We recently had a chance to chat with a senior Canadian economic policymaker. Among other topics — he estimated fiscal stimulus would boost growth by around half a percentage point in 2016 and by a full percentage point in 2017 — we discussed his belief the depreciation of Canada’s currency could help export growth offset some of the weakness in the oil economy. What follows is an attempt to assess Canada’s progress so far.
For context, the Canadian dollar has lost about 21.5 per cent of its value against the currencies of its trading partners since the most recent peak in mid-2011, although the loonie had dropped as much as 31 per cent before the recent rally in risky assets:
Australia has handled the commodity bust surprisingly well — so far, anyway. We’ve already looked at how a strong job market and a housing boom have helped offset some of the pain from cuts in mining capex.
Now we’re going to focus more on changes in the external balance, which has helped push the growth rate in total output significantly above domestic demand: Read more
To understand what happened in China this week we think the best financial analogy for China’s management of its economy and its external capital account is this: think of it as a giant money market fund.
So when the currency was officially devalued three times, it was equivalent to the Great China Money Market (GCMM) fund “breaking the buck”, a rare event when presumed safe investments turn out to not be so safe as thought.
We’re going to explain what that means in two posts, the first of which is the extended history of China’s economic management needed to realise how the world got to this point in the first place. Read more
As a brief follow-up to yesterday’s post on the impact of US trade with China on US employment and incomes, we thought it would be useful to visualize a few interesting facts about the evolution of the bilateral trade balance over time.
First, look at how the deficit in the trade of goods swamps the modest surplus in the trade of services. Whilst the data on services are annual and stop in 2012, the general picture would probably not look much different even if it were more up to date: Read more
Polled in March 2012, top academic economists overwhelmingly agreed that “freer trade improves productive efficiency and offers consumers better choices, and in the long run these gains are much larger than any effects on employment.”
This academic consensus has penetrated popular opinion to the extent that some people believe increasing cross-border trade flows is unambiguously good for everyone. Likewise, there is a relatively common — and wrong — belief that the Hawley-Smoot tariffs were a significant factor in the severity of the Great Depression.
We don’t want to suggest that trade is bad, but it is worth highlighting that the actual views of the experts who study these issues are much more nuanced than what the “pop internationalists” often spew out.
For example, a new paper by Daron Acemoglu, David Autor, David Dorn, Gordon H Hanson, and Brendan Price estimates that the sharp increase in bilateral trade between China and the US cost somewhere between 2 and 2.4 million jobs between 1999 and 2011 — about 1 percent of the entire civilian population in 2011. Less than half of those jobs were in manufacturing sectors that directly competed with Chinese businesses. Read more
The short answer: the June trade numbers missed expectations by a long way, and the details did nothing to provide reassurance. Here’s a long-ish term view, courtesy of SocGen:
Coming so soon before the Q2 GDP data, which is due next Monday, the data have raised the possibility — noted by the FT’s Simon Rabinovitch — that China might actually miss its growth targets for the first time in 15 years. Read more
The weaker yen hasn’t done much for Japan’s exports so far, with preliminary data out today showing another record in Japan’s trade deficit. Exports were 6.4 per cent higher, year-on-year, in January and failed to raise as much as imports (up 7.3 per cent). This brought the trade deficit to Y1.63bn.
Societe Generale say not to worry yet, however. Firstly, those figures are not seasonally-adjusted. Month-on-month seasonally-adjusted numbers show the trade deficit shrank from Y678.9bn in January from a revised Y783.8bn in December. Read more
It seems odd — and it may well be short-lived — but the US is beginning to shape up as a rare bright spot in the world economy.* Or indeed almost the only bright spot in the world’s economy, except for the Gulf petro-states. That is, if you were to base such an assessment solely on Japan’s September export data, released on Monday.
Japan’s preliminary September trade data tell a story not dissimilar to China’s — exports to Europe are slowing (unsurprisingly) by a lot, down 26 per cent for the month, year-on-year. Read more
So far, the dispute with China over the Senkaku/Diaoyu islands doesn’t seem to have hurt Japan’s exports to China as much as the headlines might suggest. True, as Dow Jones points out, exports to China were 14.1 per cent lower than in September 2011. However Nomura’s fixed income strategists Naokazu Koshimizu and Asuka Tsuchida note that exports to China actually rose 0.5 per cent compared to August, “suggesting to us little sign of an impact from anti Japan protests in September”. Read more
Charts, charts, charts, from Credit Suisse at the end of last week.
Do not be misled by the “big jump in surplus” headlines: as most reports on the subject will quickly point out, China’s trade figures for June are another signal of slowing growth.
Export growth fell as expected, but import growth fell much more than expected (hence the big surplus). Many imports are destined to become exports, so a slowdown in imports points to falling demand for Chinese goods too. And the categories of imports bear this out, says Nomura’s Zhiwei Zhang points out: Read more
With the news being all eurozone-eurozone-China-eurozone of late (at least, in our world), interactions between the two — who happen to be massive trading partners — have produced some interesting stories. Which are probably best illustrated with cats and animated gifs.
