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Keynote Address – Investing in Mining Indaba: Bringing Foreign Investment to Fuel Asian Resources Supply






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    Keynote Address – Investing in Mining Indaba: Bringing Foreign Investment to Fuel Asian Resources Supply Keynote Address – Investing in Mining Indaba: Bringing Foreign Investment to Fuel Asian Resources Supply Document Transcript

    • MONTHLY    R  EPORT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    OCTOBER    2012                                                             OCTOBER    2012 DAVID HALE GLOBAL ECONOMICS STILL MUDDLING THROUGH:  WILL INNOVATIVE MONETARY POLICY REVIVE THE GLOBAL ECONOMY?KEY  CONCLUSIONS TABLE  OF  CONTENTS• The   US,   European,   and   Japanese   central   banks   have   all   Key  Conclusions  ...............................................................................................  1 ini�ated  new   unconven�onal   monetary   easing  ac�ons   in   the  face  of  deteriora�ng  economic  condi�ons G-­‐3  central  banks  unleash  new  unconventional  measures  .......................  2• Although   US   job   growth   has   been   anemic,   the   housing   Weak  economic  data  prompts  Bernanke’s  actions  ........................................  2 sector   is  seeing  accelera�ng  growth   and   consumer   confi-­‐ dence  is  increasing Fiscal  cliff  brinksmanship  set  to  increase  after  elections  .............................  3• If   the   elec�on   produces   an   outcome   that   causes   both   The  Federal  Reserve  embarks  upon  open-­‐ended  quantitative  easing  ......  4 policy  gridlock  and  the  US  to   fall  off  the  fiscal   cliff,  income   taxes   could   increase   significantly   and   a   value-­‐added   tax   Is  CEO  confidence  a  precursor  to  disappointing  profit  growth?  .................  5 may  become  a  necessity Will  Rajoy’s  intransigence  undo  Draghi’s  efforts?  ........................................  5• Spanish   PM  Mariano  Rajoy   is  trying  to   hold   off  on   apply-­‐ ing  for   a   formal   rescue   program   un�l   he   receives   assur-­‐ Other  peripheral  countries  still  face  a  daunting  road  to  growth  .................  7 ances   that   further   substan�al   austerity   demands   are   off   the  table Will  Hollande  address  France’s  own  competitiveness  crisis?  ......................  7• Eurozone   GDP   will  contract  this  year,  but  easing  of  auster-­‐ Eurozone  growth  should  turn  positive  in  2013  .............................................  8 ity   in   the   periphery   next   year   should   lead   to   posi�ve   growth  in  the  euro  area  in  2013 Will  austerity  be  deferred  in  the  UK?  ...............................................................  8• The   Japanese   economy   may   actually  shrink   in   the   third   Why  the  Japanese  economy  could  contract  in  the  third  quarter  ...............  8 quarter  due  to  weak  auto  sales  and  exports Will  Chinese  leaders  hit  their  7.5%  growth  target  for  2012?  .......................  9• China  is  set   to   experience  a  U-­‐shaped  recovery  in  the  year   ahead   instead   of  the  V-­‐shaped   recovery  that   occurred   in   Advanced  Asia  is  lagging  behind  emerging  Asias  growth  .........................  10 2008-­‐09• While   the   advanced   economies   in   East   Asia   con�nue   to   Indian  reforms  could  propel  future  growth  if  fully  implemented  .............  11 grow   slowly,   developing  East   Asian   economies   are  seeing   stronger  growth Australian  growth  outlook  remains  near  trend  rates  .................................  11• Recently   announced   Indian   reforms   will   increase   future   Is  the  Canadian  housing  market  starting  to  deflate?  ..................................  