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UK Gets Wrong Kind Of Economic Recovery
http://www.ft.com/cms/s/0/4be6ab7a-1977-11e3-afc2-00144feab7de.html#ixzz2fF6iRTZj By John Plender Consumption is the driver, writes John Plender Why all the excitement about the UK economy? Recent data have, it is true, been modestly encouraging and a rebound is certainly under way. Yet thanks to the chancellor’s front-loaded austerity the economy is still not back to where it was five years ago. In the first quarter of this year the Office for National Statistics estimated that gross domestic product was 3.9 per cent lower than in the first quarter of 2008 before the financial whirlwind struck. Equally dispiriting is that the UK has once again embarked on the wrong kind of recovery. After the credit-fuelled boom and bust in property there was a clear need to rebalance the economy away from consumption towards exports and investment. Very little rebalancing has actually happened. Instead consumption is driving the recovery financed in part by reduced household savings. In the first quarter the household savings ratio was at its weakest since early 2009. Giving the rebound a notable push are the government’s Funding for Lending and Help to Buy schemes. That push will be further increased when the quixotic second phase of Help to Buy is extended to existing properties. The logical way to help first time buyers is to reduce house prices to more affordable levels. Unfortunately that cannot be done without threatening the solvency of a still shaky banking system. So instead we have the prospect of another house price inflation – no doubt very helpful for Tory election prospects – along with continuing trade deficits, under-investment in industry and a “solution” to an overhang of debt that requires households to take on more debt. The trouble with this very British property obsession is that it damages the structure of the economy. As house prices rise, the wealth effect encourages homeowners to spend more, which inflates the size of the non-tradeable sector. Workers are sucked out of the tradeable sector as the demand for labour in the non-tradeable sector increases. The difficulty is that innovation and technological growth are lower in the non-tradeable area than in the tradeable sector. So, in effect, housing bubbles encourage deindustrialisation and reduce the growth potential of the economy. What makes this worse is that the property obsession is rife in the banking sector too. UK banks rely more heavily on property collateral than those elsewhere. So if bankers are not confident about the housing market, they extend less credit to finance an upturn. Since banks require entrepreneurs to back their borrowings with housing collateral the small business sector also needs a rising housing market to prosper and generate jobs. Rebalancing the economy is made more difficult by the Anglo-Saxon capital market culture. When UK manufacturers are given the benefit of a devaluation they tend to respond to increased export demand by raising prices rather than reaching for market share. This boosts the short-term profits on which executives’ incentive pay is based and cheers up all those fund managers who take a narrowly financial, short-term view of corporate performance. But there is, naturally enough, a long-term cost. There is a strong sense of déjà vu in all this. I recall in the recession of the early 1970s a top Treasury official responding to complaints about under-investment in the UK by asking how else a recovery was going to start if not through increased consumption. And in fairness to the chancellor, George Osborne, that point can be made with equal validity today. The public sector is contracting. The external environment is dismal, with the eurozone struggling and emerging markets slowing down sharply. The manufacturing sector accounts for a mere 11 per cent of GDP, so there are limits to what it could do even if export prospects were rosy. At this stage of the upturn companies are too uncertain about potential demand for their products to increase investment significantly. It is tempting for the British, at this point, to cast an envious glance at Germany, which has rebounded more strongly from the recession and where exports have been the chief motor of economic growth. Not only is home ownership much lower in Germany; house prices there fell in real terms over the first decade of the new millennium. Yet the German export obsession is arguably as damaging as the British property obsession. Adam Posen, president of the Petersen Institute for International Economics, rightly pointed out in the FT last week that dependence on external demand has deprived German workers of what they have earned, and should be able to save and spend. The export obsession has also distracted policy makers from recapitalising the banks, deregulating the service sector and incentivising the reallocation of capital away from old industries. The Brits like their houses, the Germans their exports. To each, his own poison. Continue reading
