A letter from Global Head of Treasury Dept, Standard Chartered
Subject : US economy – understanding the issues
If it looks like a duck, walks like a duck and sounds like a duck,
chances are it is a duck. That, I believe, is how the saying goes.
Something similar may be appropriate for looking at the US economy
this year. If it looks like a recession and feels like a recession
chances are, it is a recession. This year, the US economy may
technically avoid a recession (whether you want to define it in the
current convention as two successive quarters of negative growth, or
whether you prefer the old fashioned view of an outright year of
negative growth). But to get caught up in the fine detail risks
missing the key message – the US faces a prolonged period of weak
growth. This began towards the end of 2006, when the housing market
started to turn down, continued through last year, and in our view
will persist in 2008 and 2009. Last year the loss of momentum was
gradual. This year, because of the subprime crisis and credit crunch,
the downturn may be more severe, with growth of only 0.5%, and next
year only 1.2%. And this year's growth will not be driven by domestic
demand, which will be flat, but will be explained by falling imports
that reduce the current account deficit. These growth figures compare
with trend growth around 2.7%. So it will look like a recession. It
will feel like a recession. And chances are, it will be called a
recession.
Our view of the economy is the one we have talked about for some time
– Americans need to spend less and save more. If they do this
gradually, it will be a soft landing. If the change is dramatic it
will lead to a recession. To understand the story, it is that American
consumers need to do something similar to what American firms did back
in 2001, namely get their balance sheets back into shape. US firms did
that then by spending less on investment and curbing costs. Big US
firms then followed that up by positioning themselves well across
Asia, both in terms of producing goods there at cheaper cost, and in
selling into the Asian market. The bulk of exports from China are by
foreign firms, many of them American. Thus, when US politicians urge
China to revalue the renminbi at a faster pace, many US big firms are
noticeable by their silence! Anyway, big corporate America (outside
the financial sector) seems in good shape, and share buy-backs over
recent quarters have contributed to a healthy stock market.
Now, it is the turn of US people to spend less and save more.
Admittedly one could have said this for some time, but in recent years
the backdrop for Americans has not forced them to face this day of
reckoning. In recent years, equities, housing, credit and jobs have
all been moving in the right direction – up. Now, this is changing.
Housing was the first to go. Then, towards the end of last year, it
was credit. Now it seems to be jobs, as last Friday's poor non-farm
payrolls suggest. Soon it may be equities. Lending money to people who
can't repay is never a good thing for a bank. And one shouldn't be
surprised if those people who get the money go out and spend it. They
did. So the first casualty is discretionary spending. The next is
spending on durables. In fact, those with the highest propensity to
spend will be the hardest hit in this downturn. Soon, in this
environment, even companies start to cut back. Who and how they cut
back depends on where you sit. If, for instance, you are a firm in a
sector where skilled workers are in short-supply and it took you a
long time to fill positions you will keep hold of your staff. This
even happened in Japan for seven full years after the bubble burst.
Yes, Japan's bubble burst in 1990, but it was only in 1997 that
employment stopped rising! Instead, in Japan then, and in America now,
firms that are optimistic their longer-term prospects will keep hold
of workers. They will cut costs elsewhere. But when it comes to
sectors really facing a downturn (such as construction) or to firms
who for whatever reason do not have much room for manouvre, jobs will
be cut. And this appears to be already starting to happen. Even
allowing for the often overlooked increase in both public and private
sector infrastructure spending, the weakness in housing will weigh on
construction.
Often in a US downturn, the credit contraction comes after the economy
has started to turn down, as unemployment rises and firms start to go
bust. This time, because of the subprime crisis, the credit
contraction is occurring earlier in the cycle, and based on what
usually happens, is likely to continue, and become even more severe.
Certainly the news so far out of the banking industry points to
further credit restrictions – the earnings season for the US banks
kicks off in earnest with Citigroup's results on Jan 15 – and there is
more pressure in the US for banks to confess to losses.
Thus the proactive policy response. The Fed has cut rates
aggressively, down 100bp so far from 5.25% to 4.25% now (a 0.5% cut
in September, and 0.25% at the October and December FOMC meetings).
