Posts Tagged ‘brics’

The world had de-coupled, we were told. Time was, that when the US consumer sneezed, the rest of the world got a cold.

Then in 2008, the US consumer was sent to bed, with a thermometer in his/her mouth, and the rest of the world was in agony.

Then something odd happened. After a few months, in which everyone suffered, the emerging world did okay. China did more than okay, it boomed.  The BRICs, or if you want to include South Africa in that illustrious group, the BRICS, took the baton of growth from the US.

Sure there was talk of currency wars, sure the UK limped along like a cripple on broken crutches, but the global economy did well. It had de-coupled we were told.

Or did it? There are time lags in these things.

Now things seem to have gone into reverse. Sure China is still growing, but it is struggling to change from export to consumer led growth. India is picking up, Brazil looks dire, Russia looks worse, and if you want to make the small ‘s’ at the end of BRICS into a big “S” South Africa  is struggling.

There are signs Japan may be recovering, more of that in another article, the Eurozone is well and truly stuck in a very low gear, or even reverse, but the UK and US are the new stars.

The UK economy slowed a bit in Q3, with quarterly growth down to 0.7 per cent, from 0.9 per cent the quarter before. But then the UK’s main trading partner is the Eurozone. At least investment is rising at a very brisk pace, and that gives good reason for cheer.

But there is even more reason to cheer the US.

The year got off to an awful start, with a cold winter and unfortunate timing of the inventory cycle hitting  the economy hard. Was the Q1 contraction a one-off?   Or was it a sign of something more serious?

Well the data on the US economy has been unremittingly good, ever since.  Take for example the latest US consumer Confidence Index from the Conference Board. It hit a new seven year high in October. If you like your numbers, then you may be interested to know the index hit 94.5. The last time it was so high was in October 2007.

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Yet, the global economy still struggles. If it has de-coupled, then right now this is negative thing.

But there is one other issue here.

As the US recovers, the Fed makes noises about upping rates. This is spooking markets, and hitting emerging economies hard.

It is not that the US economy is no longer the lynchpin of the global economy. It still is. It is just that the actions of the Fed seem to count for more than the well-being of the US consumer.

But can the US consumer yet save the day? Only time will tell, but it is surely the case that if US Consumer Confidence continues to grow, then the rest of the world will grow with it – eventually.

p.s. I have been away for a while to complete my new book, called ‘iDisrupted‘ which is available to purchase via Amazon. If you are interested in my thoughts about how the incredible changes in technology are likely to change our world forever then you are invited to buy the book and let me know whether you agree or disagree with my predictions. Further details about the book can be found on www.idisrupted.com

Michael Baxter, The Money Spy

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If 10cc were to write a song about the latest surveys on the UK economy they might say: “I don’t like surveys. Oh no, I love them.” The fact is that the surveys are not just good; they are remarkable, but can they really be right?

It was told here on Tuesday how the latest Purchasing Managers’ Indices (PMIs) on UK manufacturing and construction were pretty darned impressive. The last index tracking manufacturers’ output and another for new orders, both produced by Markit/CIPS each rose to their highest level since 1994. Another index, this time tracking construction, rose to its highest level since 2007.

Then yesterday came the PMI for services, and a composite index which combines the PMI readings for manufacturing, construction and services. The PMI for services rose to its second highest level in the 15 year history of the index – the record was set in December 2006.

As for the composite PMI, this rose to 60.7. Now you might say 60.7 what? Well to put this reading in context, any score over 50 is meant to be consistent with growth. And the 60.7 reading just happens to have been the highest reading ever recorded during the 15 years that these composite indices have been produced.

So what does this mean? Markit reckons its surveys points to growth in Q3 of between 1 and 1.3 per cent compared to Q2.

Also this week, the OECD was busy revising upwards. It is one of those strange-but-true quirks that forecasters tend to revise their predictions downwards when we enter a downturn, and revise upwards when we exit. The OECD is now predicting that the UK economy will expand by 3.7 per cent in Q3 on an annualised basis. Incidentally, if its forecasts are right the UK will be the fastest growing economy across the G7 in the second half of this year. But if the PMI indices are right, the OECD will in fact be understating the truth.

