TR EMERITUS – Untold Hard Truths From Around The World – 淡马锡评论 – formerly Temasek Review

Global economies are heading for turbulence – ARE WE IN TROUBLE GOING FORWARD?

Strong headwinds ahead, global economies are heading for turbulence – ARE WE IN TROUBLE GOING FORWARD? Financial markets across the globe cave-in last week amidst contrasting optimism among economists in frenzied GDP forecast upgrades of the Singapore economy for 2010.- ST, 2 July 2010, A3, Prime News, Economists in frenzy of forecast upgrades. To be fair, OCBC economist, Selena Ling, is somewhat restraint of bullish outlook. She warned ‘formidable headwinds….brewing the the form of the euro zone debt crisis and renewed worries about a China-led slowdown.” The most recent past forecast was of May 2010 is for the growth to hit below 7 to 9 percent but the week past saw many economists rushing to revise their GDP forecast for 2010 upwards on the back of strong manufacturing numbers with DBS as high as 13% and UOB posting 9%. The contrasting numbers and the timing are interesting considering a whole slew of uniformly bad news hitting financial markets across the globe and most major European and US markets actually ACCELERATED their downwards decline from the week prior. The published impressive bounce forecasts of 2010 over 2009 had no positive impact on local stock market sentiments. No one pointed to the “no-so-obvious” void of inherent logical flaw of optimism – it came from a VERY LOW, indeed a NEGATIVE, base of minus 2.5% GDP decline in 2009 such that a 10% growth, even achieved in 2010, would have meant the economy grew by a mere 7.5% compared back to 2008. Not much to crow about of economic “irrational” exuberance over these seemingly ebullient “bouncy” numbers. The softer property market in Singapore mirrored that duller subdued reality and a more restraint outlook awaiting 2011. Notwithstanding this artificially strong (though not equally enthusiastically welcomed by stock market here) forecasts, this author is staking a view that the range of published strongly bullish forecast is MORE likely to be in error of being over-optimistic rather than realistic. The downside in Selena Ling’s cautionary note is, in my best informed judgement, more likely to bear fruition taking the world’s major economies into a double-dip and maybe Singapore into yet another surprised recession in the second-half. None of the impressive forecasts might materialise – even the lowest in the range of 9% GDP growth for 2010. The reasons are many and is shared in this blog for others who may have same or disagreeing views. The ebb and flow of the upturn has tipped over from the rise over the peak into the ebb slide downward – the inevitably of that is increasingly apparent from the consistent pattern of economic macro-economic numbers emanating. It is worrying. Financial markets are more likely to “forecast” economic direction correctly and ahead of actual economic swings and the week’s past market behaviour is eerie of my fears that all is ill of the world’s economic landscape beyond political of the recent Toronto G20 cross-Atlantic division of austerity drive and further fiscal stimulus against a background of continuiing sovereign debt crisis and German’s Chancellor, Angela Merkel’s unhelpful political setback on the domestic front. The global economic prospects in 2011 may well be hostage to the G20 split and Merkel’s weaken political stature – the obvious lack of co-ordinated economic strategizing so critical if Merkel lost her political base and G20 unable to act collectively and resolutely in crisis, noting Obama’s administration is also facing Congressional re-election pressures. I want to go back to the ebb-and-flow logic and observations. This author is constantly reminded of this pattern – a robust first quarter 2010 economic upturn across the globe and resurgent metal prices on London Metal Exchange in parallel. In that 1st Quarter, Taiwan sees biggest quarterly growth in over 30 years – even far more spectacular than Singapore which sank deeper in early 2009. http://www.channelnewsasia.com/stories/afp_asiapacific_business/view/1057952/1/.html The key flaw in there was strong corporate earnings during the first quarter in 2010 was that these were NOT uniformly supported by stronger sales but more due to costs cuttings. Sales had the supported to some extent by inventory re-stocking rather than adding on of organic business growth. Together they lifted GDP numbers globally giving stock markets the upleg rise in