Further easing is inevitable. Even when rates were at 5.25% back in
the summer, the view within the Fed was mixed. That is probably still
the case, but with the balance to risks on the downside they are not
taking chances. I think they should cut sharply and soon. But they may
trade more carefully. Whilst the Fed will likely prefer to cut at
official meetings there is nothing to stop them easing whenever they
want to. But on the basis they stick with cuts at the FOMC meetings a
likely profile is something like this: down 0.25% on January 30th,
down 0.5% on March 18th, reductions of 0.25% at both the April 30th
and June 25th meetings, with rates down to 3% by mid-year. And as I
indicated to you in a previous note, do not be surprised if rates go
sharply lower. In addition there is pressure for a fiscal stimulus
(being pushed by former Treasury Secretary Summers in two FT articles,
the latest of which was yesterday). Such a fiscal stimulus would be
welcome, and makes sense. Whether the politicians will agree remains
to be seen. The Democrats don't want tax cuts. The Republicans don't
want higher spending. And a weaker dollar seems to be an accepted
fact, although not seen as such a big issue in Washington. However,
the dollar's outlook is not a one-way bet. Lots of bad news has
already been discounted. So whilst the trend may be for a weaker
dollar, it is not a straight line down. If there is any bad news out
of Asia, the dollar could bounce.
US downturns are often V shaped – down sharply, big policy response,
then a rebound. This is more like a U. Or a prolonged U if that is
possible, where the bottom is drawn out, whilst consumers get their
finances back in shape.
How this impacts the rest of the world is something that we will
discuss in the new monthly out later this week.
A year ago, we had some of the most optimistic growth forecasts for
the emerging economies, particularly in Asia, Africa and the Middle
East despite having a pessimistic US growth forecast. A view we held
with throughout the year, and indeed at the beginning of August we
were in the minority of those expecting the Fed to cut rates before
the end of 2007, at a time when the market anticipated rate hikes.
Decoupling was the theme.
But decoupling does not mean that Asia, or indeed emerging markets are
immune to a US downturn. They are not. And we should anticipate and
expect weaker growth rates. There are trade links. There are financial
sector links. And there are indirect effects as commodity prices
adjust.
But the world can change. US growth used to be heavily correlated with
Japanese and Germany growth through the 1970s and 1980s. Partly
because they all faced the same external shocks: high oil prices and
inflation. Then, since the end of the 80s, growth in the US has been
desynchronised between the US and Japan and between the US and
Germany. Interesting to think that despite increased globalisation,
local or regional, factors dominated in all three of the major
economic blocks. Similarly now with China.
Just as there was change in the industrialised world, there could be a
shift between the US and the emerging world. That is, whilst any
downturn in the US does impact our markets it may not pull them down
the way it used to. American sneezes the rest of the world catches a
cold was the dictum. Now, America sneezes the rest of the world takes
preventative action – distancing itself from the sick patient and
taking a policy boost to protect themselves. On this basis, coming
years may see US domestic demand lag behind that in the rest of the
world – something that last happened in the late 80s
This points to a tough year. Not a collapse. And it highlights the
need to be nimble to react to possible downside risks. It is a time
when local knowledge combined with a clear global perspective should
provide a competitive edge. But there is also the need to prepare for
tougher future competition, as financial firms in the West may turn
their attention more to emerging markets as that is where the better
longer-term opportunities exist. Caution not pessimism is called for.
2008 will be a time to balance the need for near-term caution whilst
building for longer-term opportunity.
Lyons, Gerard
Global Head of Treasury Dept, Standard Chartered
On Jan 12, 2008 3:31 PM, Bandar Junior <[EMAIL PROTECTED]> wrote:
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> jumat dow -246 points (1,92%) ; subprime mortgages still haunted allong the
> way ; credit card bad credits is peeping to jump out and woes the market.
>
> BEWARE............................
>
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Mohon saat meREPLY posting, text dari posting lama dihapus
kecuali diperlukan agar CONTEXTnya jelas.
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