12 growth  rates  if  they  are  not  diluted  over  �me Brazil’s  economy  is  rebounding  ....................................................................  12• The   Australian   dollar   has   become   a   safe-­‐haven   asset   in   the  eyes  of  central  banks  around  the  world Strike  resolutions  could  set  a  dangerous  precedent  for  South  Africa  ......  13• Brazilian  economic  growth  is  accelera�ng,  but  the  finance   Developing  countries  continue  to  diversify  reserves  with  gold    ................  13 ministry  is   having   to   ac�vely  protect   the  recent   compe�-­‐ �veness  gains  it  has  achieved BBC  Interview:    US  elec�on  -­‐  Economy  focus  of  TV  debate  ..............  14• If   the   pla�num   price   con�nues   to   decline   and   miners’   About  David  Hale  Global  Economics  ............................................................  14 wages  increase  at  double-­‐digit   rates,  South  African   mines   may    b  e      f  orced    t  o    s  hut      d  own                                                                                                                                                                                                                                                                                                                                                                                        DAVID  HALE    GLOBAL  ECONOMICS 1                                                                                                          
    • MONTHLY    REPORT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    OCTOBER    2012 G-­‐3  CENTRAL  BANKS  UNLEASH  NEW           The   good  news  has  come   from   the   housing  sector.  Exis�ng  home   sales  rose   7.8%  during  August  a�er   a  2.3%  gain  in  July.  The  confi-­‐ UNCONVENTIONAL  MEASURES dence   index   of   the   Na�onal   Associa�on   of   Homebuilders   rose   The  dominant   factor  driving  financial   markets  during  recent  weeks   three   points   to   40   in   September,   the  highest   reading  since   June   has  been   monetary  policy.   The  Federal   Reserve   and   the  Bank   of   2006.  Housing  starts   rose   2.3%  in  August  to  750,000   and  are  now   29.1%  above  their   level  one  year   ago.  The  Case-­‐Shiller  Twenty-­‐City   Japan   have   announced  plans  to   expand  their   balance  sheets.  The   Home  Price  Index  rose  1.2%  during   July  and  is  now  1.2%  above  its   European   Central   Bank  has   indicated   that   it   will  support   the  bond   level   one   year   ago.  Fannie   Mae   conducts  a   survey   of   consumer   markets   of   troubled   debtor   countries   if   they   seek  formal   rescue   programs  from  the  European  Financial  Stability  Facility  or  European   a�tudes   towards   the   housing   market.   In   August   35%   of   the   re-­‐ Stability  Mechanism.  The  promise   of   further   monetary  accommo-­‐ spondents  expected  house  prices  to   increase  while  11%  expected   a   decline.  One   year   ago  20%  expected   a  price   increase   while   27%   da�on   from   major   central   banks   has   boosted  equity  markets   and   expected  a  decline.  As  a  result  of  the  recent  up�ck  in  home  prices,   the   gold   price.   There   is  no   guarantee  that   these   monetary  policy   the  Federal   Reserve  now  es�mates  that  the  value  of  the  countrys   changes  will   directly  bolster   economic   growth,  but   investors   have   learnt   from   past   experience   that   they  can   influence   market   psy-­‐ residen�al   housing   stock   has  increased   by  $700   billion   since   last   chology  in   a  posi�ve   direc�on.  The   Fed  chairman  himself   has  said   December.   The   housing   sector   made   no   contribu�on   to   growth   during   the   first  two   years   of   the  economic   recovery.  