optimism. Commodities-based currencies like the Australian dollar and the Canadian loonies rocketed up to pre-2008/2009 levels. If one look at http://www.kitcometals.com, even a dog of metals like zinc and nickel peaked in late March/early April over 6-months interval view and infrastructure-sensitive copper – the PHD in economics - was US$3.50 per lb hardly 10% off its all time historical high. There were strong anecdoctal evidence that Chinese farmers are using access to easier bank credit to stock up copper for speculative gains instead of buying fertilisers. Staggering as this stocking of copper instead of fertilisers as might be beyond believability, market watchers in potash and phosphate markets were all stunned by the lack of buying interests in fertilisers demand when traders in that segment were busy forecasting a big upturn - after a dormant 3-year sleep and poorer and poorer harvest crop yields per acre. The upturn for fertiliser market was a non-event, adding to fear that some speculation in commodities and the bubbly real estate, aside from infrastructure spending, rather than real economy were driving the Chinese economic recovery in 2009. Anecdotal evidence suggest that the ad-hoc combination of quantitative banking easing, government stimulus packages and zero-interest-rate policies has distorted global equities, currency and metals markets. In the last quarter of 2009, The 10-year US government bond yields about 3.5 per cent, down from a five-year average of 4.14 per cent and its 20-year average of 5.57 per cent. Liu Mingkang, China's top banking regulator and Bank of Japan Governor Masaaki Shirakawa in Tokyo warned in November 2009 the US Federal Reserves that its prolonged policy of keep rates near zero for an ``extended period'' may lead to a repeat of the financial crisis. The reason is that Monetary easing in advanced economies has stimulated capital inflows to emerging economies,'' Shirakawa said http://www.smh.com.au/business/world-business/bubble-trouble-looms-20091116-ihtj.html And came May 2010, the Australian dollar, Canadian loonies, the entire phalanx of base metals and global stock markets all tumbled in mutually confirming synchronisation of weaker economic outlook. The question must be asked now is – was the outstanding GDP achievement in 1 Quarter 2010 the peak past of this “recovery” rise from a low base of 2009 aided by inventory restocking in consumer markets in the west and some wealth effect on consumer spending in Asia of bubbling real estate prices.? The answer now looks pretty much that way. And in June 2010, particularly, stocks markets globally slide accelerated – noting that each fall was steep and any efforts at rebound muted of sustainability to only modest gains and not durable of staying. Stock markets are decidely bearish since. Two weeks ago, I warned of China’s Shanghai stock market meltdown as the tripwire to watch and last Monday’s China-led sell-off held grim prognosis ahead for the rest of the year. China is the beacon and last survival stronghold of economic rebound seems to have buckled. We need to look closely at the reasons why. Besides “Kang Ba Shi” ghost town in Inner Mongolia, there is market talk that half of commercial properties in Beijing lies vacant. China's investments in new factories and properties surged 67 percent last year to 15.2 trillion yuan, more than Russia's gross domestic product. Yet despite all this apparent growth, electricity consumption is reported to be falling - which just doesn't add up. http://www.mineweb.com/mineweb/view/mineweb/en/page72068?oid=98654&sn=Detail&pid=92730 The growth in the industrial sector, is hoped, would more than counter the phasing out of less efficient plants. Would that materialise??. Look at steel sector consolidation going on. Vale and BHP Billiton struck deals with Asian steel mills that increased iron ore prices by between 80 per cent and 100 per cent in April 2010. http://www.smh.com.au/business/steel-makers-cry-foul-over-iron-ore-prices-20100401-ri69.html This is on top of 50% rise in iron-ore prices in 2009 – a staggering 130% at least over two years period. But what happened to steel prices in China in the same interval? Steel prices weakend in the June Quarter. If iron-ore prices – major costs component of steel manufacture - escalated substantially faster in 2010 than 2009 risen a few mutiple of its 2008 benchmark price and Chinese steel producers can’t pass the costs on to its end users – it must prove that Chinese manufacturing is weak and most likely infrastructure