By Dmitriy Belyanin
An exporter of natural resources, Central Asia prospers only if the world economy does. What shape is the globe in? Dmitriy gives us a Cook’s tour
Two years after the financial crash, the global economy has yet to recover everywhere. Some economies in the West are picking up speed – as well as China and India, of course. But the economies of the United States and many European countries still look wobbly, with unemployment rates more reminiscent of a depression than of a recovery.
Exchange rates manifest the economic unevenness. For at least two months, the euro has been strengthening and the dollar weakening. Why these puzzling trends? A survey of national economies may clue us in.
The U.S.: Unemployment continues
The government's attack on virtual depression has created more income than jobs. The unemployment rate -- i.e., the share, in active adults, of those who look futilely for work -- in the U.S. is rising from 9% in 2009 to 10% this year, estimates the International Monetary Fund (IMF). Whatever its merits, the government's program was expensive. It spent $700 billion to shore up commercial banks via the Troubled Asset Relief Program. The public debt is $13 trillion, almost 90% as much in value as the American economy produces when running on all cylinders.
While such a debt burden may look modest to the Japanese, it has eviscerated political support in the U.S. for more spending by Washington to stimulate the economy. The American central bank, the Federal Reserve, has taken charge, printing money to encourage spending. The bloated supply of dollars is pushing down the foreign value of a buck. In the short run, investors won’t add dollars to their portfolios.
In the long run, a weaker dollar should make U.S. exports cheaper for the world to buy. The rise in demand should create U.S. jobs. This has yet to happen, although U.S. export prices probably won’t rise sharply for at least another year.
China: Conflicting interests
The People’s Republic has pegged its exchange rate to the dollar since 1948, when the gold-backed buck became the standard currency for the postwar world under the Bretton Woods system. (True, in the 1970s, the Communists let the yuan appreciate from 2.5 per dollar to 1.5.) During the 1980s, Beijing gradually devalued the yuan to make exports more competitive. China’s economy grew at double-digit rates in the early 1990s. It slowed during the Asian financial crisis of the late 1990s but took off again after China joined the World Trade Organization in November 2001. To pay for the increasing exports from China, world demand grew for the yuan, tending to raise its exchange rate. Catering to exporters, the Chinese government held the yuan's value below market levels.
The U.S. has long pressed China to let its currency strengthen. This would help the U.S., and much of the rest of the West, to sell more to the world, relative to what it buys from it. (In shop talk, the U.S. balance of trade would improve.) In July, China allowed some floating but not enough to satisfy the U.S. So the Fed is weakening the dollar.
By helping foreign producers, a floating yuan could alleviate damages done by the global financial crisis. And it would relieve the People’s Bank from the need to spend in order to support the exchange rate. But China’s exports are diverse, and its exports exceed its imports. China may fear that a stronger yuan would endanger its trade surplus in many industries. Economic growth and employment might tailspin.
In coming months, the yuan will strengthen only mildly against currencies other than the U.S. dollar and those pegged to the dollar. Against the dollar itself, the yuan won’t fluctuate much.
Europe in turmoil
Unemployment is increasing in almost all countries of Western Europe. In Spain, the unemployment rate forecasted for 2010 is 20%; in Greece, 12%; Portugal, 11%. Norway, an oil exporter, has performed comparatively well; unemployment there is to increase slightly to 4%, well below the European average. Germany, Austria and Switzerland are recovering mildly, though unemployment in Germany remains high (7%).
When the dollar depreciates in terms of the euro, investors switch to the latter, which indeed has been appreciating since mid-September. A stronger euro reduces export sales in many European countries, slowing their economies and destroying jobs. Effects on debt are mixed: Dollar debts are easier to pay, but governments might have to borrow to fight the slowdown.
The European Central Bank may be the most independent of major central banks. It largely ignores groups that pursue their vested interests at society’s expense. But balancing the interests of 16 nations is hard. If the Bank strengthens the euro, export-led countries like Norway will object. If it weakens the euro, the inflation-phobic like Germany will complain -- as will countries with debts that must be repaid in foreign currency.
Prospects for the euro-dollar exchange rate are uncertain. In the short run, the euro will keep appreciating, thanks to the easy-money policy of the Fed. Fears that the Eurozone will dissolve (though it probably won’t) may reduce the euro's value. Both currencies are risky, so investors might consider the dollars of Australia and Canada.
Fortunate economies
In a rarity for the West, Australia and Canada are clearly recovering. For Australia, the IMF projects a growth rate in gross domestic product (GDP, the value of domestic production) of 3% in 2010, compared to 2% in 2009. (The IMF lends foreign currencies to countries facing emergencies.) Unemployment is to fall from 6% in 2009 to 5% in 2010. In Canada, unemployment decreased slightly to 8% in 2010. Real GDP (that is, adjusted for price changes), which had declined by 2% in 2009, is to increase by 3%.