It   began  to   that   rising  equity  prices  are  one  of  the   variables  through   which   a   revive   one   year   ago   and   should   contribute   0.2-­‐0.3%   to   output   quan�ta�ve  easing  program  can  bolster  the  economy. growth   this  year.  The  upturn  occurring  in  house  prices  should   also   bolster   household   confidence   and   consumer   spending.   As   the   WEAK  ECONOMIC  DATA  PROMPTS         economy   lost   2.3   million   construc�on   jobs   during  the   downturn,   the   recovery  in   homebuilding   has  the   poten�al   to   create   several   BERNANKE’S  ACTIONS hundred   thousand   jobs   during   the   next   two   years   as   well.   The   housing   recovery   has   so   far   produced   only   59,000   construc�on   The  Federal  Reserve  decided  to   pursue   another  round  of   quan�ta-­‐ jobs   in   the   official   figures,  but   the  Bureau   of   Labor   Sta�s�cs  has   �ve  easing  because  much  of  the  economic  data  released  during  the   past   month   has  been   disappoin�ng.  The  economy  produced   only   just  produced  a  comprehensive   revision  of   the  na�ons  labor  data   which   suggests   that   the   economy  might   have   produced   an   addi-­‐ 96,000  jobs   in   August.  Industrial   produc�on  fell   1.2%.   Core  retail   �onal  85,000  construc�on  jobs.   sales   (those  excluding  gasoline,   autos,  and   building  materials)  fell   0.1%.  There  has  been   a  clear  loss  of  momentum  in  the  manufactur-­‐ Rela�onship  Between  Building  Permits  and  Future   ing  sector  and  the  August  level  of  produc�on  was  slightly  below  the   Construc�on  Employment:  1982-­‐2012 first  quarter   average.  The  rise  in  gasoline  prices   since  June  has   also   once  again  squeezed  consumer  spending.   US  Manufacturing  Produc�on  Growth  Rate:  2002-­‐2012 *  Lines  represent  a  4-­‐quarter  moving  average Source(s):  Bureau  of  Labor  Sta�s�cs,  Census  Bureau There  has   recently  been  a  break  in   oil   prices   which   should  lower   Source:  Board  of  Governors  of  the  Federal  Reserve  System the  CPI  during  the  next  two  quarters  and  help  to  boost  consumer   spending.  2                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        DAVID  HALE    GLOBAL  ECONOMICS
    • MONTHLY    REPORT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    OCTOBER    2012The  CPI  may  increase  at   only   a  2.0%   annual   rate  during  the  fourth   overseas  auto   shipments  (-­‐4.9%).  Sales  to   Europe   and  Canada  were  quarter  and  at  less  than  a  1.0%  annual  rate  during  the  first  quarter   down   11.9%  while   sales   to  Japan   fell   6.4%.  The  ISM  export   index  of  2013.   has  fallen  to  48.5  in  September  from  53.5  in   May.  The  weakness  of   exports   is   one   of   the  reasons   manufacturing   output   has   stalled.  As  the  growth  rate  of  wage  and  salary  income  has  been  restrained   Exports  account   for   one-­‐third   of  US  manufacturing   shipments.  The  by  high  unemployment,  the  household  sector  needs  lower  infla�on   export   sector  is  likely   to   have  li�le  effect   on  real  GDP   growth  dur-­‐to  bolster   its  spending.  It  could  not   increase  discre�onary  spending   ing  the  third  quarter  a�er  contribu�ng  nearly  half   of  output  growth  during   August   when   the   CPI  rose  by  0.6%.  Real   PCE   ex-­‐food   and   during  the  second  quarter.energy  rose  by  only  0.1%  as  the  savings  rate  fell  to  3.7%  from  4.1%.Despite  the  recent  upsurge  of  gasoline   prices,  there  has  been  sur-­‐prising  resilience   in  surveys  of  consumer   confidence   during  recent   FISCAL  CLIFF  BRINKSMANSHIP  SET  TO      weeks.  The  University  of  Michigan  survey  of   consumer   confidence   INCREASE  AFTER  THE  ELECTIONSrallied   4.9   points   to   79.2   during  early  September.   The   up�ck  re-­‐flected   greater   op�mism   about   the   job   market.  