What Chinese officials say they think about the eurozone and Greece’s place therein: Read more
China’s exports fell and imports slid more than forecast in January, reports Bloomberg, the first declines in two years, as a weeklong holiday disrupted trade and commodity prices dropped. Overseas shipments decreased 0.5 per cent from a year earlier, according to the customs bureau said. Imports fell 15.3 per cent, compared with a median economist estimate compiled by Bloomberg for a 3.6 per cent fall. That left a greater-than-forecast trade surplus of $27.3bn, a six-month high, the data showed. Adjusted for the four fewer working days than last January, exports rose 10.3 per cent while imports were up 1.5 per cent, the customs burea said. Commerce Minister Chen Deming said on Thursday that January exports “cannot make us optimistic”.
European geopolitical FAIL:
LONDON, Nov 11 (Reuters) – Greece is relying on Iran for most of its oil as traders pull the plug on supplies and banks refuse to provide financing for fear that Athens will default on its debt… Read more
Protracted US budget negotiations will cast a shadow over President Barack Obama’s trip to the Asia-Pacific next week where he will tout growing US-Asian economic and security co-operation, Reuters reported. Obama is set to visit Hawaii, Australia and Indonesia from Friday, coinciding with the Asia-Pacific Economic Cooperation summit that he will host in Honolulu on November 12-13. However, Obama’s bid to market his export strategy to Asia – hot on the heels of the recent free-trade agreement with South Korea – coincides with domestic calls to cut the nine-day trip short amid US budget talks and the 2012 presidential election, the wire reported. An editorial in the New York Times on Friday urged the President to tout his free market credentials and “make a case for expanding and liberalizing trade with other Pacific Rim countries”.
India and Pakistan are preparing for the biggest liberalisation in bilateral trade since partition more than six decades ago, reviving commercial ties that have been strangled ever since the end of British rule in 1947. Senior officials on both sides of the border say Pakistan’s politicians and generals have softened their traditional insistence that expanded business links with India be conditional upon resolution of a bitter territorial dispute over divided Kashmir. Hina Rabbani Khar, Pakistan’s foreign minister, told the Financial Times that her government would press ahead with granting India ‘Most Favoured Nation’ status in an effort to break a long-standing deadlock in trade and investment that has hurt both economies. Details of the deal are expected to be agreed at a meeting of commerce secretaries in Delhi in November.
Growth in Chinese trade slowed significantly last month as the effects of the economic turmoil hitting its most important trading partners in Europe and the US, the FT reports. Overall Chinese exports increased 17.1 per cent in September from a year earlier, down from a 24.5 per cent increase in August and well below most forecasts, according to data released by Chinese customs on Thursday. Imports also decelerated, rising 20.9 per cent from a year earlier, compared with August’s 30.2 per cent rise. China’s trade surplus also came in lower than expected at $14.5bn in September, compared with $17.8bn in August and $31.5bn in July. The risk of a slump in trade may encourage Chinese officials to refrain from further interest-rate increases, Bloomberg says.
China’s trade surplus rose sharply in July, Xinhua says, to $31.48bn from 22.27bn in June. Exports climbed 20.4 per cent from a year earlier, reports Bloomberg, compared with the 17 per cent median forecast among economists surveyed by the news agency. Imports also exceeded estimates, rising 22.9 per cent. Meanwhile Chinan’s National Development and Reform Commission said the US could launch a new round of quantitative monetary easing, Reuters reports, in a statement addressing the country’s future inflation risks. The NDRC reiterated its view that China’s inflation may have peaked, and noted that the Federal Reserve may buy more US Treasuries, but it did not say why it thought that is likely.
Japan posted an unexpected trade surplus for the first time in three months, adding to signs that manufacturers are recovering from the huge disruption caused by the March 11 earthquake and tsunami, reports the FT. Japan returned to a narrow trade surplus of Y70.7bn ($898.4m) in June, compared with a market forecast for a deficit of Y150bn, data from the finance ministry showed. The pace of the decline in exports slowed to 1.6 per cent to Y5,775.9bn, compared with double-digit falls in the previous two months. Meanwhile, imports rose 9.8 per cent to Y5,705.2bn, a smaller increase from May’s 12.3 per cent rise. Companies so far appear to be coping with power restrictions during peak times by shifting some production to weekends, as the crisis continues at the Fukushima Daiichi plant and while other nuclear facilities remain offline following regular checks amid a lack of political clarity over restarting them. However, it is unlikely to be plain sailing for Japanese exporters. There remain concerns about power shortages ahead, particularly during the peak summer month of August.
In the days immediately following the twin earthquake and tsunami disasters in Japan, there was much speculation about how big the impact might be on the country’s trade and exports.
