2011 will be remembered as a year of extreme turbulence. From Arab Spring uprising culminated in violent revolution and regime change in MENA to Fukushima twinning of earthquake/tsunami and nuclear disaster, the unprecedented massive month–long flooding in Thailand and near implosion of sovereign debt crisis in Europe, this author is pleasantly surprised that world economy is still standing in modestly “good” shape as it is today. Conditions remain tough. Politically, Middle East is still unsettled. We are watching the transitions to new leaderships in China, North Korea and definitely some prospects of a surprise falling into the abyss of political turmoil in Iran as well. EU is, for all seeming resilience till now, is waiting for a recession, the Japanese third-quarter strong economic recovery is stalling, broad-based deceleration noted in China, Taiwan, Singapore accompanied by signs of property bubble bursting in China, Hong Kong and Singapore. A flickering light of some hopeful signs of an economic recovery fight-back seems to have been ignited in the US - more of this a little later.
So what is the prospect going forward in 2012 – the dawn of a new spring of surprise recovery or the autumn of a wintry slide into a deep, fearful recession, possibly worst than 2008?
The hints are, in the collected thoughts of this author, found in financial markets, some recent macro-economic statistics, notwithstanding any other inevitable shocks of unpredictable natural and political calamities.
2011 in Perspective and what that tells us.
The intense inter-play of politics, finance and economic upheaval gripped the global economic landscape in 2011. Few might be aware or acutely conscious of these facts. Key European stock markets tumbled badly – the German DAX fallen 15%, French CAC 40 down 18% and the FTSE slipped 9% - though mostly off their September lows. Base metals complex across the board plunged a massive 18% to 30% despite the US Dollar (DXY) index returning and poise to close the year out where it begins at around 80. In effect, the US dollar remains unchanged against a weighted basket of 6 currencies, principally, the euro, Japanese yen, sterling pound, Canadian dollar, Swiss franc and the Swedish Kroner. Iron-ore prices also fell a massive 30% from peak. The information tells me industrial production and infrastructural construction has slowed globally – not surprising of reported deflationary property price tendencies in China, even in Australia, Hong Kong and Singapore. The consistent erosion of metal and mining shares in Canada and Australia is revealing to me the world economy is much weaker than thought. Despite resilience of oil price – thanks largely to new political sanctions against Iran, even oil shares are weaker than at year beginning. Iran is desperate now – defaulting its oil and iron-ore supply contracts in quality and quantity – and the Chinese have reduced demand of late. It is sure sign that Iran is a step closer to implosion – politically, economically and maybe even militarily confrontational of posturing against its neighbors and that can’t be good for the global economic landscape in 2012.
Globally, big fund managers reported poor performances in 2011 whether they invested in commodities, equities or bond. Financial markets were rocked by extreme volatility not seen in 2010 and inopportune timing of decisions at each big sudden swing exacerbated losses. In general, fund managers noted extremely high correlation between stocks and market indices. So it was very difficult to hunt and locate “under-valued” stocks at any given time. Big gold investors like George Soros and John Paulson differed widely on their forecast and outlook for gold through 2011 and their different timing of significant divestment exit points from gold investing mirrors the extreme gold price volatility. The sovereign and lurking banking crisis in Europe have been threatening liquidity flow through the hard economies of the world and that magnified currency and financial volatility. Stockbrokers, at times, are as confused as their clients of market read. The parallel, even seemingly synchronized, fall in the equities, bond and gold prices against renewed resilience of the US dollar tells compelling of investors fleeing to cash. Neither gold nor Swiss franc is seen as safe haven and the Chinese Yuan remain hardly convertible. Interesting that China and Japan have in this week announced their trades can be settled either via the Yuan and the Yen. There is no “yen” for long-term preference of other currency - be it the US dollar in trade. It means that current support for the US dollar is temporary refuge. Bigger currency and financial instability awaits us in 2012 – hardly surprising as global economies wait the inevitable recession in Europe.
Global economies as of now.
None of the EU sovereign debt risks have been resolved. The temporary US dollar swap arrangements to expire 1 February 2013 announced on 30 November 2011 by central bankers from both sides of the Atlantic prolonged, not resolved, the EU debt crisis.
Economies are slowing rapidly in EU. European banks have already cut business loans by 16 percent in the third quarter. And no one knows how much European banks will lose on their massive holdings of bonds of heavily indebted countries. Until the damage is clear, banks are reluctant to lend despite ECB lowered its main interest rate to 1% in early December from 1.25%. That is two quick successive cut is some indication of economic desperation engulfing EU economies. The ECB also lends US$641 billions to European banks last week. It helps stabilised nerves in financial markets but not resolving the risks inherent in sovereign indebtedness. Italy’s 10-year Treasury bond yield exceeded 7% again last week is proof of that. It is unsustainable of debt servicing. A recession and further financial market turmoil is ahead for the EU in2012.
As for China, its export growth have been sluggish in recent times and decelerating, partly due to deteriorating trade environment particularly in Europe and cheaper competitive costs structures elsewhere. The onward feeding trend of export growth for 2012 in print now is continuing negative slide, slower growth and shrinking state revenue Year-on-year direct foreign investment is also declining , more so of recent months. The last two quarters also saw manufacturing PMI readings, even dipping to negative. All these are indicative of strong recovery in 2010 is losing momentum. With tighter monetary policies in place, until some recent slight easing, property bubbles are slowly bursting in major cities, Bankruptcies among SMEs are rising as so is inflation-triggered riots in Southern Chinese industrial hubs. Nobody knows the true extent of banking bad loans exposure to semi-government and state-owned enterprises. While there is no immediate sign of imminent hard landings in China, the headwinds blowing are very strong and the days of double digit growth of the last decades are likely to be gone forever. The Chinese stock market is now trading close to 33-month low.
