ExRussian

Today, North America saw the Q4 2009 GDP figures for Malaysia and Germany. In my view, the two releases accurately depict the developed vs. developing picture of economic recoveries: one is causing the other.

Malaysia’s real GDP, population 29,992,577 in 2008 according to the World Bank, grew 4.5% compared to the same period one year ago. The impetus behind headline number was domestic demand (GDP minus net exports), +3.9% Y/Y and external demand (exports), +7,3%.

The recovery in Malaysia is healthy. Domestic private consumption improved 1.7% Y/Y, while investment surged 8.2% over the same period (up from -7.9% in Q3).

The pace of contraction in German real GDP, population 82,140,043 according to the World Bank, slowed to -1.7% Y/Y from -4.7% Y/Y in Q3. On the surface, the trend is sound: the annual economic deterioration is slowing markedly. But below the hood, the true nature of the beast is present: only external demand and government spending are stabilizing GDP.

The growth rate in domestic demand is essentially moving laterally; it fell to -2.8% Y/Y from -1.6% Y/Y in Q3, and is now essentially unchanged from Q2 (-2.7% Y/Y) . Pockets here and there are improving – the decline in imports and machinery slowed somewhat; spending on machinery jumped 3 points to -18% Y/Y in Q4 (this is not much of an improvement).

Is this a country-level illustration of the world growth schism? Are Emerging Markets providing the impetus growth for all? I think so.

Rebecca Wilder

An article I wrote on Angry Bear:

Forget the Eurozone for just a minute. Japan’s problems are big: Toyota is a major exporter/employer. Last year 48% of all new standard passenger vehicles sold in Japan were Toyota (or its Lexus brand). The WSJ article describes Toyota’s status in Japan as the following:

In short, Toyota is to Japan what General Motors Corp., in its heyday, was to America. And for a beleaguered country that has suffered a series of institutional blows in recent months—the collapse of the long-ruling political party, the bankruptcy of its champion national airline, a renewed bout of deflation— the global humiliation of Toyota may be the most psychologically damaging blow of all.

Psychological blow, what about an explicit economic blow! Toyota is certain to drag the only Asian G7 economy down due since auto exports are big in aggregate export income.

Japan’s single largest export category in December was, of course, manufacturing: 22% of total exports. And a huge 14% of the total value of exports in December came from motor vehicles (auto sales, that is – separate from parts).

The Japanese economy grew 1.14% in Q4 2009 with a huge 0.67% contribution from exports. The second major contributor was private consumption, which added 0.39%. Going forward, consumption and export contributions are likely to wane from the major Toyota recall campaign that is underway.

First the direct export channel will probably crumble as demand for Toyota cars derails. Second, there will be a lagged labor market effect. Sure, workers will be needed to address the recalls; but the the loss in hours stemming from a drop is sales is likely to be much larger, and the net jobs effect negative.

Toyota is a major employer in Japan that currently has 320,808 employees and has already shuttered doors (at least temporarily) in other countries. It’s only a matter of time before the effect hits the home labor market.

This is big. I wouldn’t be surprised if the IMF downgraded their forecast of Japan based solely on Toyota’s misstep.

ExRussian

Beginning of the year economic blues in the US? I think so. Just looking over Spencer’s CPI post; here is an excerpt (the first paragraph):

The CPI report was encouraging. The total CPI rose 0.2% and the year over year increase is only 2.6%. Although real average hourly earnings fell, real weekly earnings were unchanged.

The core CPI actually fell for the first time since 1982, bring the year over year change in the core CPI to 1.6%. The 6 month SAAR for the core CPI is 0.8%. Despite all the worries about inflation the normal pattern is for the best cyclical reading on the core CPI to occur in the first year or two after a recession. If the economy follows the normal pattern, the core CPI should continue to moderate for another year or two.

My first thought is that I don’t think that this is encouraging at all; and I’m not alone. Core prices fell; these prices are typically very, very sticky. For example, shelter prices are biased upwards in their calculations, but have been declining or unchanged for every month since August 2009. I know that the output gap is not directly observed, except by proxy in the capacity utilization numbers or the unemployment rate; but it must be huge to do this to housing costs.

Look at it differently: the velocity of money improved in October and November of 2009…

… but then took a step back in December of 2009. If this trend continues, non-energy prices are sure to back down much further. There’s just no support for price action at this time – the Fed can’t pull back… it probably should be putting more in.

Rebecca Wilder

Note on data: Macroeconomic Advisers now publishes a blog where they make available their calculated monthly GDP series (nominal and real) to the public (thank you).

