Alex Carrick: Maybe it’s the turn of the U.S. to be the world’s white knigh
Our economic futures currently depend on the high stakes game of chicken European Union leaders are playing with speculators. Lack of confidence in the long-term efficacy of the action plan adopted by the EU is causing the value of the Euro to slip further into decline.
There is the danger of one or more nation states in the Euro-zone descending into bankruptcy. This would be a disaster for the financial sector and bring international lending to a halt, similar to what occurred in early 2009.
The European Central Bank (ECB) has lowered its policy-setting interest rate in two stages of 25 basis points each (where 100 basis points equals one per cent) to help stimulate the continent’s economy.
The lower official interest rate will also make a small dent in the high borrowing costs some of the Euro-zone’s most financially-strapped members are facing.
The way to halt speculators in their tracks is through their wallets. In a sense, this is what Angela Merkel and Nicolas Sarkozy are paid to do. Plus they must accomplish their goal at minimal cost to their electorates.
Hence the reason, despite the outcries for more assertive action by spokespeople in the media and by some business and financial sector leaders, that progress is being made in incremental stages.
But let’s pull back for a second and look at the broader picture.
There are three major geographic blocks to consider when assessing the world economy
1) Europe which is dominated by Germany; 2) the Far East, led by China (with even Japan as largely a satellite of that nation); and 3) North America, where the United States is in the vanguard.
In Europe, the jury is still out on what will become of the Euro. Meetings on December 8 and 9 established an altered fiscal framework moving forward. There will be closer integration between 26 of the 27 nation states, with England as the exception.
The ruling Conservative Party in Great Britain has a history of wanting to maintain some distance from what is transpiring on the continent. The specific reason for the current arms-length stance is concern that London’s status as a world financial capital may be jeopardized by tighter EU regulations.
There will be tougher rules governing deficit-to-GDP ratios. Failure to meet targets will be met with automatic sanctions. More money is being allocated to the International Monetary Fund to help bailout the weakest member states. And the setup of a new emergency stability facility will be brought forward by a year.
The installation of technocrats as heads of government in Greece and Italy raises the confidence that those nations will stay the course on belt-tightening measures. All official pronouncements to the contrary, it also increases the chance that the European Central Bank will take a more active role in bond markets.
The ECB may not officially become the lender of last resort, but there are ways in which it can make it easier for nations that need the money to satisfy their borrowing requirements. Other central bankers in the G20 have already smoothed the way for European banks to acquire more funding.
The above restorative measures would be greatly abetted by a stronger-than-expected German economy, which is not out of the question. Weakness in the Euro traditionally helps German export sales. The problem is that stronger employment in that country doesn’t translate into as many spin-off pluses—in terms of importing goods from hard-luck neighbours—as it should.
Also of huge benefit would be a rise in the U.S. economy. The U.S. is a juggernaut and it can pull the world in its wake. More on such a prospect in a moment.
The worst case scenario would see Europe sink further into despair. There are two paths that could lead in that direction. The tough austerity measures may paralyze Greece, Italy and a few other countries, thereby denying the healing powers of growth. And/or voters may take to the streets to protest their downsized prospects even more aggressively than they have already.
In any event, future elections in Europe are likely to be trying times, with opposition parties offered the opportunity to blame all local woes on the broader problems of the Euro. Changes in government may eventually determine the longer-term outlook for the Euro.
Let’s move on to Asia. How is China faring? It’s got problems of its own.
There are known to be myriad bad loans in the banking sector. Evidence of see-through buildings in several major cities suggests property markets are verging on “bust” conditions.
Residential property prices in some centres have exceeded what the market can bear. Inflation rose to 6.5 per cent earlier this year, but has lately fallen back to 4.5 per cent.
Some slowing in industrial production is underway. The U.S. and Europe vie for No. 1 ranking among China’s chief export markets. The expected slowdown in Europe will have a detrimental effect.
China does have a backstop. Its $3 trillion in foreign exchange reserves will allow it to weather most anything that brews up in its financial sector.
China, like Europe, would greatly benefit from a more vigorous revival of the American economy.
How likely is that to happen? Will the U.S. become white knight to the world economy?
It’s a stronger possibility now than seemed likely only a short while ago.
Most of the recent numbers on the U.S. economy have turned positive.
A combination of new hires plus revisions to previous monthly results left November’s total employment number nearly 250,000 higher than in October.
Initial jobless claims have been at a low 400,000 or less for the past four months.
Home starts have stabilized at the bottom and may be trending slightly upward. The inventory of unsold homes has dropped to an almost normal level.
Retail sales have been strong. Storeowner revenues on Black Friday and Cyber Monday set records.
The U.S. inflation rate has retreated from nearly four per cent and the core rate has stayed close to two per cent, accommodating the expansionary monetary policy of the Federal Reserve.
The federal funds rate will be held near zero per cent through all of next year.
Commodity prices have eased back from their highs on account of uncertainty about the world economy. Gasoline prices aren’t as scary as they were in the late spring and summer.
Perhaps the biggest obstacle standing in the way of the U.S. economy is perception. This is “silly season” south of the border—the year-long run-up to the presidential election next November.
The political contest has taken over the airwaves and the nature of the competition is such that no good news will go unchallenged and no bad news will be left unspoken.
The U.S. accounts for 25 per cent of the world economy. If America is seen to be more clearly on the mend, the implications will be positive for all of us.
Alex Carrick is Chief Economist with CanaData, a division of Reed Construction Data (RCD). CanaData is the leading supplier of statistics and forecasting information for the Canadian construction industry. RCD is a division of the global publishing firm, Reed Elsevier. For more economic insight from RCD, please visit www.dailycommercialnews.com/features/economy. Mr. Carrick’s lifestyle blog is at www.alexcarrick.com and he would welcome a follow on Twitter (Alex_Carrick) or Facebook.