The   Conference   There  con�nues   to   be  li�le  visibility  as   to   how   Congress  and   the  Board  confidence  survey  also  rose    nine  points  to  70.3  during  Sep-­‐ White   House   will   resolve   the   threat   of   large   tax   increases   and  tember   because   of   greater   op�mism  about   the   labor   market.  The   spending  cuts  during  the  first  quarter  of  2013.  There  appears  to  be  "jobs   hard   to  get   index"  slipped   to   39.9%  from  40.6%  the   month   li�le  support   in  either  party  for   extending  the  payroll   tax   cuts   an-­‐before  while   the  "jobs  plen�ful  index"  rose  to  8.3%  from  7.2%.  It   is   other   year.   If  they  expire,  there  will   be  an  $85   billion  tax  increase  remarkable  that   the   household   sector   is   repor�ng  a   be�er   envi-­‐ equal   to   about   0.6%   of   GDP.  The  great   disagreement   centers  on  ronment  for   job   crea�on   when  the  government   is  repor�ng  weak   the   Bush  tax  cuts.  The  Republicans  want  to  extend  them  for  every-­‐employment   gains.   The   Na�onal   Federa�on   of   Independent   one.  The  president  wants  to  increase  top  marginal  income   tax   rates  Business  reports  that  small   firms  have  begun   to   increase  their   hir-­‐ back  to  40%   for   those  earning   over   $250,000  per  annum.  Both   the  ing,  but  the  gains  have  so  far  been  quite  modest.  The  improvement   White  House  and  congressional  leaders   say  they  want  to   avoid   the  in   consumer   confidence  is  a  clear  posi�ve   for   the  presidents   ree-­‐ risk  of   a   so-­‐called  "fiscal   cliff"  in   January,  but   they   have   not   indi-­‐lec�on   campaign.  It   suggests   that   the   household   sector   does  not   cated  how  they  will  compromise  on  this   issue.  If   they  cannot  reach  perceive  as  much  weakness  in   the  labor   market  as  recent   govern-­‐ a   compromise,   they   could   simply   vote   to   extend   the   tax   cuts  ment  data  or  the  Republicans  allege  to  exist.   through   March   and   promise   to   con�nue  nego�a�ng   through   the   first  quarter. University  of  Michigan  Consumer  Sen�ment  Index:  1990-­‐2012 The  November   elec�on   could   influence  how  the  nego�a�ons  pro-­‐ ceed.  If   the   president  is  reelected,  he  will  feel   that   he   has  a  man-­‐ date   to  increase  taxes.   If,  by   contrast,  the  Republicans   retain  con-­‐ trol  of  the  house   or   gain   control  of   the   Senate,  they  will  perceive   they  have  a  mandate  to   restrain  taxes.  In  such  a  scenario,  it   will  be   difficult  to  avoid  gridlock  in  the  short  term. The  stakes   with   this   issue   are   high.  The  CBO   is   projec�ng   that   if   Congress   does   not   intervene,  the   tax   share   of   GDP  will   rise   from   15.7%  of  GDP  in  2012  to  18.4%  in  2013,  19.6%  in  2014,  and  20.3%   in   2015.  If  the  tax  increases   are  repealed,  by  contrast,  the  tax  share   of   GDP   would   increase  to   just   16.3%  next   year.  The  CBO  projects   that  if  all  the  tax   increases  and  spending  cuts   occur,  real  GDP  could   decline  by  1.5%   during  the   first   half   of   next   year   and  push  unem-­‐ ployment   back   over   9.0%.  The   sheer   uncertainty  about   tax   policy  Source:  Thomson  Reuters/University  of  Michigan appears  to  already  be  having  a  nega�ve  impact   on   business  confi-­‐ dence,   employment,  and   investment.   The   CEO   economic   outlook  The   US  trade   deficit   widened  marginally   to  $42   billion   during   July   index  plunged  23  points  during  September  to   its  lowest  level  since  as  exports  fell   for   the  first  �me  in  three  months.  The   level   of   real   the   economy  emerged  from  recession.  This   pessimism  may  help  to  goods  exports  sagged  2.2%  a�er  a  gain  of   2.0%  during  the   second   explain   the   recent   weakness   of   orders   for   non-­‐defense   capital  quarter.  The   weakest   sectors  were   industrial   supplies  (-­‐5.6%)   and   goods  excluding  aircra�.3                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        DAVID  HALE    GLOBAL  ECONOMICS
