Monthly Archives: September 2013

Quarterly Economic Update – Sept 2013

This is my personal view, based upon many years researching and reviewing the work of others “standing upon the shoulders of giants”

This commentary seeks to provide guidance over a 3 -5 year timescale.

Europe

The European situation is not getting much better.

In France president Hollande appears weak, pandering to vested interests and his socialist leanings. There’s little to suggest a significant economic stimulus or recovery, and in a country of traditionally high levels of taxation and regulation proposals for new taxes and president Hollande’s failure to address the social security system (in particular the retirement age) are attracting negative publicity.

In Germany, the other key driver to Eurozone growth, all attention is focused upon the upcoming elections and there’s unlikely to be any change of direction, as it seems very likely that Angel Merkel will still be in charge.

In southern Europe, Italy, Spain and Portugal have all suffered from political infighting. To me the row over Gibraltar instigated by the Spanish government looks like an attempt to disguise problems with corruption allegations closer to home. In Italy, which is still a significant economy in world terms, it is not clear what Silvio Berlusconi is planning. Will he bring down the government? Does he have that much control over his party? There’s a lot of uncertainty.

It seems very likely that Greece will need another bailout soon.

It seems reasonable to assume that the Syrian crisis (and that across the Mediterranean in Egypt) will have relatively little effect on Europe as a whole. Turkey will struggle with the influx of refugees but that is likely to be contained within Turkish borders.

My forecast is unchanged as below:

Over the forecast period, the Eurozone as a whole will probably show modest growth rising to perhaps 3% in year 2016, but individual countries will perform at markedly different rates. All of the Latin countries will be subject to further political instability and potentially further investor / lender shocks. Germany is likely to be more stable, with growth gradually improving from 2013 – 2015/6, perhaps to as much as 3.5%. France may well be in steep decline by 2014 but that is heavily dependent upon the political situation; I do not see significant upside potential.

Italians are used to weak / no government and growth of 1.5 – 1.8% should be achievable in 2014 with gradual improvement through to 2016.

Smaller countries, particularly those in Eastern Europe, offer real potential for growth. Ireland appears to have weathered the crisis and has a positive outlook, and general acceptance of their fate (albeit still with some political upheaval) is appearing in Spain, Greece & Portugal.

UK

The new governor of the Bank of England, Mark Carney, has brought a fresh approach and that includes longer-term guidance for the markets, indicating that interest rates will stay low until there is a significant impact upon unemployment rates.

Businesses considering investment welcome such certainty, and that will be good for the economy.

Service sectors businesses and manufacturing are showing signs of real growth; the financial services sector is a very large part of our economy, and is by no means out of the woods. I would not be surprised to hear of another scandal in the next few months, as new management and new transparency continue to uncover the sins of the past.

The economy will also be boosted by the confidence engendered by rising house prices supported by the chancellor’s actions in providing government funding. There’s a real danger of history repeating itself – one of the causes of the 2007/8 credit crisis was an unsustainable boom in US house prices fed by lax lending. Tapering the “Right to buy” and similar schemes will be necessary, and it’s worth noting that Mark Carney has issued some comments on this already.

USA

The big question over the US is related  to world politics; if action is taken by the US against Syria will that lead to an economic backlash from Syria’s supporters, notably Russia and to a lesser extent China?  My view at the moment is probably not, I think we will hear lots of bluster but the US economy is too important a market.

It’s notable that the US presidential election cycle has commenced and that may be an influence over the coming quarters, as Obama will be keen to play up any economic success to support the ambitions of the Democrats.  Will he be able to leverage the emerging bi-partisan support for Syrian intervention into support for some business friendly measures? The economy and business does not appear to be high on this president’s agenda.