So far then it is all good stuff.

Can it last? It is clear that the Help to Buy Scheme has helped to buy the UK economy more growth. The danger remains, however, that the chancellor is creating growth from a new housing bubble. The Bank of England dismisses this, but do members of the MPC, for all their cleverness, understand the British psyche, and how prone it is to getting behind housing booms, even when they are built on smoke, mirrors and the naive belief that interest rates will stay at near record lows for the 25 years during which they still have a mortgage.

But there are reasons for hope, however. Take for example the news that Nissan is creating 1,000 new jobs, as it expands its factory in Sunderland – a car factory by the way that some people claim is the most efficient in the world.

Or take UK trade. Since the end of 2011, UK imports have grown by 5 per cent and exports by 6 per cent. According to the ONS, UK exports to the BRICS countries as a percentage of total UK exports have increased from 2.6 per cent to 9.1 per cent over the last 15 years. 6.0 percentage points of this rise have occurred since 2006. Okay imports have risen too, but in the last couple of years UK exports growth to the BRICS has outstripped import growth to those same countries.

It is just a shame the chancellor cannot put the same level of commitment into what we might call a Help for Business Scheme as he has put into the housing market.

© Investment & Business News 2013

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As we slowly move towards a post QE world, or at least post US QE world, things start to look very different. Countries that seemed unstoppable a few years ago look vulnerable. Perhaps the three countries to suffer the biggest knocks in recent days have been Brazil, Turkey and South Africa – all have seen their currencies fall sharply. In two of these countries we have also seen street protests.

Yesterday it was Brazil’s turn to be seen in an unpleasant limelight, as Brazilians took to the street to protest over a multitude of woes – among them the cost of hosting the forthcoming World Cup and the Olympics. Meanwhile credit ratings agency S&P has downgraded Brazil’s sovereign debt outlook – it is still rated as BBB, but now it is under a negative outlook.

Look beneath the surface and the threats to Brazil look worrying indeed.
For one thing, Brazil’s current account has fallen from a small surplus in 2007 to a deficit worth around 2.3 per cent of GDP in 2012. What Brazil needs is more investment, higher domestic savings to partly fund the investment, and a cheaper currency to give exporters an advantage. Alas it also needs much lower inflation. The IMF has forecast Brazilian inflation at 6.1 per cent this year. Interest rates are currently at 8 per cent. To fight off inflation, Brazil needs a strong currency. Do you see the dilemma?

The savings ratio in Brazil is the lowest amongst both the BRICS and in Latin America. Part of the problem is a very generous state pension scheme. This needs to be reduced, but street protestors may not be too happy with that idea.

At face value, government debt in Brazil does not seem so bad. In fact net debt is 35 per cent of GDP. Wouldn’t the US and the UK love it if their equivalent measure was so low? It is just that net debt is made up of gross debt minus assets, and many of the assets that count towards Brazil’s net debt are highly illiquid and risky. Capital Economics reckons a better measure of net debt would be around 50 per cent of GDP.

Brazil is posting a primary budget surplus, meaning government receipts are greater than expenses before interest on debt – but, thank to high interest rates, Brazilian public debt is rising.

And there is a much deeper woe. Commodity prices have been falling of late, and many, including the World Bank for example, are now forecasting a new phase in what’s called the commodity super cycle, as the massive levels of investment into commodities during the up phase of the super cycle leads to greater supply.

The last few years have been characterised by high commodity prices, poor economic performance in the developed world, and cheap money. As we enter a post QE world, it appears we may also enter a phase of lower commodity prices. For Brazil this may be a perfect storm.

This does not mean that the Brazilian growth story is over, but remember markets tend to overreact and Brazil may be one of the big victims of post QE over-reaction.

© Investment & Business News 2013

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The BRICS are not what they were. Maybe it is time to look elsewhere.