    • MONTHLY    REPORT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    OCTOBER    2012The  Republicans  and  Democrats   have  strikingly  different  pla�orms   �onal   income  accruing  to   the   top  1%  of  taxpayers   has  risen   from  for   economic  policy.  The  Republicans   want  to   reduce  marginal  in-­‐ 7.7%  to  17.4%  in  2010.  This  is  the   highest  ra�o  since  the  1936,  and  come  tax  rates  by  20%  and  pay  for  the  revenue  losses  by  curtailing   suggests  that  there  has  been  a  massive   increase  in  income   inequal-­‐unspecified  tax  allowances.  They  also  propose  to  cap  the  growth  of   ity  during  the  past   four   decades.  The   Democrats  want   to   reverse  health   care   spending   by   turning   Medicaid   into   block   grants   for   some   of   this  inequality  by  hiking  marginal   income   tax   rates.  The  state  governments  and  priva�zing  Medicare  for  those  re�ring  a�er   Republicans  counter   that  higher   marginal  income  tax  rates  will   fall  2022.   The  president   does   not   have   a   comprehensive  plan   for   re-­‐ heavily  on  the  small  business  sector  and  thus  retard  job  crea�on.  forming  personal   taxa�on.  He  simply   wants  to   hike   the  top   mar-­‐ginal   income   tax   rate   of   those   earning   over  $250,000   per   annum.   Share  of  Income  Accruing  to  the  Top  1%  of  Earners                              He  also   has  failed   to  propose   any   major   reforms  of  Medicare.  His   in  the  US  and  France:  1915-­‐2006current  plan  is  to   appoint  a  special  commi�ee  with  the  authority  to  search  for  ways  of  economizing  health  care  spending.  There  can  be  li�le   doubt   that   Medicare   is   the   major   long-­‐term   challenge  con-­‐fron�ng   federal   fiscal   policy.   If   there   are   no   major   reforms,  the  Medicare   share   of   GDP   could   increase   by   ten   percentage   points  during   the   next   thirty  to   forty   years.   In   such   a   scenario,   the   US  would  probably  have  no  alterna�ve  but  to   introduce  a  value-­‐added  tax  in  order   to   pay  for   such   a  large  increase  in   health  care  spend-­‐ing.  There  has   been   no   serious   discussion  about  crea�ng   a  value-­‐added  tax  since  1978,  but  the  US  is  now  the  only  industrial  country  not  to  have  one.  It   will   therefore  loom   as   an  obvious  policy  choice  if  the  government  cannot  restrain  the  growth  of  health  care  spend-­‐ing.Representa�ve  Paul   Ryan   (R-­‐WI)   has   proposed   a   bold   plan   to  re-­‐ Source:  The  World  Top  Incomes  Databaseplace  Medicare  with  a  private  insurance  scheme  which  would   have  more  incen�ves  to  control  spending.  The   risk  for  the  Republicans  is  that   the  Democrats  will   use   this  proposal  to  frighten  elderly  voters   THE  FEDERAL  RESERVE  EMBARKS  UPON  into   thinking  they  could  lose  Medicare  benefits  in  the  near   future.  If  this  strategy  works,  the  president  could  win  reelec�on  by  a  land-­‐ OPEN-­‐ENDED  QUANTITATIVE  EASINGslide   and   possibly  gain   several   house   seats.   The   Republican   land-­‐ The  Federal  Reserve  has  made  a  commitment  to   purchase  $40  bil-­‐slide  in  2010  reflected   the  fact   that   they  received  over   60%  of  the   lion  of   mortgage-­‐backed  securi�es  each  month  un�l  there  is  a  ma-­‐vote  among  Americans  over  the  age  of  sixty.  If  they  lose  the  vote  of   jor  decline  in  the  unemployment  rate.  