An article I wrote yesterday on Angry Bear blog:

No, the US Treasury’s time is not running out. Where’s Brad Setser when you need him – and the media definitely needed him in reference to the December TIC report.

Okay, okay, we know: China dropped its share of Treasury holdings in December by $US 34.2 bn. China now holds just 20.9% of the total foreign-owned stock of Treasuries, second only to Japan (21.3%).

But China’s share is closer to its average, while Japan’s share is way off – there may be a reversion here, i.e., Japan will grow its stock of Treasuries relative to China (Please see my post yesterday). Except for the period of September 2008 through November 2009, Japan held a much larger share of Treasuries than did China for every month since 2000.

Is there a sinister plot developing? Is China selling off S-T T bills to retaliate against the Obama administration’s push on the renminbi? Or is China simply reallocating its portfolio toward risk?

Perhaps there is a (partial) retaliation scheme underway, as suggested by the 3-month accumulation of short-term US assets (mostly T bills agencies with a maturity of less than 1 year).

But isn’t it just slightly more plausible that the Chinese are – official + private – selling off zero-yielding (practically) Treasuries in exchange for longer-duration, higher-yielding, and riskier assets.

The first bit of the story is this: one should take care in not reading too much into the TIC report. It’s just one month’s worth of data; but more importantly, the data miss a critical component of the capital account, foreign direct investment.

The chart above illustrates China’s one-year rolling monthly flows of long-term, high quality asset purchases – Treasuries bonds/notes, agencies, stocks, and corporate bonds. The Chinese are accumulating stocks, primarily through private investors, but through official channels as well (see press release, lines 8 and 13). This suggests an increasing interest in equity, which could signal growing foreign direct investment flows (not shown in TIC).

Furthermore, the entire year’s shift in assets, long-term Treasury purchases, +$US 98.8 bn fully offsets the drop in short-term Treasuries, -$US 98.8. This suggests diversification.

Finally, everybody’s doing it, not just China – diversifying away from T bills, that is!

The chart above illustrates the 3-month rolling sum of all foreign net flows of ST US assets (mostly T bills). If you invest $US 1 million dollars today in a bill expiring in August 2010, you make about 900 bucks. Man, doesn’t that sound like a wonderful investment?

So the next question is: why do the Chinese care about return on their F/X holdings? Because they have a peg! Here is a great article for all of you who wanted to know about the costs of maintaining a peg. Accumulating FX reserves is a costly business, and T bills are unlikely to finance the type of sterilization that is needed by the PBoC.

ExRussian

Spencer at Angry Bear presents the Industrial production report for January:

January industrial production rose 0.9%, with the gains with gains across almost all components.

Industrial production has now risen for seven months and is 5.5% above its bottom. This implies that so far industrial production has been rising at a 9.4% annual rate. Compared to previous industrial production recoveries this appears to be about a normal recovery. However, given that this was the most severe drop in industrial production in the post WW II era and that recoveries are typically proportional to the decline, this implies that the recovery is moderate.

The gains were widespread,but perhaps the most important development is that information technology is soaring. Over the last three months it rose 1.8%, 1.2% and 1.7%, respectively.
This translates to about an 18% annual rate, compared to about a 15% growth rate in the 2002-08 expansion.

The other major development is that manufacturing productivity appears to be slowing. Over the last three months estimated manufacturing productivity slowed to only a 1.7% annual rate as compared to an 8.1% rate over the past year. This may imply that the typical early cycle extremely strong rebound in productivity is ending and that we may now start to see stronger employment gains.

cross-posted from Angry Bear by Rebecca

Marshall Auerback’s response to China’s (recent) actions on currency valuation (tied to this post).

There’s another factor as well. There’s been an enormous increase in money and credit in the past year. In fact, it seems to be as great as 5 years’ growth in credit in the previous Chinese bubble. What happens is that the increase in money and credit is so great and so abrupt that you tend to get a high inflation quite quickly even if there are under utilised resources? Add to this the fact that you’ve got massive fiscal stimulus occurring today in China.

You have the makings of a very messy situation: if China seeks to sustain demand via fiscal policy, then you could get a big inflation problem, which could severely erode the tradeables sector. And you have all of these Chinese students all steeped in Chicago School monetary theory, coming home and taking over. So they might do a Paul Volcker to stop inflation.

But, what if the they don’t? Inflation can take off and thereby begin to ERODE the competitiveness of Chinese exports. This might be the real reason why China is so reticent to revalue its currency. The Americans might go crazy if the Chinese devalue, but if the inflation is high enough, they might have to do it, as it will severely erode their terms of trade and cause their tradeables sector to collapse.