demand has also weaken. http://sg.news.yahoo.com/rtrs/20100625/tbs-chna-steel-shaoguansteel-7318940_1.html Industry sources said.. "Steel prices are likely to keep falling in the next three or even five months. The biggest uncertainty comes from the property sector, and demand growth in other sectors is also slowing down." And when Chinese Government tighten banking liquidity curbed speculation in its hot property sector, they knew that Chinese speculators are buying into 2nd or 3rd mortgages each piggybacking on the other’s ballooning asset valuations which could bust any moment with reverse cascading impact. Chinese economy, I believe, it bubbly and delicately poised on the knife edge. China stock market is heavily retail-driven rather than institutional. The extent, suddenness and steepness of retail sell-off on the Shanghai Stock Exchange early last week sent a tsunami shock wave across all global stock markets. One notes the liquidation ahead of the massive Agricultural Bank IPO said to be valued close to US$23 billion underlines the liquidity crunch in general and lack of confidence among Chinese of their real economies. We now know that it is sliding and much faster than expected. More of this a little later in this blog. And currently for the record, the US Government 10-year bond is even lower now at a paltry 3%. Against a backdrop is rising US dollar against all major currencies particularly after May 2010 global equities decline (except the Japanese Yen) spot gold keeps testing its historical high of US$1250 per oz levels whilst IMF is selling 403 tonnes of physical gold slowly since October 2009! – both underscore the fragility of financial markets and risks of another meltdown derailing global economic recovery. There is a noticeable flight from risk back to the scantuary of US dollar and safe haven hedge in gold instead of leaving money invested in real economies, even drawing blood from commodity-based currencies like Canada, Australia and South Africa. http://www.xe.com/currencycharts/?from=USD&to=EUR&view=1Y These are ominious signs which cannot be ignored but its fundamental needs discovery of explanatory reasons by way of macro-economic statistics. The strenth of lst Quarter 2010 performance has to thank the tail end of global fiscal stimulus – USA, PRC, Singapore included. They put economies back to work which even saw improving employment figures in USA until this June sudden shock decline. Cash for clunkers (cars) and housing subsidy ended in March 2010 with housing settlement to finalise end May 2010. This lifted the last spree of consumer spending cashing on these subsidies – they won’t be repeated. Investors and economists were looking for macro-economic data post the end of this Obama’s stimulus spending to confirm that the US recovery is taking root, spreading grip and broadening base – THE BRIGHT SPOT WAS MANUFACTURING REBOUND notably strong sales in autos. UNFORTUNATELY, MOST STATISTICS CAME OUT SINCE MAY 2010 WERE DISAPPOINTING CONFIRMING THE WORST IN PERVERSE. The US Commerce Department, uncharacteristically revised the US 1st Quarter GDP growth twice, from 3.2% to 3% and then to 2.7%. in part due to weaker consumer spending. That was a hint that consumer spending had already started to ease off in a recovery even in the first quarter of 2010, which was driven by unprecedented government and Federal Reserve support measures. In mid-June, preliminary data from the US Commerce Department showed that sales unexpectedly dipped 1.2 percent to 362.5 billion dollars in May from the previous month. The decline, driven by sharp drops in sales of autos after the end of cash for clunkers and building materials items in a hint of weaker housing sector ahead.That was the first decline in 8 months. New-home sales plunged to a record low in May. http://www.theaustralian.com.au/business/markets/federal-reserve-cautious-on-outlook-for-us-economic-growth/story-e6frg926-1225883503455 Yet Federal Reserve chief Ben Bernanke bravely told Congress that consumer spending was likely to increase forward and would be a key cog in strengthening the US recovery. http://sg.news.yahoo.com/afp/20100612/tts-us-economy-retail-sales-c1b2fc3.html Did that materialise? The answer is no. Weaker prospects are ahead for retail sector – even fast food chains like KFC, Macdonald etc are revising downwards their earning outlook for the next six month. With Europe debt crisis spiraling, Bernanke in early June dodged a question about whether he fears a double-dip recession, saying "nobody knows