Prospects in the US are positive, largely powered by shale gas (pardon the pun) but also by the corrections to spending, borrowing and taxation implemented by the fiscal cliff. Clumsy as those corrections are, and awkwardly implemented, they are moving to addresses the imbalances in the US and with a stable (if ineffectual) government combined with a young well educated population, prospects for growth are good, and we could see growth of 3.5 to 4% in 2015/6

BRIC

Brazil & Russia are benefitting from significant natural resources and will show good growth in the mid to medium term. The longer term depends upon political stability and the willingness to develop infrastructure and eliminate corruption.  Both economies suffer from the disadvantage of a large population speaking a language other than English, which is now and will remain the defacto language of business and the internet. Neither country has a culture of educational achievement, or an educational establishment to support the development of a highly skilled graduate level workforce.

India benefits from both the education and the use of English as the language of business / commerce, but is hampered by poor infrastructure and a bureaucratic legal and administrative system. The infrastructure problems are compounded by a complex political system with national and regional bodies operating in their own interests.  Investor confidence has just been shaken by some poor statistics in the most recent quarter, which resulted in a rapid depreciation of the currency.  My words from the last version of this still seem appropriate:

“All 3 economies are still economies of promise, but not yet of delivery, and that seems set to continue for the foreseeable future. Growth rates could easily be in 5% or more, but subject to shocks and upsets.”

China is the powerhouse that is going to drive the world economy in this timeframe. There are significant stresses, both social and political, but the central government is making the right noises and very careful to cool the economic growth when it appears to be getting out of hand.  The social stress most likely to cause problems is the move of the populations, especially those of working age, from the country to the city. Parallels can be drawn with England in the mid-19th century and America in the early 20th and the rise of the urban poor. China appears to have learnt some of the lessons of history and is making great efforts to provide the infrastructure to improve mobility, including the development of new cities in less populated areas.

Growth rates of 7-9% are most likely

“Greater China”

I’m loosely defining this area as the countries surrounding China & supplying Chinese demand, from Vietnam and Thailand /Malaysia /Singapore right though to South Korea. These countries have generally good prospects, decent infrastructure and well educated populations. They cannot but benefit from rising demand in China and most have the political stability to take advantage of it.

The glaring exception is of course Myanmar, the former Burma, but even there the path to democracy seems to be the chosen road. That road appears less smooth, with considerable racial / religious disturbance reported.

The political risk in this area is conflict with North Korea, which would heavily affect South Korea.

Growth rates could be exceptional at up to 10%

Japan

When I wrote this

“Japan is often ignored / written off in the commentaries but is still one of the world largest economies. Good opportunities exist in many sectors, but overall growth rates will be hampered by legacy issues, much as in Europe.”

I did not intend the reference to be to the Fukushima nuclear plant, but that seems likely to be the leading business news story for some time to come.  From an economic perspective this has exposed Japan’s reliance upon ageing (and unsafe?) nuclear power plant, and that is a significant infrastructural weakness. It’s difficult to do business when you can’t keep the lights on.

MENA

The main stories in this region are of course Syria and to a lesser extent Egypt. Both economies are collapsing, and refugees fleeing Syria (in particular) are impacting on surrounding countries. Factor into that mix the long standing Sunni – Shiite divide where it seems likely that Syria is a proxy for Iran’s ambitions to become the dominant player in the region.

The Gulf States have significant natural resources, but Middle East oil & gas is becoming less important to the world economy as Shale Gas, improved efficiency and new discoveries reduce the world’s reliance on the region.

It is difficult to be optimistic for prospects in this region.

Australasia

The story of the moment is the Australian election but I don’t see that making a significant difference. There is perhaps some upside in a significant decline in the value of the AUD against the US Dollar over the last 3-4 months, making Australian resources more competitive, but that probably still has some way to go. My comments from the last edition still stand

I suspect the story can be summarised as “the party is over” at least for now. Australia has benefited greatly by shipping commodities to China, but that seems to be cooling off, perhaps as a result of Chinese investment in Africa’s mines. Growth rates of 1-2%

© Tim Luscombe September 2013