Unlike the U.S., Australia managed to create workplaces. High and rising world demand for farm products boosted its exports but thus sent the Aussie dollar soaring to its record peak, in October.
Canada benefited from well-regulated banks. Unlike Europe and the U.S., Canada did not loosen regulations. Regulators know personally the top executives of the five dominant banks. Canada was the first country to increase interest rates, which pushed up its dollar.
The Asian tigers are even more impressive. The IMF forecasts growth in real GDP of 9% in Taiwan and 15% in Singapore, compared to declines of 2% in 2009 for Taiwan and 1% in Singapore. Unemployment fell from 6% to 5% in Taiwan and from 3% to 2% in Singapore. South Korea is recovering as well, with unemployment falling to 3%, from 4% in 2009. Real GDP, stagnant last year, is rising by 6%.
The Pacific Rim – Asia’s chunk of it, anyway – is cashing in on the globe’s growing reliance on computers. Electronic sales are clicking along for Taiwan, South Korea and Singapore. Early recovery in Asia feeds back into it: Taiwan sells 40% of its exports to the surging economies of China and Hong Kong. Because exports account for half of its GDP, Taiwan may be more vulnerable to external shocks than are economies more oriented towards sales to domestic households, such as China's.
Technically advanced, Singapore profits from the growing global market for drugs. In yearly terms, the economy grew by nearly a fifth in the first half of 2010. The Singapore dollar strengthened by 8%, peaking at about 1.3 per U.S. dollar in October. Manufacturing in Singapore began to contract this autumn. But, fearing inflation, the Monetary Authority of Singapore said it would not rein in its dollar.
South Korea benefited from higher demand at home and abroad, but its economy is to grow more slowly in 2011 (4%), due in part to rising global risks. To some degree, this slowdown may be deliberate. In July, the Bank of Korea raised the interest rate by a fourth of a percent to 2.25%, fearing that volatile global markets might fuel inflation. [Sang Lee addresses this point in next week’s blog. – lt]
Less fortunate is Japan, South Korea’s neighbor and the world’s third largest economy (after the U.S. and China). Its public debt is twice as large as GDP; its population is aging and shrinking. The Bank of Japan held the interest rate to zero throughout the year. The IMF forecasts economic growth of 3% this year; last year, GDP fell 5%. Although unemployment rose slightly to 5.2%, the yen appreciated in September and October.
Conclusions
The economies of the U.S. and Europe remain troubled by unemployment, growing public debt, and uncertainty in foreign exchange markets. China and the U.S. clash over undervaluation of the yuan. Australia, Canada, and the Asian tigers perform better than most Western countries but remain in heavy weather due to fluctuations in export demand.
Dmitriy Belyanin, an MBA graduate of KIMEP, assists the associate dean of KIMEP’s MBA program in research. He writes often about economics and finance in Central Asia.
Coming issues: If Almaty is the engine of Kazakhstan’s economy, why isn't it firing on all cylinders?
References
Adam, Shamim. October 14, 2010. Singapore to allow stronger currency even as economy contracts. www.bloomberg.com/news/2010-10-14/singapore-s-economy-shrinks-as-manufacturing-slows-currency-band-widened.html
The Associated Press. June 21, 2010. Canadian economy: The envy of the world. www.cbsnews.com/stories/2010/06/21/business/main6602637.shtml
BBC News. September 1, 2010. Australian economy picks up pace to three-year high. www.bbc.co.uk/news/business-11149283
Bloomberg. 2010. Government bonds: Japanese government bonds. www.bloomberg.com/markets/rates-bonds/government-bonds/japan/
Chinability. July 13, 2010. Renminbi (Chinese yuan) exchange rates, 1969-2010.
www.chinability.com/Rmb.htm
Eisen, Sara and Allison Bennett. February 17, 2010. European Union should limit appreciation of euro, Mundell says. www.businessweek.com/news/2010-02-17/italy-is-biggest-threat-to-euro-nobel-winner-mundell-says.html
Froomkin, Dan. October 15, 2010. Job Creation Idea No. 10: A lower dollar would level the playing field. www.huffingtonpost.com/2010/10/15/jobcreation-idea-no-10-a-_n_763862.html
International Monetary Fund. October 2010. World economic outlook database. www.imf.org
Lee, Sang H. November 15, 2010. E-mail message on South Korea’s monetary policy.
OANDA. 2010. Historical exchange rates. www.oanda.com/currency/historical-rates
Sim, William and Eunkyung Seo. July 25, 2010. South Korea economy expanded faster-than-expected 1.5% in second quarter. www.bloomberg.com/news/2010-07-25/south-korea-economy-grew-1-5-in-second-quarter-from-three-months-earlier.html
Sung, Chinmei and Jay Wang. February 18, 2010. Taiwan economy probably exited deepest recession, survey shows. www.businessweek.com/news/2010-02-18/taiwan-economy-probably-exited-deepest-recession-survey-shows.html
No comments:
Post a Comment