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Economic Focus Professor Tyrone M Carlin. Presentation Overview. Euro Jitters Anyone? From Prominence to Pre-Eminence A Blithe Consensus Barbarian at the Gate Thinking Beyond Imagination Consequences & Conclusions. 2. 1. Euro Jitters?. Turmoil Revisits Global Markets.
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Economic Focus Professor Tyrone M Carlin
Presentation Overview • Euro Jitters Anyone? • From Prominence to Pre-Eminence • A Blithe Consensus • Barbarian at the Gate • Thinking Beyond Imagination • Consequences & Conclusions 2
Turmoil Revisits Australia ''From my own perspective, this is my No. 1 sovereign risk issue on a global basis,''
A Second GFC Compounded by Policy Woes? • Worries persist in relation to the Eurozone “bailout”, the integrity of the Euro and the potential downside risk for the European banking industry if Greece and others exited the Euro zone. • The US mortgage market is still weak, with Morgan Stanley estimating that 1 in 7 US mortgages is subject to some form of impairment / arrears. However: • Domestic demand growth in Aust running at 8% • Asia and US appear to be making “V” shaped recoveries – with U.S GDP rising at an annualised rate of 4.4% past 2 quarters. • China presently growing at an annualised rate of 12% • Germany, France, Benelux represent 60% of Eurozone and are showing growth. It is the “fringe” economies of Europe that are troubled. • IMF is looking to global growth of 4.2%
2. From Prominence to Pre-eminence
A Selection of Superlatives • Population 1.34 billion (World Number 1) • Labour Force 813 million (World Number 1) • Foreign Reserves $2.6 trillion (World Number 1) • Cell Phone Connections 634 million (World Number 1) • Internet Users 320 million (World Number 1) • Current Account Surplus $300 billion (World Number 1) • Gross Domestic Product $8.8 trillion PPP (World Number 2) • Export Values $1.2 trillion (2009) (World Number 2) • Electricity Production 3.5 trillion KwH (World Number 2) • Value of Listed Equities $3 trillion (World Number 3) • Value of Imports $925 billion (2009) (World Number 3) • Landmass 9.6 million square kilometres (World Number 4)
A Catalyst to Consciousness Goldman Sachs (2003) Dreaming With BRICS – The Path to 2050 McKinsey & Co (2006) From “Made in China” to “Sold in China” McKinsey & Co (2008) Preparing for China’s Urban Billion
China and the Global Investment Thesis • China’s performance is central to the thesis that emerging markets will provide the impetus for global emergence from the economic slump. • China has continued to exhibit strong growth throughout the global economic crisis. • At the National People’s Congress, President Hu has confirmed a 2010 growth target for China of 8%. • If the “China Miracle” fails or shows clear signs of stress, this is likely to be a catalyst for major repricing in global asset markets. • The question of significance is not whether China can continue to grow, but at what pace it can sustain growth in future. • A related question concerns the existence (or otherwise) of forces likely to trigger “economic shock” events in China.
Some Cautionary Words “Some Australian companies that depend on China are improving their analytical capability, although most are yet to acknowledge that they have a problem.” John Garnaut “There's no one in Treasury who can tell up from down on China, beyond what they read in the newspapers.“ Stephen Joske
This Man is Shorting China Right Now “China is Dubai times 1000, or worse” “Bubbles are best identified by credit excesses and there Is no bigger credit excess than in China” Jim Chanos Kynikos Associates
Sources of Growth Consumption + Investment + Net Exports Growth
China Growth Pattern China, Quarterly GDP Growth %
A Black Hole Opens Under Exports China, Export & Consumer Good Sales Change % China’s pre crisis export to GDP ratio was approximately 35%, making China one of the most export dependent nations.
Massive Fiscal Policy Response • November 2008, Central government announces Rmb 4 trillion fiscal stimulus package covering 2009 and 2010. • This equates to 14% of 2008 GDP. • 2009 government deficit hits almost 1 trillion Rmb (vs 111 billion Rmb in 2008). • Additional central government bond issue of 200 billion Rmb for the benefit of local governments. • However – the fiscal actions noted above pale into insignificance in comparison to the monetary response.
Translating Policy Response to Growth Consumption Investment Net Exports Growth Stimulus
Net Exports - The Engine Least Likely “The rebuilt American economy must be more export-oriented and less consumption oriented” Lawrence Summers Director, U.S National Economic Council
The Arithmetic of Chinese Consumption Private Consumption Household Income GDP 11 – 12% 7 – 8% 7 – 8%
Why The Gap? • Undervalued currency provides subsidy to traded goods sector while representing implicit tax on households through more expensive import prices. • Very low deposit interest rates, forcing savers to provide implicit subsidy to borrowers. • High structural spread between deposit and lending rates, forcing savers to recapitalise banks and “pay” for NPLs • Low wage growth • Poor safety nets and weak environmental controls – households subject to externalities • Other direct subsidies to industry (energy costs, land costs) which indirectly transfer value from household sector.