Or you get the hard-line monetarists triumphing by fighting inflation and you get riots as unemployment increases.

It could get very ugly.

This could be happening now in China. Everybody says no. The consensus is that inflation is a couple per cent and it is all pork prices because there was a lousy corn harvest.

However, economists such as those at Lombard Street in the UK, Jim Walker, Simon Hunt and the like try to figure out the changes quarter to quarter in Chinese nominal GDP which is reported only year on year. And they come up with giant double digit growth rates for the second half of last year.

Now this is complicated by the fact that the Chinese have revised up their GDP numbers and they throw the revisions all into the final quarter of the year. But when these guys try to adjust for that statistical screw up they still come up with giant nominal GDP increases. Lombard Street thinks it was twenty five per cent or so in the second half of last year. They think it was twenty per cent real and five per cent inflation.

Economies never grow at a twenty per cent real rate. And Simon Hunt says if you look at proxies like power output and rail traffic you don’t get those kinds of numbers for real growth, which suggests that inflation must be higher than four or five per cent. Indeed, it could already be double digit. It is hard to say. But if it is double digit then the resultant inflation will cause a real revaluation of the trade weighted exchange rate.

And more so if the dollar rallies. That could well crush the volume of exports and the profitability of the industrial tradeables sector. Exports are the only area where China makes any kind of money because they can sell these products for about 10 times what they obtain for a comparable product in the domestic economy (where profits are virtually nil). The export sector is a big contributor to overall super excessive fixed investment in China. FDI will go to zero net.

There will be strong forces for a reduction in fixed investment in this large sector. Hence, there is a good chance that even without monetary tightening by the Chinese authorities, the overall fixed investment boom in China will turn down.

Nobody is thinking about this but it is a real possibility. And with fixed investment now at fifty per cent of gdp (which is unprecedented in any economy) and exports at more than thirty, we’re looking at ratios that have never been reached before on a combined basis turning these two down could create a severe recession in China. China has gone too far this time. I think they are in a box that they and others don’t recognize. The “Black Swan” event this year could well be a devaluation of the RMB.

by Marshall Auerback, posted by Rebecca

I can’t believe that the Financial Times can get away with this. From the FT, titled Foreign demand falls for Treasuries:

Foreign demand for US Treasury securities fell by a record amount in December as China purged some of its holdings of government debt, the US Treasury department said on Tuesday.

China sold $34.2bn in US Treasury securities during the month, the US Treasury said on Tuesday, leaving Japan as the biggest holder of US government debt with $768.8bn. China overtook Japan as the largest holder in September 2008.

I don’t know what foreign demand is (these are net flows, so it could likewise be a product of domestic supply and/or demand), but foreign holdings of US Treasuries grew! In December, foreign holdings for US Treasury securities – official and private holdings of US Treasury bonds/notes + US Treasury bills – increased by $17 bn over the month (you can see the major holders by country here, or the total on the press release, lines 5+10+23).

And lookie here, China dropped its overall holdings , yes, but the article fails to mention the shift in holdings by other key countries that offset completely China’s sell-off. In December, the UK and Japan jointly increased their holdings by more than China dropped its holdings, + $US 36.4 bn vs. -$US 34.2 bn.

And finally, China’s current portfolio is really not that difference from recent history. China’s December share of US Treasury holdings, 20.9% (as a % of total foreign holdings), is barely off its 2007-2009 average, 21.4%. But Japan’s holdings are way off, and could revert towards the average, 23.7%.

The FT’s coverage of the TIC report does not do justice to the undertones of this massive release (especially the China piece, in my view). More TIC analysis to come tomorrow…

Rebecca Wilder

Why does the world care about Chinese monetary policy? In short, the ten countries below enjoy 60% of China’s import demand ($1.3 trillion annualized in December 2009), where the % are listed in the legend.

The globe is watching Chinese policy. The People’s Republic of China raised bank reserve requirements another 50 bps yesterday – its second such measure since January. From the NY Times:

China’s central bank moved late Friday to reduce lending to companies and individuals by requiring large commercial banks to increase the amount of cash they park with the central bank. The move, which came earlier than most economists had expected, was meant to slow China’s breakneck economy and inflation.

and later…

Fears that China’s move Friday would slow global growth sent share prices sliding across Europe and pushed New York markets lower when they opened, though they recovered some of the losses. China’s commercial banks have become important lenders to the rest of the world as American banks have considerably reduced lending.