Take news out this morning. According to Capital Economics, growth in GDP across emerging markets may have fallen to a three year low. Other data revealed that the Brazilian economy grew by just 0.6 per cent in Q1. But despite the lacklustre growth, fears over inflation have forced Brazil’s central bank to up interest rates by half a per cent. Looking at other data out today revealed that the economy of the Philippines grew by 7.8 per cent.

The BRICS have problems. China is struggling to adjust from a growth model that relies on exports and investment to one that grows off the back of consumer spending. In short China needs more internal impetus for growth. Brazil’s problem is the opposite: too much reliance on consumers and not enough investment.

News on the Indian economy has been a disappointment, as the country fails to make the reforms necessary to compete on the international markets. As for Russia, it remains over-reliant on oil and gas and Capital Economics forecasts it will grow by just 2.3 per cent this year.

In contrast, the TIMPs – that’s Turkey, Indonesia Mexico and the Philippines – look a lot more interesting. As indeed does Malaysia, Thailand, Vietnam, Chile, Columbia and parts of Central America – such as Panama.

The stock markets of the Philippines and Thailand have been the second and third best performing in the world during the last two years. (Venezuela was first, but this market is small and very illiquid.)

Stock market growth does, of course, bring with it the risk of stocks rising too high. The Philippines’ stock market is trading on a valuation of around 20 times 2013 earnings, but less than the p/e ratio seen before the Asian crisis in 1997.

The Asian crisis of 1997 rocked the South East Asian region hard. Are we in danger of seeing a repeat of this episode? This time around there is a difference. The savings ratio in Singapore last year was 49 per cent of GDP, and 39 per cent of GDP in Malaysia.

The biggest economy in the region is Indonesia. Some reports have suggested a credit bubble may be forming in the country. It may be worth pointing out that in Indonesia the ratio of credit to GDP is 30 per cent, against an average of nearer 100 per cent for the region. More interestingly, in Indonesia a smaller proportion of credit has funded projects in the property sector, relative to Hong Kong and Vietnam, for example.

As a result there is little hint of a property bubble in the making. Instead, much of the credit has funded infrastructure and manufacturing. In 1997 around 50 per cent of Indonesia’s credit was funded by foreign currencies. Today that level is nearer 15 per cent.

© Investment & Business News 2013

The headline figure was nothing to write home about, but drill down and maybe there is reason for real optimism.

The UK’s balance of trade in goods barely moved in March, with the deficit coming in at £9.1 billion. So far, so indifferent.

As for the UK’s deficit on trade in goods and services, this was marginally better than February scoring £3.1 billion from £3.4 billion the month before. Okay that was an improvement , but actually the deficit for March was pretty close to average over the last year or so.

The deficit has not significantly changed over the last ten years. Now, change the perspective, and look outside Europe. Exports to the US soared 21 per cent in March over the month before.

Exports to the BRICS have been steadily rising for some time. See this chart:

Okay, exports to China are still way below imports from China, but the chart makes it clear that exports have been growing much faster than imports for some time. In fact over the last two years, exports from the UK to China have increased by half as much again. Imports from China to the UK have risen 10 per cent.

© Investment & Business News 2013

In November, UK exports to Ireland were worth £1.45 billion. We sold £2.09 billion worth of stuff to the Netherlands, £1.785 billion to France, and £1.21 billion to Belgium/Luxembourg.

In short, UK exports to its nearest neighbours were worth around six and a half billion pounds in November.

Exports to China were worth just £840 million.

Alas, data for November is not available yet, but In October, exports to Brazil were worth just £207 million, to India they were worth £397 million and to Russia £381 million.

In short, the UK sold almost more goods and services to little old and deeply troubled Ireland than it did to all the BRICs put together.

Be grateful for small mercies. At least it was a case of almost as much. Until recently, exports to Ireland were trouncing our combined exports to the BRICs.

But now take a look at Germany. In 2011, 59.2 per cent of German exports were to countries in the EU, which was a 20 year low.

According to ‘Spiegel’, in 2012 growth in exports outside the EU will make up for the decline in exports within the area.