Emerging Market Investors Hide Out in ‘Korexico’
http://www.ft.com/cms/s/0/7bb3efaa-1c85-11e3-a8a3-00144feab7de.html#ixzz2f3XJ2xx3 By Paul J Davies Markets are awash with buzzwords. Ever since Brics was coined we have recoiled from PIIGS, grappled with Chimerica and been sceptical about both Abenomics and Liconomics. So here is an aide memoire for where to invest when the US Federal Reserve threatens to taper its ultra-loose monetary policy and emerging markets sag with a draining of vital liquidity. When the markets correct, go “Korexico”. South Korea and Mexico have been two of the best defensive stories around in emerging markets in recent months for a handful of simple reasons: their exports are geared towards a US recovery, they did not suck in the hot money unleashed by central banks and they have not seen credit booms in the past two years. Stock markets in both countries suffered with the rest after Fed chairman Ben Bernanke first talked of “tapering” on May 22. However, they did not fall as far and they recovered more strongly. Stocks in Brazil, Indonesia, Thailand, and the Philippines fell deeply into late June and have not enjoyed a big bounce from the recent weaker US economic data that may have put off the end of “quantitative easing”. Korea’s Kospi index fell 11 per cent at worst by the last week of June and is now back to where it was in late May. Mexico did not even drop that far, losing only about 6 per cent at most. Now it is up 1.5 per cent. The other four were down between 15 and 24 per cent at worst. Brazil’s Bovespa is still 5.5 per cent lower since late May, while Bangkok’s SET, Jakarta’s JCI and the PCOMP in Manila are all down about 17 per cent. Part of the story is in fund flows. Both Korea and Mexico suffered outflows from equity markets at first, but not for long. Mexican markets saw almost $4bn of foreign cash leave stock markets in June, but more than $2bn return in July and August. In Korea, where data are published daily, inflows of more than $7bn since the end of June have more than replaced the outflows of $6.6bn during June. What is more, according to Freya Beamish at Lombard Street Research in Hong Kong, money that came out of Korean equities did not leave the country. “When the taper hysteria first hit, foreigners pulled out of Korean equities in the same way as they did across Asia,” she says. “But they went into Korean bonds. Then when the taper concerns eased foreigners went back into equities.” So what has kept these markets attractive and is the defensive story justified? Both have avoided the hot money problem of other emerging markets to a great degree. On the credit side, bank lending to GDP in Korea may look high at 86.5 per cent, but it is lower than many Asian neighbours and has declined a few points since 2009. Other Asian markets have seen explosive credit growth. In Mexico, the ratio has barely moved, remaining at about 20 per cent of GDP. Their stock markets attracted less hot cash, too, especially compared with the dizzying highs reached by the Philippines, Thailand and Indonesia. Korea and Mexico are both exposed to a US recovery via exports. More than two-thirds of Mexico’s exports head north across the border, but only about 10 per cent of Korea’s go to the US. But while Korea is much more dependent on China in general for exports, its key industries of electronics and cars are more influenced by US buying than Chinese. A boon for Korea has been Japan. The yen’s recent depreciation was meant to hit Korea’s competitiveness – but that has not happened. Oddly, a boon for Korea has been Japan. The yen’s recent depreciation was meant to hit Korea’s competitiveness – but that has not happened. “At the corporate level, there had been a concern about renewed competition from Japan benefiting from a weaker yen, but Japanese companies have focused on restoring profitability not boosting sales,” says Jeff Shen, head of emerging markets at BlackRock. But it is not entirely rosy. For a start, first-half earnings were a big disappointment. According to Citigroup, almost half of Korean companies missed analyst estimates and less than 20 per cent beat them – the worst in Asia. In Mexico, again half of companies missed forecasts, but fewer than one-in-ten beat them, the worst in Latin America. In Korea, investors were not expecting great things. The Kospi trades on 8-times forward earnings, one of the cheapest in Asia and below its average over the past 10 years, according to JPMorgan. Mexico, however, is one of the most expensive markets in the world on 17 times forward earnings, a good way above its average. This could well prove a dangerous place to be. For both countries, a sustained US recovery is what will really help – and that is far from certain. Their key attraction in the months ahead is more likely to be as a short-term haven from bouts of taper-hysteria in other emerging markets. Korexico is less a destination than a hide-out. paul.j.davies@ft.com Continue reading
