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United States
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United States: more growth, but real estate market remains at thread
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United States hoping to recover good economic state after weak half-year.
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The United States economy now is not only riding the storm successfully but, following publication of latest indicators, seems to have the prow aimed at a growth horizon with inflation relatively under control. And, while growth of gross domestic product (GDP) in the first quarter ended up a poor 0.7% quarter-on-quarter in annual terms, for the second quarter it its expected to go well above 3%. The biggest growth factor, however, is still coming from consumers helped by a labour market that functions at a good pace. Inventories are at low levels so that it may be expected they will go up while the expected drive in exports and investment is still to be seen. In spite of this reassuring scenario, risks still remain and the bad genie of the real estate market has not yet been brought to bay.
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Consumers keep on doing well...
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In this context, retail sales in May, excluding the highly variable figures for cars and petrol, grew by 4.5% year-on-year. This may stay below the growth rates seen in the boom months at the end of 2004 but it shows a level of resistance with increases of around the 5% it has shown in recent months which has been more solid than expected. This strength has been obtained in spite of the fact that these variable components (cars and petrol) have also been gaining strength in recent months, which means an adverse effect on budgets for other purchases. In keeping with this trend, the consumer confidence index published by the Conference Board is maintaining an upward trend which, nevertheless, has been easing off after failing to come close to the high in the previous growth cycle. The help from the labour market remains considerable with some 157,000 new jobs created in May and an unemployment rate at only 4.5% of the labour force.
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...as well as businesses, up to now.
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Largely as a result of the strong consumer drive, business executives are now seeing things more clearly. The business sentiment and economic activity index put out by the Institute for Supply Management (ISM) for May showed significant increases that were rather unexpected. In manufactures, in spite of the low level of industrial production, the index went to the 55.0 points level and in services, the increase was even sharper at 59.7 points. These figures were well above the 50 which indicates there were more optimists than pessimists. New orders, especially for exports, and prices were the factors showing most strength while inventories showed up as the weakest. Utilization of industrial production in May stood at 81.3 points, a high level but lower than the peaks reached last summer and also below average growth in the Nineties so that price pressures should be moderate.
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Core inflation moderates to 2.3%.
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The Fed and the government bond market seem less concerned about the slowdown in economic activity than by inflation, in contrast to just a few months ago. In view of the trend in prices, the former should be more certain than the latter. The consumer price index (CPI) for May rose by 2.7% year-on-year thus showing a slight rise over April. Core inflation, the general index excluding the volatile headings of food and energy, slowed to 2.3% and marked up a downward trend. Clearly in this direction, the underlying CPI excluding housing rentals (which are more closely linked to possible overheating of the production fabric), increased by 1.2%.
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Real estate market still not recovering although for now prices holding up.
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In view of this picture, it seems that the US economy is not presenting major problems. Nevertheless, existing risks are considerable. Firstly, the real estate market is still far from getting onto a recovery course. In April, existing house sales dropped by 10.7% year-on-year putting end to the weak recovery noted in February. Neither did tendering for public works or housing starts respond. The main indicator was housing prices, given that a mortgage based on these prices and the wealth effect, could seriously affect private household consumption that makes up more than 70% of economic activity. For this reason, the fact that up to now price decreases have been minimal is the most positive factor so far. But it is necessary to be cautious given the sharp increase in the number of properties for sale which in one year has grown from 1.3% to 2% of occupied housing stock.
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Price of imports, excluding oil, up 10% since end of 2001.
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Secondly, there is the foreign sector in deficit. The trade balance is negative. In the past 12 months up to April it went to 742 billion dollars. This amount is equivalent to 5.5% of nominal GDP although it has been moderating from the 6.0% seen in the summer of 2006. For now, the trade deficit is not in any difficulty in terms of financing. There are two positive factors associated with the deficit that could be turning around. The desire of the Asian countries to keep on piling up dollars and buying US government bonds could dry up with a possible rise in long-term interest rates. Should any thing come of pressures for revaluation of the Chinese currency, the renmimbi, this could more likely bring about a rise in interest rates than a correction in the trade deficit which has improved little since the dollar began its downturn. Secondly, up until now the non-energy trade deficit has served to import deflation, that is to say, buying products at a very good price (especially from East Asia) and in the process put a hard brake on possible inflationary pressures. This may also be coming to an end. Between 1995 and the end of 2001 the deflator for imports excluding oil dropped by nearly 17% but since then it has gone up by close to 10%. With things as they are, the urgency for correction of the trade deficit could begin to be greater than it has been up to now.