“The timing is a surprise,” said Qing Wang, an economist in the Hong Kong office of Morgan Stanley, referring to the central bank’s action…

… Jing Ulrich, the managing director and chairwoman of China equities and commodities at J. P. Morgan, said, “The message coming out of China has been quite clear — policy makers are becoming more concerned about containing inflationary expectations and managing the risk of asset price bubbles as a result of last year’s aggressive expansion of credit.”

Less credit = smaller growth rates. And it’s not just “markets” that are worried about the slowdown of the Chinese economy. On Feb. 2, the Reserve Bank of Australia referred to China directly in its policy statement:

In Asia, where financial sectors are not impaired, recovery has been much quicker to date, though the Chinese authorities are now seeking to reduce the degree of stimulus to their economy.

And Feb. 11, the Bank of Korea, in its monetary policy statement, referred explicitly to the European crisis as cause for concern:

There still, however, remains uncertainty as to the economic growth path due to the risk of government debt crises in some European countries.

Trade, i.e., external demand is very much on the mind of global policy makers. Global trade is rebounding, but US import demand has not recovered fully. And until global domestic demand is a sure-fire boost to economic activity – not just an inventory cycle – policy makers will consider carefully the external factors (i.e., exports from China, for example) when making fiscal and monetary decisions.

ExRussian

Today the European Union released a statement about Greece. Absolutely no specifics are given regarding the terms of any Greek bailout, but there was a (slight) surprise:

Euro area Member states will take determined and coordinated action, if needed, to safeguard financial stability in the euro area as a whole. The Greek government has not requested any financial support.

This is a much broader statement than I was expecting; I take it as a blanket guarantee. Euro area members – Germany and France being the largest members as measured by aggregate GDP – will support the stability of the euro-zone, meaning that help will be dished out where needed.

I wanted to look at debt levels, not just in Europe but across the world. I suspected (before I made this chart) that the emerging market space would generally reduce debt levels (consistent with broader trends in countries like Indonesia or Mexico), while developed countries would generally increase debt levels. “Debt” considerations go deeper than gross debt as a % of GDP. I digress.

Below I illustrate two charts of gross government debt as a percentage of country GDP. The first chart illustrates general government debt burden for 68 countries, emerging and developed markets alike. Global Insight forecasts the numbers, which is proprietary information, but you can see the IMF’s forecast for free here).

In the chart, there is a 45-degree line: countries above the 45-degree line are expected to increase debt burden spanning the period 2009 and 2012; countries below the line are expected to lower debt burden over that same time horizon.

Global Insight envisages just three “developed” countries to drop debt burden between now (2009 forecast) and 2012: Netherlands (barely), Norway, and Denmark. Any other debt improvements will occur across the emerging market space (there are quite a few countries, by the way).

The second chart illustrates the same pattern of indebtedness, but for the “big spenders”.

I had to separate the big spenders from the rest due to their relative magnitudes of indebtedness. In the big-spenders chart, the Y-values (debt to GDP) span the range of [5%, 255%] rather than [5%, 80%] in the previous chart.

Of the big spenders, Japan is the worst, with debt rising from 229% of GDP expected in 2009 to 230% of GDP by 2012 (this forecast was published before the passage of the Japanese 2010 budget, so indebtedness is likely to be higher still). But it’s only the worst. There are other countries, Lebanon, Greece, Iceland, USA, fighting for second place. Looks bad, right?

Well….maybe…sort of. Before you start freaking out, there are things that one must consider.

External vs. domestic debt

Japan has a lot of gross debt but most of it is issued domestically. Total foreign debt – debt held by foreign investors – is expected to be just 22% of GDP in 2009. Having a lot of domestic debt is sometimes okay, as firms, pensions, and households support (define) demand for the debt. On balance, this makes aggregate debt (public plus private) much smaller.

Autonomous monetary policy

This is an important one, and central to Greece’s current situation. If the Greek government could print money – the ECB controls the money supply across the 16-member euro-zone – it would. It would simply print euros pay debt obligations, essentially inflating its way out of debt. Japan and the US can do this, making the risk of default lower.

Of course inflating your way out of debt can cause a much bigger problem if money supply growth gets out of hand. And this method of debt reduction can lead to a much slower and probably more painful way of going bankrupt.

ExRussian

I got a little obsessed today with the prospects of inflation – I guess it’s all the deficit talk out there. But good central banking has brought the number of countries with 20%+ inflation rates from 27 in 1982 down to just 18 in 2008.

I guess my question is: is the global inflation moderation to continue? According to the IMF, the answer is yes (at least through 2011).

Rebecca Wilder