Fed  Chairman  Ben  Bernanke  the  elderly,  they  have  no   hope   and  some  district  presidents  take   very  seriously  the  Feds  mandate  of   winning  the  presidency  and   to   pursue  full  employment.  They  also  do  not  perceive  major   infla-­‐could   lose   seats   in   the   con-­‐ �on  risks  when  the  economy  has  a  large   output  gap.  The  dissidents  gressional   races.   Recent   poll-­‐ do  not   believe  that  large-­‐scale  asset   purchases  will  be   effec�ve  in  ing   from   Reuters/Ipsos   has   s�mula�ng  employment,  and  they   are   also   concerned   about   how  indicated   that   Mr.   Romney’s   the   Fed   will  exit   from   such   a   policy.   There   have  been   as  many  as  support   among   seniors   has   five   dissen�ng   members   among   the   twelve   district   presidents.  declined   from  a  twenty  point   There  was  some   poli�cal   risk  in  embarking  upon   a  new  QE   policy   Paul Ryan, US Congressmanlead   over   Mr.   Obama   to   just   Source: foxinsider.com only  two  months  before  a  presiden�al  elec�on.  The  Fed  could   have  four   percentage   points   as   of   waited   to   see   how   the   risk   of   a   fiscal   cliff   plays   out   during   the  late  September.  Other   polling  firms  have  been   witnessing  a  similar   fourth   quarter,   but   Fed   Chairman   Bernanke   felt   that   recent   eco-­‐trend.   nomic  data  jus�fied  a  more  immediate  move.  If  the  fiscal  cliff  actu-­‐ ally  occurs,   the   Fed   might   even   expand   its   volume   of   asset   pur-­‐The  Republicans  want  to  make   the  central   issue  in  the  elec�on  the   chases   next   year.   The   Federal   Reserve   has   made   it   clear   that   its  fact  that  the  economy  lost  8.8  million  jobs  during  the  recession   and   overwhelming  priority   is  promo�ng  economic   recovery  and  lower-­‐has  so  far   regained   only  4.4  million.  The   Democrats  want  to  make   ing   unemployment.   It   appears   prepared   to   live   with   modestly  the   central   issue  income   distribu�on.  Since   1973  the  share   of   na-­‐ higher  infla�on  in  order  to  achieve  its  goal.  4                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        DAVID  HALE    GLOBAL  ECONOMICS
    • MONTHLY    REPORT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    OCTOBER    2012The  Feds   policy  of  de  facto  financial   repression  is  also   good  news   ing  since  the   third  quarter  of  2009.  Corporate  execu�ves   are  con-­‐for  the  Treasury.   It  will  help  to  hold  the  governments  debt  servic-­‐ cerned   about   both   the   situa�on   in   Europe  and   unresolved   fiscal  ing  costs  close  to   1.5%  of  GDP  despite  the  steady  growth  of   the   issues   in   the   US.  The   pessimism   in   the   corporate  sector   explains  na�onal   debt.   In  1991  the  governments   debt   servicing  costs   were   why   non-­‐defense   capital   goods  orders   have   been   so   weak  during  3.3%   of   GDP   despite   a   much   smaller   na�onal   debt.  If   the  Fed   al-­‐ recent  months.  Only  30%  of  the   execu�ves  in  the  CEO  survey  plan  lowed   short-­‐term   interest   rates  to   once   again   track  nominal   GDP   to  boost  capital   spending  during  the  next  six   months  compared  to  growth,   the   governments   debt   servicing   costs   could   triple   and   43%   during   the   second  quarter.  Nineteen   percent   also  plan  to  re-­‐make   it  impossible  to  hold  federal  spending  at  its  fi�y-­‐year  average   duce  capital  spending,  up  from  12%  during  the  second  quarter.  The  of  20.6%  of  GDP.   cau�on  in  the  corporate  sector  will  con�nue  to  restrain   hiring   and   make   it   difficult  to  achieve  a  growth  rate  higher   than   1.5%  during   US  Government  Net  Interest  Payments  as  a  Share  of  GDP:  1962-­‐2011 the  second  half  of  2012.   