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Poor in the lands of the wealthy: United States awakens while Europe begins to dream
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Economic growth a major factor in reducing poverty and aiding social integration on both continents
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More than 70% of US citizens believe that, with enough effort, it is possible to jump out of poverty and become rich. Only 40% of Europeans think alike. While the «great American dream» holds optimism up in the United States, most people in Europe see poverty as a trap hard to escape from. Is this perception a reflection of reality? Is the American dream real? Is poverty in Europe a life sentence?
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Ernest Hemingway once said that what distinguished the rich was that they had more money. But what does it mean to be poor? Most people associate poverty with malnutrition, illiteracy, limited access to health care and education, early death and deprivation in general. In order to estimate the number of persons living in such conditions, the United Nations (UN) uses a measure of extreme poverty established by the World Bank in 1990 that qualifies as poor those individuals who have to live with less than one dollar a day. Using a definition of this sort to measure poverty in rich countries would lead us to conclude that it had been practically eradicated. For this reason, the poverty line used in those countries is more demanding and represents the level of income necessary to be able to participate normally in the society; hence it is also an indicator of social inclusion.
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To determine the poverty line, the United States uses the cost of a basket of basic goods and services. According to this indicator, 12.6% of people in the United States stood below the poverty line in 2005. The European Union, on the other hand, sets the poverty line at 60% of the median national income. In other words, if we sorted the citizens of a country from the poorest to the richest, the «median individual» would have ahead and behind the same number of fellow citizens. An individual whose income was less than 60% of the income of the «median individual» would be considered poor. Based on this definition, the poverty rate in the United States is higher than in Europe (24% and 16% of the total population, respectively), being in the Northern European countries where this rate is the lowest (see following Graph).
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Defining the poverty line in terms of the median income presents two problems. First, it is a purely monetary definition and therefore ignores the lack of other resources the poor may face, such as education or health care deprivation. In order to alleviate this problem, the UN designed an index that tries to synthesize various dimensions of poverty by including, besides relative income scarcity, the likelihood of early death, the rate of long-term unemployment, and the literacy level of the population. According to this index, Italy and Ireland fall behind the United States, while the Nordic countries remain in the lead (see following Graph).
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Second, this is an arbitrary and relative definition of poverty. It is arbitrary in the sense that there is no particular reason to use the 60% of the median and not another percentage like, for example, the 50% of the median used by the Organization for Economic Cooperation and Development (OECD). It is relative because it does not define the poverty line as the cost of subsistence but in relation to the median national income, which varies from country to country and from year to year. Furthermore, some claim that 60% of the median income in any rich country is quite a substantial amount; hence, we would not really be measuring poverty but income inequality. In view of these arguments, and still not free of controversy, the definition of «absolute poverty» used in the United States would seem the most appropriate. Nevertheless, not having an equivalent measurement for Europe makes it difficult to compare the two regions.
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In this respect, a study by Xavier Sala-i-Martin, professor at Columbia University, turns out to be very useful. Using its estimates of income distribution in various countries (in a common monetary unit) and a poverty line similar to that established in the USA, we can compare the evolution of poverty in the USA and Europe. The following graph shows the percentage of the population per income bracket in each of the two regions in 1980 and 2000.
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During this period, and reflecting the economic growth in the two regions, both distributions of income move rightwards. Whith a fixed poverty line, such displacement implies a reduction in the poverty rate. As the graph illustrates, this reduction is especially pronounced in Europe where the poverty rate dropped from 22.5% to 8%, whereas in the USA it went from 18% to 11.5%. This translates into 50 million people escaping from poverty in Europe (from 80 million in 1980 to 30 million in 2000) whereas only 9 million people moved beyond the poverty line in the United States (from 41 million to 32 million). In contrast, the picture in the upper part of the income distribution is quite different, with a remarkable increase of the percentage of people with high incomes in the United States. According to a study published in the American Economic Review in May 2006, the income share of the richest 0.1% in the USA increased from 2% of total income in 1980 to 7% in 2000, whereas in France, for example, this figure remained stable at 2%.(1)
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Hence, while both, Europe and the United States, have managed to reduce absolute poverty, the more unequal distribution of US growth has meant that the gap between rich and poor has increased more in the United States.