Bank Lending To Emerging Markets Soars To Record
http://www.ft.com/cms/s/0/20802e26-1e12-11e3-a40b-00144feab7de.html#ixzz2f3VWpQSH By Claire Jones, Economics Reporter Banks piled into emerging markets at a record pace earlier this year, highlighting the scale of the global search for yield that has partially reversed since the US Federal Reserve said it intended to slow its bond buying. Cross-border lending to emerging markets surged by $267bn, to an estimated $3.4tn, in the first quarter of 2013, the Bank for International Settlements said on Sunday. The BIS said the 8.4 per cent increase was by far the highest recorded, with the amount of interbank lending rising by almost $200bn, or 12 per cent. The so-called central bankers’ bank, which compiles what are widely regarded as the most comprehensive set of statistics on cross-border capital flows, said in its latest Quarterly Review that 85 per cent of the rise was accounted for by more lending to China, Brazil and Russia. The publication of the figures comes as the US Federal Open Market Committee gears up for its policy meeting, ending on Wednesday, when it could decide the timing and pace at which it will slow its $85bn worth of monthly bond purchases. With interest rates close to zero across advanced economies and liquidity abundant as a result of their central banks’ mass bond-buying sprees, credit has flowed into emerging markets in recent years as lenders and investors sought higher returns. According to the BIS data, interbank lending to emerging markets in the Asia-Pacific region alone has doubled since the investment bank Lehman Brothers collapsed five years ago. Lending to emerging markets has shown signs of retrenchment since Ben Bernanke, chairman of the Fed, signalled in May that the US central bank had begun to consider unwinding its exceptional monetary stimulus. The expectation of a return to higher interest rates in advanced economies in the years ahead has led to a retreat – particularly from emerging markets with large current account deficits such as India – although the pace of that retrenchment has slowed in recent weeks. According to the BIS data, the record rise in cross-border lending to emerging markets in the first quarter mainly reflected buoyant interbank lending, while cross-border credit that was extended to borrowers in China rose by $160bn, or 31 per cent. With international demand for Chinese assets growing, companies in the world’s second-largest economy can borrow at cheaper rates from lenders abroad and are reliant on banks headquartered off the mainland for foreign-currency loans to help fund their expansion overseas. The BIS data showed emerging market companies were also increasingly turning to debt markets in offshore financial centres such as Hong Kong to secure funds. Chinese businesses’ borrowing through offshore financial centres has soared from less than $1bn between 2001 and 2002 to $51bn in the 12 months to June. Of these bonds, 16 per cent is denominated in renminbi, with most of the rest – 77 per cent – in dollars. Though there are restrictions on bringing capital into China, businesses apply for permission to bring funds borrowed abroad into the domestic market. Overseas lending to Brazil expanded by 14 per cent, or $34bn; for Russia, the figure was $29bn, an 18 per cent rise. Both were the largest quarterly increases on record. Euro area banks increased their lending to emerging markets for the first time since the second quarter of 2011. Lenders in France, the Netherlands, Germany and Luxembourg accounted for most of the growth. In contrast to the rapid rise in lending to emerging markets, cross-border claims on banks in the advanced economies slipped by $341bn, or 1.5 per cent. Though bank lending to emerging markets could remain strong as long as growth remains so, the end of quantitative easing and an eventual rise in interest rates in advanced economies are likely to slow the pace of cross-border flows. Additional reporting by Simon Rabinovitch. Continue reading
