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United States
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United States survives hurricanes and energy crises, for the moment
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United States maintaining economic activity and energy prices not shifting to other sectors.
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The vitality of the US economy seems able to survive anything. The effects of hurricane Katrina on the level of economic activity have been much less than initially expected. So far as concerns prices, that is another story as one thing adds to another. The hurricanes have put pressure on already high energy prices bringing about a notable rise in inflation. This rise, however, is not shifting to other sectors of the economy. At this time, the worst effect of the rise in oil prices is not in a reduction in growth nor in widespread inflation but in the increasingly worse state of a trade balance already in deficit.
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Retail sales remain strong with only a drop in car sales.
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On the demand side, the latest available indicators show that the effects of Katrina on consumption are turning out to be limited. In September, retail sales were strong. Apart from motor vehicles, a key but erratic component, retail sales were up by 10.3% over the same period last year and are showing a profile not simply holding up but presenting some increase. This vitality comes in contrast to the drastic drop recorded in the Conference Board consumer confidence index in September which went down from 105.5 points to 86.6. Naturally enough, the fears and doubts of the US consumer are being concentrated on durable consumer goods while at the same time people are holding strongly to the levels of consumption reached in other products.
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Industrial production remains weak.
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On the supply side, the industrial and manufacturing sector continues to be the ugly duckling of the strong US economy. In September, the poor growth of industrial production (2.0% year-to-year) falls within the marked downward trend taking place since the Spring of 2004. The truth is that the sector has had a weak and very short recovery compared with past periods. Nevertheless, business executives are seeing things with rather more optimism, as shown by the recovery in the manufacturing activity index put out by the Institute of Supply Management for August, which rose to 59.4 points, a level well above the 50 reference figure which indicates a predominance of optimists over pessimists. The non-manufacturing activity index went the other way with a drastic drop to 53.3 points, a loss which likely will be compensated in coming months.
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Strong real-estate market shows some signs of easing.
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The housing sector, one of the key players at this time, continues to show a broad picture of strength which also helps the consumer to maintain levels of consumption, whether by increasing the sense of wealth or by making access to borrowing easier. All indicators for the real-estate market continue to move up, especially the price of existing houses, which showed an increase of 16.2% annual in August. Nevertheless, while not changing the general picture, housing demand seems to be easing in some parts of the country. In this respect, the passing of Katrina, which has generated an increased need for building in shelter areas and for reconstruction, could be masking part of this slowdown, constituting a «soft landing» which would be looked kindly upon by the Federal Reserve.
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Employment being created but wages losing purchasing power.
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In the labour market, the US economy continues to create jobs. Some 35,000 jobs were lost in September, the first drop since May 2003. This decrease, however, quite small in itself, was much less than expected, if we take into account current circumstances. Furthermore, the figure for August was revised upward. Finally, the picture we are left with is that of a labour market undoubtedly quite vigorous. In spite of robust job creation, in September wages lost 2.4% of the purchasing power they had in the same period last year. The negative effect of this reduced spending capacity on retail sales is being compensated by the strength shown in housing. On the positive side, this wage moderation is helping to avoid inflationary pressures.
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Increased inflation holding to energy sectors, thanks to containment of wages and retail margins.
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Energy prices meant that inflation shot up to 4.7% year-to-year in September. This was a rate in line with the Nineties seeing that this level had not been reached since July 1991. In spite of this very notable rise, the effects on other sectors of the economy have been practically nil. In this respect, the core inflation component, which excludes energy and food, dropped slightly with an increase of 2.0% compared with 2.2% the month before. Wage moderation, mentioned earlier, is the main cause of the trend in the broad component of prices but not the only one. Producer prices for finished products went higher than consumer prices, going up by 6.7% year-to-year in September. In this case, the reduction in retail margins was the factor preventing such price increases from reaching the consumer. We may ask how long the containment of margins and wages will last but, for the moment, the sharpest effect energy prices are having is on as simple a matter as the trade deficit.
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High-cost oil increasing foreign deficit.
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The foreign sector is far from hitting bottom. Following a slight respite in the second quarter, it again sharpened its worsening state. Energy raised the price of imports and this sent up the trade deficit in August making it worse than July. The cumulative deficit for the past 12 months reached a record figure of 723 billion dollars. A return to more moderate levels in oil prices could bring about some reduction in the foreign deficit but the prospects are not going in this direction and it should be considered that US household savings represent only 0.3% of disposable income, which does nothing to help work against this sword of Damocles hanging over the US economy and its trading partners.
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Japan
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Japan’s economy continues recovery
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Machinery orders in Japan showing favourable trend thanks to domestic demand.
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Japan is continuing to consolidate recovery. At this time, the challenge lies in maintaining the strength of domestic demand, up until now the main factor in growth. Over the past decade, Japan’s growth has been too much biased in favour of the foreign sector which brought about a number of disappointments. Today, the continuation of Japanese growth will have to be based on the strength of domestic consumption.