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The increase in inequality in the United States would be less troubling if all US citizens had similar chances for economic progress. That is, if one believes in equality of opportunity and in remuneration to effort, the finding that the number of very rich increased while the number of poor was reduced could be interpreted as evidence of the American dream and the possibility for social advancement. Nevertheless, recent studies on economic mobility in the United States do not support this idea. They estimate that the likelihood of a child born in one of the most disadvantaged households reaching the top 5% richest households is only 1%. In contast, the estimated likelihood that a child born in one of the richest households maintains his/her status is 22%. Recent studies, by the economist Miles Corak for example, even suggest that moving from poor to rich is more difficult in the United States than in other advanced countries. These studies are based on cross-country comparisons of the persistence of income through generations, that is, they estimate what percentage of the economic advantage (or disadvantage) that parents enjoy relative to their cohort is transmitted to their children. The results must be viewed with caution given that they deal with a concept difficult to measure and that figures available for various countries are not fully comparable. Keeping this in mind, Corak’s estimates suggest that it is in Northern European countries and in Canada where that mobility is greater, with a transmission rate of 20%; they are followed by France and Germany with 32% and 41% respectively; United States with 51% and United Kingdom with 47% are the least mobile. Furthermore, we shall note that the degree of income persistence across generations of US citizens is estimated to be especially high for the poorest classes, moving them farther away from the American dream. For higher income brackets, on the other hand, estimated mobility varies less across countries.
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In a nutshell, economic growth is the key force to reduce poverty and improve social integration in both continents. Nevertheless, while keeping an eye on growth, Europe should continue fighting poverty, especially with relatively poorer Eastern European countries joining the EU. At the other side of the Atlantic, the United States cannot ignore the dynamics that affect the most disadvantaged groups in its society, especially regarding mobility. Otherwise, its citizens’ dream may come to an end.
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Japan
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Japan: long gradual growth
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Japan grows by 2.7% thanks to private consumption and exports.
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At the end of May, the Japanese prime minister, Shinzo Abe, listened carefully to an Egyptian journalist asking questions in Arabic. Immediately, without need of simultaneous translation, Abe replied in exquisite detail because the question had been agreed on beforehand. This story illustrates the false «normalcy» and the many factors of inertia affecting the Japanese economy. The governing party is submerged in a deep political crisis without any alternatives being offered by the opposition. Toshikatsu Matsuoka, Minister of Agriculture, committed suicide over allegations of corruption and Abe is having great difficulty in putting an end to the practice of amukudari (something coming down from the skies) through which high political figures end up with lucrative jobs in regulated companies. Following the last revision (upward in this case), the first-quarter GDP grew by 2.7% year-on-year, a continuation of the longest growth period since 1945 but prices continue to drop, dependence on exports remains key and the yield on investment (with the help of the amukudari) remains very low.
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Investment showing slight signs of recovery following breather in first quarter...
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Investment in capital goods, which in the first quarter dropped sharply after having shown very strong in 2006, was revised slightly upward. Also moving in the same direction was an early indicator of investment spending (machinery orders) with an increase of 2.8% year-on-year in April, following a drop of 14.4% in the previous month. As has become customary, the sharpest reaction came in the export sector while domestic demand continued to lose weighting in the total.
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...but demand indicators and real estate market remain slack...
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Among the more recent demand indicators, retail sales gained 0.1% year-on-year in May thus coming out of the red seen in recent months. Car sales continued along their downward course dropping by 7.0% year-on-year in May, this being nearly a second consecutive year with losses. On the supply side, industrial production slowed in April with an increase of 2.4% compared with a combined increase of 4.5% for all of 2006. At the same time, there was an increase in corporate bankruptcies in May, something that, while having a undoubted negative aspect, in this case indicated a positive ability to change, especially in a country dominated by the abovementioned aspects of inertia.
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...while prices move down.
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In turn, the real estate market in May continued to show the weakness seen in April. The number of homes sold in the capital dropped by 17.6% year-on-year although prices, which were highly volatile, moved up sharply. In line with the general state of things, housing starts in April were down 3.4% and the proportion of units on sale compared with the number of transactions completed held at relatively high levels.
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Foreign sector continues to rise.