Now thanks to Sean Corrigan, chief investment strategist at Diapason Commodities, we have it charted: Read more
The “Further further readings” post usually runs in the late afternoon US time, but in this case you can file it under “we forgot to hit publish”. Doh! Or consider it a Tokyo special. Either way, sorry about this.
For the commute home, where you always pass your Irish stress tests,
World trade has regained the levels it reached before the financial crisis, driven by rapidly rising emerging-market exports and imports, research suggests, the FT says. A monthly measure of trade compiled by the Bureau for Economic Policy Analysis, a Dutch research institute, shows that the volume of world goods traded surged by 15.1 per cent last year after contracting by 13 per cent in 2009. Strong December data capped robust growth in the fourth quarter. Trade imbalances, which shrank during the crisis, have started opening again as import demand from rich nations has recovered.
The US is going to match Chinese terms with cut-price export financing for the first time to help General Electric win an order for 150 diesel-electric locomotives from Pakistan, the FT says. With Hu Jintao, China’s president, due in Washington next week, the move suggests Barack Obama, US president, will continue to push China to follow global standards on trade. Dow Jones reports that China’s ambassador to the US said s higher yuan can’t fully resolve the US trade deficit, but that Chinese and US businesses have the potential to cooperate on some high-speed rail projects within the States.
The US needs to wake up its dormant trade policy by ratifying stalled bilateral pacts and eschewing damaging currency legislation to punish China, according to the new senior Republican on the trade issue in the House of Representatives, the FT reports. Texas congressman Kevin Brady, who took over last week as chairman of the House ways and means trade subcommittee, said four years of foot-dragging in the Democratic-controlled House had left the US falling behind on trade and tax reform.
US officials have claimed “progress” on a number of thorny issues in trade relations with China, from intellectual property to beef to software, following two days of high-level talks in Washington, the FT reports. After strong criticism that Chinese policies to promote so-called “indigenous innovation” were damaging US business, Washington’s officials said China had agreed not to discriminate in government procurement based on the origin of intellectual property. China also pledged to accelerate its accession to the World Trade Organisation’s government procurement agreement.
The US has raised the pressure on China to improve market access for foreign companies with the release of a highly critical report examining Beijing’s policies on the eve of bilateral trade talks in Washington, the FT reports. A package of Chinese policies aimed at encouraging local innovation are “expected to make it difficult for foreign companies to compete on a level playing field in China”, said the International Trade Commission, a US government agency, in a report released on Monday night just ahead of the annual meeting of the Joint Commission on Commerce and Trade. The ITC report is the first of two which, on the request from the US Senate, will attempt to measure the impact of intellectual property rights infringement in China and Chinese innovation policies on the US economy. If the second one, due next May, diagnoses sizeable damage to US companies and jobs, it could become the basis for US trade action against Beijing. The ITC also said US receipts of royalties and licence fees from exports to China suggested widespread infringement of intellectual property rights and market access problems. Meanwhile Reuters adds that a US energy department report is due to warn that the country faces potential disruption to its supply of rare earth metals unless it diversifies its sources. China currently controls 97 per cent of world trade in rare earth metals. In other US-China news, McDonald’s China chief executive said yesterday that the fastfood chain intends to double its number of restaurants in China to 2,000 by 2013, the news agency adds. The New York Times carries more discussion of the report.
The World Trade Organisation has handed China a victory in a dispute with the EU, reinforcing China’s strategy of increasing its engagement with global bodies such as the WTO. As the FT reports, the ruling, issued late on Friday, applies to the EU’s antidumping duties on Chinese steel fasteners such as screws and bolts, and finds that EU duties on these products contravene WTO regulation. China’s ministry of commerce welcomed the ruling. A spokesman for Karel De Gucht, European trade commissioner, called the ruling “mixed” and noted that both sides could appeal.
Dick Bove has an interesting take on the Federal Reserve’s QE2 policy, FT Alphaville reports. The Rochdale Securities analyst thinks the new bout of quantitative easing by the US central bank has some ulterior aims — namely debasing the dollar and financing US Treasury debt. “My view is that the United States is in a financial war with China,” Bove wrote in his most recent note. “This war is being fought in two arenas. They are the budget deficit and the trade deficit.”
Barack Obama, the US president, will attempt to clinch an outline deal this week on a high-profile bilateral trade agreement with South Korea, in spite of opposition from part of the US automotive industry, the FT reports. A US trade representative flew to Seoul to try to thrash out a deal over US access to the South Korean market, the agreement’s main sticking point. US beef exporters, previously vocal opponents of the deal, have moderated their position in an attempt to make a more gradual entry into Asian country.
We all know Dick Bove ♥ banks — sometimes to a fault.
But the Rochdale Securities analyst brings up an interesting QE2-related point in his latest note. The Federal Reserve’s first round of quantitative easing, he reckons, failed because it ended up creating a partial liquidity trap, with banks just sitting on all their Fed-given funds instead of lending them. This wasn’t a huge problem of course, as the original QE was more about repairing the financial system than boosting the economy — but it does rather beg the question; what is QE2 all about? Read more