‘Spiegel’ stated: “German exports are set to hit a new record for 2012 as strong sales to the US and emerging economies like China offset falling demand from austerity-hit Europe. Exports rose 4.3 per cent in the first 11 months, thanks to a jump in sales outside the crisis-hit Continent.” See: German Exports Seen Hitting New Record in 2012 http://www.spiegel.de/international/business/new-record-for-german-exports-expected-for-2012-despite-euro-crisis-a-876296.html

According to the ‘China Daily’, unit sales of cars in China are now greater than sales into Europe. It quoted a Germany analyst predicting that it won’t be long before the Chinese auto market is bigger than that of Europe and the US combined. See: Vehicle sales overtake Europe in 2012 http://europe.chinadaily.com.cn/business/2013-01/10/content_16100482.htm

You don’t need a PhD in anything to know that Germany will do rather well out of the exploding Chinese auto market.

We can speculate as to why. Here are a few observations.

Germany is benefiting from the euro. Because it shares its currency with the likes of Greece and Spain, its currency is much cheaper than it would be if it still had the Deutschmark.

The UK may be losing out thanks to North Sea oil and the City. Both bring in tax receipts. But both push up sterling.  It’s hard to say whether that is a net positive or negative.

The Bank of England is worried about the strength of sterling, and may well use QE to try to push the pound down later this year.

If Scotland does indeed gain independence, it will probably stay in the sterling area. Scotland may benefit from North Sea oil tax receipts, but North Sea oil will also have the effect of distorting the value of sterling. That means the rest of the UK will pay the price of North Sea oil via a terms of trade disadvantage, but won’t gain the benefits. That won’t go down well.

But here is a question.

Given the UK’s ethnic diversity, why is it not able to use its pool of labour with its global roots to sell worldwide? Is the problem that this potentially world class sales force, doesn’t have enough to sell?

©2012 Investment and Business News.

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This is no wind up. The last week or so has seen hints. The green shoots may not be big, peeking above the surface like scared mice, but they have been there all the same. So is this for real? Has the recovery begun?

Yesterday on the Andrew Marr Show former Prime Minister John Major said: “Recovery begins from the darkest moment. I’m not certain, but I think we have passed the darkest moment.”

So what’s the evidence?

Earlier this month, data from the ONS revealed another rise in employment – this time up 236,000 in the three months to July. Elsewhere, data on July’s industrial production indicated the biggest jump in this sector for 25 years. The OECD took a look at the G7 and the four big emerging economies (BRICs) and saved its most bullish words for the UK and Brazil, which were the only countries that it said were due to see a pick-up next year.

The round of good news was completed by the Centre of Economics and Business Research (CEBR), which has forecast that 2013 will see the first rise in real incomes for UK households since 2009.

Looking beyond the UK’s borders, markets were c*ck-a-whoop. Both the US Fed and the Euro regions’ central bank – the ECB – have announced QE (or in the case of the ECB QE ish), and at last they are saying central bankers are taking decisive action. A report from ‘Financial Times Deutschland’ suggested that unit labour costs have fallen by 15 per cent in Greece since 2010, with significant falls also seen in Spain and Ireland. Greece saw its current account deficit fall by 54 per cent between 2007 and 2011.

Finally maybe policy makers are learning lessons. Vince Cable is agreeing to relax labour laws in the UK. David Cameron wants to cut down on red tape, and make it easier to gain planning permission. He wants to see an end to dithering.

Then there is the funding for lending scheme.  This is an idea that really seems to have struck a chord across the world, so much so that some economists in the US are now urging the Fed to announce a similar idea.

And finally, the World Economic Forum has released its latest league table showing the world’s most competitive countries. And guess which country moved from number ten on the chart to number eight? Yes, that’s right the UK. The usual suspects did better: Switzerland, Singapore, Finland, Sweden and the Netherlands. But of the G7 only Germany in sixth spot and the US in seventh scored higher.

Recessions are bad, of course they are, but they can have a cleansing effect. They can correct bad habits, get rid of bad ideas, and create economies that are more focused on ideas that work. The UK has had a torrid few years, but maybe it is now set to benefit from the correction.

Well is it? Read on…