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On the prices front, the end of deflation (expected by everyone) continues to be illusive. While the general CPI for April was a repetition of the levels in the same period last year, core inflation, by excluding the very volatile fresh foods from the general index, gives a more accurate picture of the trend in prices, again dropped by 0.1% year-on-year. At the same time, the private consumption GDP deflator for the first quarter was down 0.7% year-on-year, thus leaving the move onto positive ground until later. In any case, the unemployment rate for April went down to 3.8% of the labour force, the lowest figure since the beginning of 1998, which confirms the fact that Japan’s economy has for some time been running close to or above its production potential.
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Japan’s foreign sector continues to be strengthened by the high level of activity in global terms. The trade surplus for 12 months ending in April amounted to 10,800 billion yen, 18.3% above the same period last year, always helped by the weakness of the yen in recent months and by gains in the efficiency of export companies.
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China
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China: waiting for consumers to respond
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China growing at 11.1% helped by industry and foreign sector.
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China continues its sharp growth (11.1% in the first quarter) but with an atypical profile that could bring about problems a social kind and geo-political tensions. The solution to all this could lie in a revaluation of the renminbi, the Chinese currency, although this does not mean that all the US pressure in this direction are underway because, in real terms, if we take into account the differences in inflation, the Chinese currency has depreciated less than 3% since 1997 against its trading partners, whereas South Korea and Japan have seen depreciation of close to 30%. Chinese growth is heavily based on investment and in the contributions of the foreign sector surplus. The main weakness in this leading engine of the world economy lies in that domestic consumption is still far behind, a fact that has been exacerbating the inequality between country and city.
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Consumption steps up but still running behind industrial growth.
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In addition, the trade surplus, which is excessively biased toward the United States, continues to be a source of diplomatic tension and keeps on piling up complaints from the US government. This time, because of government aid for exports, pirating of computer programmes and restrictions on the marketing of foreign films and music. An appreciated currency would slow down the excessive accumulation of dollar reserves and foster imports which are the cause of the surplus to a greater extent than exports.
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In any case, things seem to be moving in the right direction. On May 18, the fluctuation bands for the renminbi against the dollar were widened from 0.3% to 0.5% daily. The measure may not have any real effect on exchange rates given that the previous limits had not been reached but this is a concession for purposes of diplomacy. At the same time, the rise in the 1-year deposit rate from 6.30% to 6.57% is an attempt to restrict credit, which was up 15.7% in April, and to soften the latest increases on the stock market.
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Inflation holding at moderate rates but increasing.
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Industry continues its strong growth with industrial production up 18.1% year-on-year in May while the heavy industry component still dominating. Hydroelectric power generation is stagnant but iron production moves ahead at a dizzy pace. Nevertheless, the most notable factor was retail sales of consumer goods which continued to rise in May with growth going to 15.9% year-on-year, a rate that in the rural areas hit a notable 13.9% and indicates that Chinese consumers could be coming out of their lethargy.
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Explosive increase in trade surplus due mainly to slowdown in imports.
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This awakening could already be causing inflationary pressures. In May the CPI moved up by an apparently moderate 3.4% year-on-year. But these prices are largely regulated. In keeping with the structure of China’s economy, growth of the food CPI (8.3%) could be giving a more faithful picture of the real performance of prices. In addition, apart from the figures, we should bear in mind the sharpness of the growth process given that in September 2005 the growth rate for both indices was below 1%.
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Exports continue to be based on manufacturing but weighting of technological content running slightly down.
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The trade surplus for the past 12 months ending in May rose to 216.7 billion dollars whereas in the same period last year it was 100 billion dollars less. The balance is asymmetric given that in the 12 months up to April the bilateral surplus with the United States was 152 billion dollars, three-quarters of the total. Nevertheless, political pressure seems to be having some effect as n one year the increase has been only 27 billion dollars, equal to a quarter of the increase in the Chinese surplus. In comparison, the positive balance with the European continent grew by 38 billion dollars and the trade deficit with Asia was down by 18 billion dollars. As a result, the increase in the surplus has more to do with a slowing down in imports of raw materials than with a rise in exports.
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What continues the same is China’s bilateral trade deficit with three countries with a strong manufacturing bias, such as Taiwan, South Korea and Japan, which in the 12 months up to May amounted to 67.56, 42.30 and 27.26 billion dollars respectively. Nevertheless, the predominance of raw materials in imports and of manufactures in exports still continues. In these, the weighting of products of high technology content is beginning to drop following a long period of increases.
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Mexico
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Mexico: economic activity slowing down
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Mexico grows by 2.6% while slowdown gets sharper.