with any certainty." http://finance.yahoo.com/news/Double-dip-recession-What-are-cnnm-1239762472.html?x=0&sec=topStories&pos=7&asset=&ccode= Bernanke knew that the winding down of government stimulus programs and inventory rebuilding, which together accounted for much of the recovery, are the major factors behind a slowdown. At end June, the US Conference Board said Tuesday, as it reported that its consumer confidence index plummeted to 52.9 in June - the lowest level since March -- from a downwardly revised 62.7 in May. ANY READING BELOW 50 INDICATES A CONTRACTION. Until the pace of job growth picks up, consumer confidence is not likely to pick up. http://www.marketwatch.com/story/us-consumer-confidence-plummets-on-job-worries-2010-06-29-102500?dist=bigcharts Pending homes sales tumbled in May to lowest level on record after tax credits expire. This statistic measures represents the number of buyers who signed contracts to purchase homes dropped in May. It is the clearest sign that the US housing recovery can't survive without government incentives. http://finance.yahoo.com/news/May-pending-home-sales-tumble-apf-2024500274.html?x=0&sec=topStories&pos=main&asset=&ccode= And then this shocker last Friday, the US economy skidded with broad slowdown in construction and its recently strong resurgent manufacturing sector basically and unexpectedly declined – as non-farm payrolls fell by 125,000 last month the first terrifying dip employment figures since beginning of 2010 after having added an average of around 150,000 jobs a month in the first half of 2010. In June, 652,000 Americans left the workforce - the sharpest one-month decline in the labour force in 15 years - as people gave up hope and stopped looking for jobs as employers chilled on new hiring. Banks and corporate sectors all preferred to hold more cash fearing the next round of Eurosone contagion spreading spinning the world down into another economic spiral. http://www.theaustralian.com.au/business/markets/us-job-losses-deeper-than-analyst-forecasts/story-e6frg926-1225887389390 What is even more scary is global recovery bellwether stocks like Caterpillar, GE took a beating and even very strong perfomers like 3M here hit hard after this adverse economic news. Investors looking for a tepid US recovery had their hopes dashed. All key statistics to date disclose the US recovery faltered badly since the end of fiscal stimulus – retail sales, pending home sales, consumer confidence, and worse of all negative downturn employment needed so badly to be the cog of the economic recovery Ben Bernanke had hoped for. The only brights spots in the recovery signs – manufacturing – skidded badly. What about the statistic coming out of China?. It is also gloomier though somewhat expected. Economists had expected China to slow down in the second half to 8% to end the year with a 10% GDP growth after a fiery 11.9% gain struck in the first quarter. Most economists expects a sharp slowdown in infrastructure-related investment and, later on, property investment with corresponding delayed impact on demand for commodities and prices. But was that optimism held up? The answer is no. New measures were put into place to curb THE MUTLIPLE PURCHASE OF PROPERTIES by speculative money had collateral damage. http://www.theaustralian.com.au/business/markets/chinas-growth-tipped-to-slow/story-e6frg926-1225876669135 That liquidity squeeze may have taken on a stronger negative impact than expected. Commodities prices, particularly economically sensitive base metal cooled along with the Australian and Canadian currencies. Baoshan Iron & Steel Co announced cuts in steel prices, at the same time as the CEOs of Coldelco and Freeport-McMoran Copper & Gold Inc, the two world’s largest copper producers, forecast increased copper price volatity and downside risks. http://www.smh.com.au/business/markets/asian-stocks-drop-on-china-demand-concerns-20100604-xjjp.html At the end of June, the US Conference Board corrected its leading economic index for China to an April gain of 0.3 per cent from a previously reported rise of 1.7 per cent, a sharp revision that undermined confidence in China's ability to sustain strong growth http://www.smh.com.au/business/markets/investors-flee-stocks-in-global-selloff-20100630-zjpo.html . The Shanghai Composite Index fell 4.3 per cent last Tuesday to end at a 14-month low. And it has fallen further since. Growth in manufacturing in China whilst expanding for 15 consecutive months slowed down in May reaching 16.5% compared to April figure of 