Macro Economics

Macro Economics

Overview

Much depends on whether public stimulus will be followed by “real” demand. Global economy: The global economy has returned to positive growth following dramatic declines.

Much depends on whether public stimulus will be followed by “real” demand


Global economy:
The global economy has returned to positive growth following dramatic declines. The recovery is, however, uneven and not yet selfsustaining, especially in the advanced economies. Financial conditions have continued to improve but are still far from normal and banking system weaknesses persist.

Despite recent momentum, the pace of recovery is likely to be sluggish, since much remains to be done to restore the financial systems to health, while bank deleveraging and a sustained rebound in private demand in the advanced economies is likely to be held back by limited credit availability, households’ desire to rebuild balance sheets and rising unemployment. Downside risks have reduced somewhat. A key risk is that policy support is withdrawn before the recovery can achieve self-sustaining momentum and that financial reforms are left to languish. The threat of a double dip remains.

Commodity prices have broken out of their trading ranges after rebounding from their lows earlier in 2009, in part due to US Dollar depreciation. A good part of the recovery now appears to be priced into oil and metal prices but upside risk still remains on commodities going forward. An oil price of USD 90 per barrel is not unrealistic within the coming months.

The inventory cycle is a global phenomenon and has been a strong driver behind the collapse in world trade. For some time, companies were mainly producing based on inventories and did not order materials from suppliers abroad. Hence world trade collapsed. With inventories very lean at most levels of the supply chain, companies are starting to increase orders, which shows up in rising world trade. The inventory cycle is expected to run for at least another couple of quarters and therefore we should expect more of the same of what we saw in Q3, which was stronger economic data from Europe to the US and Japan. The latter has turned from underperformer to outperformer, because Japan is highly exposed to world trade and benefits strongly from robust activity in Asia. Also, domestic demand in Japan has improved, driven by higher capital expenditure, which is a very positive signal for sustainability.

The peak in EUR/USD is still ahead, as the Dollar-negative factors dominate in the short and medium term. Rising commodity prices are negative for the Dollar, which also tends to lose against the Euro by the end of the year. A weakening of the Dollar toward the end of the year is often observed – in part because European banks repatriate a considerable volume of their investments and with the chance that more will close their positions this year, the EUR/USD cross exchange rate could go higher towards the end of the year.

On MyBimco you can add the module showing EUR/USD cross exchange rate to your profile.

What’s happening in China?:

It seems as if China is preparing for a resumption of the appreciation of the Yuan against USD. The People’s Bank of China (PBoC) have recently announced that it will improve the setting of the Yuan exchange rate in a “proactive, controlled and gradual manner based on international capital flows and movements in major currencies”. Officially, China is targeting an effective exchange rate; in reality China has targeted the USD. An appreciation of the Yuan is in high demand amongst many significant trading partners. In addition, the Chinese leadership is sounding increasingly confident about growth and turning its attention to sustainability issues such as inflation and bubbles in the financial markets.

When talking about the governmentally and centrally driven Chinese economy, it’s important to notice that the economic recovery is well underway but the economy is far from overheated. With unemployment still high and inflation to remain moderate next year, there is no reason for China to tighten its expansionary policies. Lending is expected to rise at a slower pace in 2010 as compared to 2009. China is likely to implement a gradual reduction in the level of stimulus (credit and infrastructure spending) in response to rising private investment and consumption.

What’s happening in US?:

US house sales have risen 35% since the floor last year and are currently at the highest level since February 2007. Prospects are in favour of continuous rising house sales, given the low level of both interest rate and house prices. The improvement in house sales and in turn house prices, might boost private consumption and demand.

The development in house prices is naturally important, as the house market was the seedbed for the financial crisis and thereby also some of the major write-downs in the banking sector. House prices are interesting, as they have started to stabilize and show signs of upward movements. The supply of houses up for sale is falling steadily and in turn easing the pressure on house prices.

Even though the US Consumer Confidence Index has risen to 49.5, consumers are still very pessimistic, which is clearly seen from the current level at around 50 compared to the historical average close to 100. It is the present situation that consumers are most pessimistic about, and the situation on the labour market is a drag on the confidence.

It is worthwhile noting that Australia, India and Norway have started to hike interest rates on the back of strong economic data that signals sustained recovery and thus time to implement “exit strategies” on economic stimulus.


Outlook:

Going forward, the global economic recovery is expected to be sluggish and inflation will remain low. The most pressing policy challenges over the near term include maintaining momentum in economic recovery and, for emerging economies, dealing with capital inflows.

In due time, exit strategies should pave the way for strong, sustained and balanced growth. However, a co-ordination of timing, design and implementation of policies during the exit from the extraordinary support measures taken during the crisis will be of the highest importance.

Considerable downside risk to a recovery of the shipping market remains from the impact of state aid and subsidies to the industry both in Europe and in Asia.
in Copenhagen, DK

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