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The Mexican economy grew by 2.6% year-on-year in the first quarter, thus sharpening its slowdown. Private consumption showed a slight rise moving up to 3.5% but this was not enough to compensate for the sharp slowdown in private investment which grew by 4.0% whereas it had begun 2006 with a rise of 13.0%. The public sector also put a sharp break on increases and, in turn, the foreign sector seems to have come to a sharp halt. Exports and imports were practically stagnant compared with last year whereas only six months ago they were showing two-digit growth rates.
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Industrial sector remains weak.
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Among the most recent economic activity indicators the general image is far from bright. Industrial production showed a slight rise in April with growth of 1.5% year-on-year following the stagnation seen in recent months. Manufactures ran a similar course with an increase of 0.8% while construction was up 1.5%.
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Inflation remains stable although with a very slight downward trend which could continue. In May, prices rose by 3.9% year-on-year while the core index (the general index less energy and foods) was up 3.7%. The official unemployment rate was down to 3.6% of the labour force in April thus eliminating the slight rise seen in 2006.
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Foreign sector stabilizes deficit.
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The trade balance seems to have stabilized its worsening situation without any real correction. While the cumulative balance for the past 12 months ending in April worsened to 10.5 billion dollars, the trend over the short term and the state of oil prices point to a reduction of this figure. Nevertheless, the basic problem is still there. The Mexican economy has a currency that in recent years has appreciated in terms of the other currencies of the region. As a result, the effective exchange rate, calculated in relation to a basket of currencies of its trading partners and keeping in mind inflation differences, has appreciated 12% since 1997. By comparison, the other major countries on the Latin American continent have undergone depreciations that have made them more competitive, as in the case of Brazil, the other major Latin American economy.
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Raw materials
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Raw materials: upward trend in prices continues
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Good news on Nigeria and petrol inventories fail to halt price of crude which marks up annual high.
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A number of factors suggest some moderation in crude oil prices in June. First, the resolving of the strike in Nigeria. Second, the good news on the levels of petrol in the United States. Nevertheless, Brent quality oil marked up an annual high of 72.71 dollars a barrel on June 22. The market for oil futures moved up even more and prices are being discounted at close to 73.0 dollars a barrel for deliveries set for year-end. While the futures market is very volatile and the appearance of positive news could correct these prospects, it cannot fail to be a factor underlining the fact that, if world growth continues, the price of oil could consolidate at the level reached in June. Furthermore, operators in the oil market have stopped talking about the geo-political risk premium. That is to say, news about violence in the Middle East does not seem to have had any influence on the latest increase in oil prices.
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With regard to petrol prices in the United States, three factors are pushing up the price. Naturally, the first is the rise in the price of the raw material from which it is extracted. The second is changes in technical specifications of of petrol which has made it necessary to reduce production capacity in order to carry out industrial modifications at the refineries. The third factor is the obsolescence of refinery installations. Since 1976 no new refinery has been built in the United States. Furthermore, the range of products is now much more sophisticated than when existing refineries were built.
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Farm raw materials maintain upward course, with notable rise in wheat prices.
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Farm raw materials are not in any way lagging behind oil. The US National Meteorological Institute has confirmed that in the past month there have been even heavier rains in Oklahoma and Texas damaging the wheat harvest of the world’s biggest exporter and the third largest producer after China and India. This factor pushed up the price of wheat by 14.5% in June. The US Department of Agriculture forecasts that the supply of wheat this year will be only 112 million metric tonnes, the lowest in the past 26 years. Another trend pushing up the price of wheat is the high percentage of cultivable land in the United States giving up wheat and putting in maize. This is the basic component of bio-ethanol, alcohol produced by the fermentation of the sugar obtained from maize which has become a source of alternative energy as a substitute for petrol and diesel-fuel.
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Gold and silver drop pushed down by feeling that dollar will strengthen against euro.
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With regard to metals, gold prices fell by 0.7% in June going to a level of 651.8 dollars an ounce while silver dropped by 5.9%. In both cases, the movements reflect expectations that the dollar will strengthen against the euro thus reducing the attractiveness of precious metals as investment alternatives. Gold is maintaining a close relationship with the dollar exchange rate. A basket of currencies made up of the Australian dollar, the Canadian dollar, the South African rand, the euro, the yen and the India rupee explains 91% of the movement in gold.
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