Japan’s economic scenario in the final quarter is also showing signs of stalling. Year-on-year retail November sales dipped 2.3% last month. After a strong and spirited third quarter growth, the current quarter performance is likely to be lacklustre. Industrial output fell 2.6% in November is below forecast. A strong yen hindered export, and prolonged floods in Thailand supplying component parts to Japanese manufacturing sector hurt throughput volume. With Christmas big consumer buying over in the northern hemisphere in major economies and weakening export markets, industrial production is unlikely to look up in early 2012.
Taiwan’s export growth in November was a sluggish 1.3% compared to a year earlier – thanks to waning demand for consumer electronics that also hurt Singapore and South Korea. Even though growth for Taiwan’s export was 13% for the eleven months but the steep fell off in November is telling. November exports of $24.7 million was nearly 9% drop from October, particularly to China and Hong Kong, – a grim warning of sudden steep deteriorating external conditions. Compared to 6.1% GDP growth in 2010, South Korea is expect to reach a slower 5% GDP in the current year.
US economy.
Sunday Times read – US job growth lifts hopes for economy, 25 December 2011 provides the convenient starting point. The headline read posits that rising employment level would be enough to propel the US economy upwards despite
- Stagnating consumer spending and income
- Slowed business investment
- Dismal home sales.
Or at least some economists and analysts agree with that thesis. Let us explore that a little further in details of facts before I attempt to offer some analysis and insights as to what real prospects might hold forward for the US economy.
Non-farm payroll employment rose 210,000, 100,000 and 120,000 respectively for the month of September, October and November. In the latest month, some 140,000 service private sector jobs were created as employment in public sector continues its declining trend despite stimulus spending through 2011. The gain is not due to manufacturing or construction and easing off since September’s huge gain. That gain is unlikely to extend into 2012 due to seasonal factors of retail sales and the enforced cutback of discretionary government spending to $1.344 trillion against a budget sought of $1.386 trillion. Public sector jobs attrition will increase given the expiry loss of economic stimulus package which is now part of “mandatory” (law mandated portion) government spending. Adjusted for the volatile aircraft sector, business demand spending of capital goods actually fell 1.2% in November, the steepest decline since January 2011. Yet another ominous sign of labour market demand forward. The softness of consumer demand is steeper for big ticket item. New home sales edged up marginally by 1.6% in November but 2011 is the worst year on record. Home prices continue to tumble even as average mortgage lending rate fell to a record low of 3.91% Consumers are fearful of big spending with long forward commitments.
However, there has been generally some gain in consumer discretionary in recent months. That was apparent in US third-quarter GDP and flowing into increased imports and not benefiting US-based manufacturing. Hence there is no obvious gain in manufacturing employment within the US. Black Friday sales in September evidenced the seasonal nature of consumer demand which did not, unfortunately, extend to this Christmas peak retailing. Sears has announced the closure of 120 of its Sears & K-mart outlets since Christmas. The restructuring of Sear came after the company reported US-wide unexpected drop in big ticket items in their stores – a sign of consumer’s continued debt deleveraging.
The consumer spending bonus expected for 2012 looks overly optimistic. Personal incomes grew by 0.4% in October and 0.1% in November. Consumer confidence rebounded to 56 in November after six months of consecutive decline. But that was way below the level of 100 seen before the GFC. There is not enough solid base of gain in consumer confidence and durability of spending consumption to sustain confidence of a consumer-led recovery of the US economy. The sovereign and debt crisis in EU has not yet impacted on US manufacturing as falling euro will pressure the competitive US export to this big market which coincides with shrinkage in Chinese demand now hurting Taiwanese exports.
So on all indications of economic barometer currently available, this author concludes that the Sunday Times’ optimistic prognosis is probably incorrect. This author prefers the outlook of the US economy for 2012 expressed by in this weblink
http://video.cnbc.com/gallery/?video=3000064189
That is a recession in EU and US dangling on the edge of a recession abyss. I believe we are in the autumn of sunset of a wintry recession – globally in 2012. The rebound from there has to come from the cash-rich corporate sector.
What are the possible hints of an ECONOMIC turnaround from the next recession I will be looking for?
Instead of US employment figure which is a lagged indicator of any actual recovery, this author prefers to look from a different perspective. Specifically, I would be watching for these developments before I can feel comfortable that global economies either hit bottom or near bottom, even though actual recovery might still lag in time.
- A steep decline in the commodity-sensitive Australian and Canadian currencies followed by a sector-wide rebound in base metal prices
- A rebound in global banking stocks generally, supported by top-line revenue increases, around the world i.e. the restoration of some stability of the banking liquidity systems and life-blood needed to sustain global economic recovery
- Signs of increased corporate spending in capital goods and enhanced level of corporate takeover activities globally – both seems to be in the desert of doldrums at the moment.
- A strong rebound of the US Nasdaq technology sector.
- A rebound in gold prices
- Strong growth in Chinese import trade figures.
- Or different mixes of some of the above.
Anyone wants to share some of his/her thoughts on this economic topic?
Zhen He
