s easy for the City high-rollers to lean on politicians and central bankers and demand rate cuts…What’s much harder is honesty and leadership. But that is what is now needed from the banks of the western world,” he said.

As for the oil argument, once again there was a divergence between the Times and Telegraph. David Smith has consistently argued that the price of oil goes up and down, and that it will just take time before the current high price of oil leads to more expenditure on R&D, leading to more supply - pushing down prices. But, in the Telegraph, Ambrose Evans-Pritchard quoted Paul Horsnell, commodities chief at Barclays Capital who said “Oil has been going up a dollar a month for four years. It’s a gradual upping of the pressure and I don’t see anything to stop it.”

It’s a key point, because if oil just keeps going up, then we have a sustained rise in prices - that’s proper inflation. If it falls back in a couple of years, then we just have a temporary problem, and no underlying inflationary pressures.

But the truth is that inflationary pressures are building. In the UK, inflationary expectations are rising (see Friday’s issue), and producers are upping prices at the fastest level in 16 years (see Tuesday’s issue).

The point Mr Smith made about the relationship between demand and interest rates and inflation misses the point. Sure, demand appears to be falling, and that should lead to lower inflation, meaning central banks can cut interest rates. But, surely, demand has been too high for years. For years, consumption as a percentage of GDP has been too high, but cheap goods from China, and technological advances, kept the lid on prices.

That inflation stayed low was down to luck, and in that time we grew used to massive consumption. It is possible for consumption to fall a long way back, and yet for demand relative to supply to be too high. That’s called stagflation, and the fear is that asset prices have created a level of demand that is just way too high. That’s why many argue that cutting interest rates now is merely delaying the real underlying problem to a future date - but in the process making these underlying problems so much worse.