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Demand indicators are showing moderate growth and, while not presenting spectacular rises, are reporting more and more sustained increases. In this respect, retail sales are holding strong. In August they recovered the drive they had lost in July and confirmed the upward trend that has been dominant in recent months. Car sales dropped in September in year-to-year terms for the third consecutive month although they had increased up to June. Consumer confidence continues to show a more than acceptable rate in terms of the Japanese pessimistic outlook. The slight drop in the third quarter must be seen as being within a process of stabilization at highs for the decade. Even so, levels of confidence are lower than at the beginning of the Nineties when Japan had not yet begun its lost decade.
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Retail sales holding up.
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On the supply side, it is domestic demand on which most optimism is based and this is something new. Domestic machinery orders, an early indicator of investment, grew by 6.6% year-to-year in August and are following a sustained growth profile with a slight upward trend but orders from abroad have been suffering a notable slowdown. Japan will have to pursue growth more concentrated in domestic demand, something which has not been the case until this year. In the past 15 years foreign orders have increased their relative weight to 37.6% of the total.
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As a positive note, corporate bankruptcies in September dropped below 1,000 for the second time this year and, adding weight to this, the Tankan company index improved in the third quarter, although less than expected. Following restructuring programmes carried out, the health of Japanese companies is the best in recent years although the banking sector is still awaiting solution. Industrial production in August continued to represent the weakest side of the present recovery, reporting practically nil year-to-year growth.
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Real-estate sales up in Tokyo.
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The housing market continued its gradual recovery in September with real-estate sales in Tokyo showing the most notable growth at 22.2%, along with maintenance of the upward trend in all indicators. Clearly, the sector is now no longer the block to growth it represented in the Nineties.
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Deflation refuses to disappear.
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On the prices front, the danger of deflation has not yet been put to rest. In August, the consumer price index again dropped by 0.3% year-to-year. The central bank asserts that deflation will have disappeared by year-end but the truth is that prices in Tokyo in September again dropped by 0.6%, which does not mean we can presume that September prices for the whole economy rose and the end of the year is not far off. The unemployment rate was down slightly in August to stand at 4.3% of the labour force. The biggest job creation came in the services sector while the largest job losses showed up in construction.
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Energy prices reduce surplus.
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Japan’s trade surplus continued to shrink in August but the causes of this reduction have changed. Oil has been raising import prices, which grew by 13.5% year-to-year, while export prices have risen by only 0.6%, with the understandable negative effect on the trade surplus. On the positive side, the reduction of exports to China, the main cause of the worse foreign balance this year, is now easing.
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China
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China continues to grow but without inflationary pressures
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China growing through investment and exports while avoiding inflation.
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China’s economy grew by 9.4% in the first nine months of 2005 which suggests a continuation of the high rate of economic activity in the third quarter. Investment and exports continue as the main engines of growth, well above private consumption which remains the big unresolved question in the economy of this Asian giant and the central bank has publicly expressed its concern about this matter. A major part of investment is going into removing bottlenecks in infrastructures and energy production, so that inflation pressures still seem far off, as the figures would indicate.
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On the supply side, in the third quarter the industrial sector continued to lead with highest growth while services increased their progress slightly. In this respect, as in so many others, China has a unique economy. Industry represents 56.9% of its nominal gross domestic product, a rate which does not stop growing, whereas services are tending to drop.
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Industry, mainly heavy industry, dominates.
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Supply indicators are coherent with the surprising macroeconomic stability shown in the statistics. Industrial production, especially important in China due to the relative weight of industry, continued to grow above 16.0% in September. At this time, China seems able to absorb nearly all the overall growth of this indicator which is diminishing in countries such as the United States and Japan. Heavy industry continues to grow more rapidly than light industry, while the relative weight of the state sector compared with total industry in August held at the same figure of 39.8% seen in July, which demonstrates the rigidity being encountered in reducing the state conglomerates.
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Trade surplus shows explosive growth because of easing off in imports.
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The strength of China’s awakening is also confirmed by the level of various production figures. In the past 12 months ending in August, compared with the same period last year, electrical power generation continued its upward move. Production of motor vehicles and cement, which appeared to be slowing down at the beginning of summer, is now showing new drive. Finally, production of personal computers deserves special attention with year-to-year growth of 70.5%, a rate into which it has settled for three consecutive years. The amount of value added on each computer of specifically Chinese origin may still be small but this is growing.
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Retail sales growing but not as fast because of moderate domestic consumption.
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It is on the demand side that China’s economy shows up weakest and this is the cause of the central bank’s concern. Retail sales in August grew by 12.7% year-to-year. Even taking into consideration the high level, the profile shows something of a slowdown.
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In spite of the level of economic activity, prices continue to show more moderate increases. In September, consumer prices rose by 0.9% year-to-year. Such moderation can only be understood in a situation where consumption is growing less than investment.
