Tony Alexander

Economic Commentaries

A summary

Thursday May 23rd 2013

The week started firmly in the United States in the form of the consumer confidence index from the University of Michigan rising to its highest reading since mid-2007 at 83.7 in May from 76.4 in April. The rise suggests that in spite of the sequester affecting public sector employment and incomes people are increasingly hopeful of the future and are therefore more likely to increase their spending. Businesses seeing the report will become more likely to rise their hiring and investment.

Japan also started the week well with the release of data showing the economy grew by 0.9% during the March quarter following 0.3% growth during the December quarter, with consumer spending accounting for around half of the quarterly improvement. This is good, but then after near two decades of a moribund economy facing deflation, structural rigidities, banks unwilling to lend, and politicians failing to agree on much at all, there was bound to be some sort of positive catch-up spending response to PM Abe’s monetary policy easing.

The question for Japan is two-fold from here. Can the surge in growth be well-founded enough that when the 16th fiscal policy package in the past two decades and doubling of money supply within two years cease the economy will keep growing? And will the economy be opened up to the capitalistic forces of creative destructionalism – the so called third arrow in Mr Abe’s policy thrust? The signs so far are not good with an apparent backing away from moves to deregulate the labour market. One also suspects that the Japanese have no intention of opening their agricultural sector up to competition during the TPP negotiations. The average Japanese farmer is aged 66, has 1.9 hectares, and subsidies to the sector equal the value of its output.

Therefore there is a good chance that just as over the next two years European countries will probably waste the deregulatory window provided by the easing in fiscal austerity, so too will Japan fail to make effective use of its money printing sugar rush. Speaking of Europe, the Eurozone shrank 0.2% during the March quarter after shrinking 0.6% in the December quarter. Some analysts consider this reduced speed of decline to be a positive – which it is – but the fact remains that the zone is still shrinking and with weakness spreading out of the debtor countries to Germany and in particular notoriously rigid and often un-capitalistic France, worries are deep regarding the area’s immediate prospects.

In China the main story is one of underlying concerns about indebtedness, the increasing role played in recent years by SOEs, and simple adjustment to a huge economy not likely to return to double digit growth rates. However China has to be the most exciting place to consider analysis and observation as the authorities move to boost societal inclusiveness through development of an affordable healthcare system, welfare, residency in major cities for migrants, and well-priced housing for the millions who shift from the countryside into the cities each year. The opportunities for businesses with high assertiveness, good capital, lots of battle scars and a long-term focus are immense – especially if one has some way of protecting one’s IP!

In the United Kingdom there were some weak numbers released last night in the form of retail sales for April which fell away by 1.3%. A 0.1% increase had been expected. Sales were just 0.5% ahead of a year ago. Still, there is some underlying optimism regarding growth improving in the UK even though the Conservative government is determined to maintain its fiscal austerity programme aimed at improving the government’s accounts. After growing 0.3% during the March quarter the soon to leave bank of England Governor Mervyn King reckons growth will improve to 0.5% this quarter.



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