17.8% . http://news.smh.com.au/breaking-news-business/chinas-consumer-prices-up-31-per-cent-20100611-y23b.html In the same period, China’s Purchasing managers May index slid to 53.9 from 55.7 in April. http://www.theaustralian.com.au/business/markets/chinas-manufacturing-growth-slows-official-report/story-e6frg926-1225873953545 The same PMI figure again declined to 52.1 in June sparking fears that the slide in Chinese manufacturing activity is continuing. http://www.theaustralian.com.au/business/markets/stocks-at-11-month-low-on-china-data/story-e6frg916-1225886813696 A separate measure, the HSBC China Manufacturing Purchasing Managers Index also showed a slowdown, falling for the third month in a row to 50.4, from 52.7 in May. This puts it close to the threshold between expansion and contraction. So what was surprising of Chinese macro-economic statistics? The slowdown in infrastructure construction had been widely anticipated. But why the concurrent slowdown in manufacturing when this was tipped to be a delayed ripple effect to come later after the end of stimulus brake? The answer is here. Chinese National Bureau of Statistics, the drop in the official PMI reflected the impact of policy tightening as well as a grim outlook in exports. I believe this could get worse, not better ahead for a number of good reasons. Asian factory data and falling currencies may signal crisis rebound may have peaked and it behind us. Manufacturing activity across Asia may have crossed a high-water mark after the rise and now be headed downward on the ebb - though economists have cautioned it may be too early to call the trend conclusive. Purchasing Manager’s indexes across China, India, South Korea and Taiwan – all export-oriented economies – have shown muted rate of growth signalling a synchronised slowdown of factory orders. South Korean manufacturing expanded for a 16th straight month in June, though the pace of expansion slowed for a second straight month. Similarly, in Taiwan, manufacturing logged its 16th consecutive month of gains - though the pace of the growth was the slowest in a year. India's industrial activity expanded for the 15th straight month in June, but softened to 57.3 in June from 59 in May. http://www.marketwatch.com/story/asian-factory-data-may-signal-rebound-has-peaked-2010-07-01 Recent weakening of the Indian, Taiwan and Korean currencies against US dollar suggest weakness in export markets. This is to be expected as EU and Japan have now taken an aggressive posture in favour of fiscal austerity. In the Eurozone, Britain, Germany and France, Spain, Portugal, Greece - spooked by Greece's near bankruptcy and a deep eurozone crisis – vowed fiscal austerity with the intent to halt the rise in public debt ratio to GDP and taking them to a downward trend from 2016. The negative impact of Greece meltdown have NOT yet impact on EU. It is NOT gone and the austerity drive have not yet impacted on consumer demand aggregate. EU is the largest market for Chinese manufactured exports ahead of US. With both EU and US heading for a definite slowdown, Chinese manufacturing already adversely hurt by the quantitative squeeze could erode faster than expected in the second half. The scenario thus painted till now points to a) Eurozone financial contagion uncertainty leaving ripple impact on economic activity to come and b) That contagion ripple of economic slowdown has spreaded to slower US economy and both will hamper growth economies of India, South Korea and Taiwan c) China will not escape the chill of these twin chilly blasts. My odds, as of now, reads – a robust 1st Quarter global GDP recovery aided by mainly inventory re-stocking, the tail end of fiscal stimulus, followed by steep declines in May/June of economic activity in US and China in the 2nd Quarter of a crisis recovery ebb leaving a compelling fear that the 3rd Quarter could shock the world with a double-dip recession. If and when that happens, I shudder to think what the final quarter 2010 of economic statistics will show. The stock market behaviour of steep declines in recent weeks and the failure of Australian mining shares to rebound this week (after the dismantling of its proposed super profit tax regime by newly elevated Prime Minister, Julia Gillard ) points in that direction of weaker global economies and commodities markets. Singapore GDP growth could well turn up a lot weaker than the 10% plus frenzied economic forecast for 2010 most eagerly touted last week. We could be in deep trouble again in 2011. Zhen He Read More →