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The foreign sector holds a notable place in China’s overall economy and is the cause of fairly common pressures. The most closely watched indicator is the explosive trade surplus. In the 12 months ending in September, it reached 96.38 billion dollars, an amount five times higher than in the same period last year and it has now come to represent 5.0% the Chinese economy. The sharp increase in the trade surplus is expected to contribute 30% to the growth of the economy in 2005. These are big figures but they are increased by the current renmimbi exchange rate. The trade balance is valued at international prices which are higher than the prices operating inside China and this means that in real terms, discounting price differences, the effect is much lower.
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In this respect, growth rates are high but their peaks have lagged behind. Exports rose by 32.2% year-to-year while imports were up by 19.2%. Within this sharp growth we cannot now speak of an upward trend but rather of an easing off, especially in the case of imports, this being the main cause of the rapid increase in the trade surplus.
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By product, exports of manufactured goods in the 12 months ended August grew by 33.6% while imports were up 15.4%, half the January figure. What is significant is the sharp drop in imports of machinery and electronic equipment. If we compare growth in August with January, we find 3.8% in Germany as against 30.1%; in Japan 4.6% as against 26.0%: in Taiwan 15.3% as against 30.8% and in Spain 17.7% as against 58.9%. In raw materials, imports are growing at a considerable rate but less than in 2004. Steel imports rose to 10.8%, a fifth of the average in 2004.
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Mexico
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Mexico recovering but losing competitiveness
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Retail sales in Mexico holding up while maquiladoras lead in industrial production.
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The Mexican economy grew by 3.1% year-to-year in the second quarter of 2005 thus recovering part of the situation in 2004. This recovery was based on investment, replacement of inventories and a better situation in exports. Under the heading of investment, it is the government that is playing the biggest hand, which raises some doubts about sustainability.
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Growth without inflationary pressures.
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By sector, bank and financial services, construction and transportation are showing the most strength.
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Unemployment under control but unit labour costs growing and hurting competitiveness.
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On the demand side, retail sales in June grew by 3.3% year-to-year, a rate somewhat lower than the average for recent months. On the supply side, industrial production in August moved up 2.1% year-to-year which meant a recovery compared with the decreases seen in previous months. The positive side of this growth lies in the leadership of the manufacturing component. Always ahead of local industry, the industrial production of the maquiladoras (foreign companies manufacturing in Mexico and exporting to the United States) moved ahead by 5.7%.
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Consumer prices remain moderate.
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The general employment rate rose to 4.1% of the labour force in August but manufacturing productivity stopped losing ground although it is still early to speak of real recovery. The most troubling note comes with the sharp increase in unit labour costs which was up 12.0%. This figure causes concern because Mexico has been suffering from a lack of competitiveness for some time. The sharp increase in unit costs, added to the fact that the Mexican peso is among those Latin American currencies which have lost least value, means growing difficulties for the trade balance which already is in deficit.
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On the positive side, consumer prices in September rose by 3.5% year-to-year. The moderation that was maintained during the first half of 2005 is thus being continued. The core component, excluding food and energy, went in the same direction for that month holding at a rate of 3.2%.
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Foreign sector worsening.
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The Mexican foreign sector is the most negative in an economy that, on the other hand, is growing without showing inflationary pressures. The trade deficit for the 12 months up to August 2005 held at 9.5 billion dollars, but if we exclude oil exports it come to 38.4 billion dollars and it is the loss of competitiveness that counts. The Mexican deficit especially draws attention at a moment when the overall group of economies in the region are showing trade surpluses.
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Raw materials
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Oil prices provide some relief
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Better-than-expected supply situation in United States sends oil below 60 dollars a barrel.
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Following notable increases in July and August and the great uncertainty in September due to the impact of hurricane Katrina, oil prices in October have given temporary relief. Evidence that inventories of oil and refined products are holding above expected and that the impact of hurricane Wilma in terms of oil supply would not be appreciable (and therefore that the risks regarding oil supply to the US market had been reduced) sent prices below the psychological barrier of 60 dollars a barrel for one-month forward Brent quality oil on average in October.
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In any case, it should not be forgotten that current levels remain historically high and are even 20% above those reported one year ago. Furthermore, fundamental conditions in the oil market have not improved significantly. The supply/demand ratio remains very narrow and the trend in both variables for 2006 does not imbue much optimism. While it is expected there will be an increase of 1.8% in supply in the coming year, demand will grow by two decimals more at 2.0%.
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Metals moderating but raw materials overall stand 11% more expensive than one year ago.
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Nor should we forget the trend in other raw materials. As opposed to oil, raw materials measured by The Economist index in dollars for October showed a growth increase of 11% year-to-year as against 8% in September. The main culprits for this increase were food raw materials and non-food farm materials whereas metals, which were recording a very strong upward trend, showed a slowdown in growth rate. Gold deserves separate mention as it came close to 470 dollars an ounce with more than 11% growth in the past 12 months.
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