Real S&P 500 Operating Earnings Per Share: 1988-2013Source:  Office  of  Management  and  Budget Source:  Standard  and  PoorsIS  CEO  CONFIDENCE  A  PRECURSOR  TO  DISAPPOINTING  PROFIT  GROWTH? WILL  RAJOY’S  INTRANSIGENCE  UNDO  There   is   increasing   concern   that   the   slowdown   apparent   in   the   DRAGHI’S  EFFORTS?economy   could   depress   corporate   profits.   More   firms   are   now  guiding  analyst   forecasts  down  rather  than   up.  The  growth   rate  of   The   eurozone  remains   in   recession.  The  eurozone   PMI  dipped  0.2  non-­‐farm  business   produc�vity  perked   up   to  2.2%  during  the  sec-­‐ points   to   46.1   during  September,   and   the   quarterly  average  was  ond  quarter,  but  the  year-­‐on-­‐year  gain  was  only  1.2%.  As  wages  are   the   lowest   since   the   second   quarter   of   2009.  The   service   sector  growing  at   a  3.7%  annual   rate,  unit  labor  costs  have  increased  by   performed  worse   than  manufacturing  with  services  output  declin-­‐0.9%  during   the   past   year.  Pre-­‐tax   profits  have   increased  by  6.7%   ing   1.1   points   and   new   business   contrac�ng   at   the   fastest   rate  during   the   past   year.  The  profits   of   domes�c   industries   rose  27%   since   June   2009.   Manufacturing   output   rose   1.0   points,  but   new  while  interna�onal  profits  contracted  by  2.6%.  Analysts  are  project-­‐ orders   and   employment   were   s�ll   contrac�ng.   Germany  outper-­‐ing   that   profits   in   the   third   quarter   will   dip   to   $25.00   per   share   formed  other  countries  during  September.  Its   PMI  rose  2.2  points  from   $25.43   during   the   second   quarter.   They   then   expect   a   re-­‐ to   49.2,  the  first   gain   in   seven   months.  The  French   PMI,   by  con-­‐bound  to  $26.94  during  the  fourth  quarter  of   2012  and  $30.51  dur-­‐ trast,  fell   sharply.  The  composite  index   fell   4.8   points  to   43.2.  The  ing  the  fourth  quarter   of   2013.  The  large  gains  projected  for   2013   new  orders   index   fell   to   a   forty-­‐one   month   low  and   the   employ-­‐are  likely  to  occur   only  if  the  economys  growth  rate  can  accelerate   ment  index  fell  to  a  rate  of  contrac�on  last   seen  in  December  2009.  to  3.0%  or  more. The  composite   PMI  in  the   peripheral   countries  dropped  1.5  points   to   42.5  in  the   flash  es�mates.  The  PMI  data  suggests  that  output  in  The  new  mood   of  pessimism  is  apparent   in   the   Business  Roundta-­‐ the  eurozone  could  have  contracted  by  1.0%  during  the  third  quar-­‐ble  survey  of  confidence  among  CEOs.  It  plunged  to  66.0  during  the   ter.third  quarter  from  89.1  during  the  second   quarter,  the  worst  show-­‐5                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        DAVID  HALE    GLOBAL  ECONOMICS
    • MONTHLY    REPORT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    OCTOBER    2012European   Central   Bank   President   Mario   Draghi   has   provided   fur-­‐ electoral  setback  if  it   has  to  seek  a  formal  aid  program  which   im-­‐ther  details  about   his  plans  to  help   troubled  debtor   countries  such   poses  yet  more  fiscal  austerity.as  Italy  and   Spain  with   the  Outright   Monetary   Transac�ons  (OMT)  program.   He   wants  them  to   apply   for   a  formal   aid   program  with   Spanish  and  German  Euro  Era  Cumulative  Current  Account   Surplus/Deficit  as  Share  of  GDP:  1999-­‐2011the   European   Financial   Stability  Facility   or   the  European   Stability  Mechanism  once  it  is  ac�ve  which   will  then  set  condi�ons  for  assis-­‐tance.  Once  a  program  has   been  established,  the  ECB  will   be  pre-­‐pared   to   purchase   on   the   secondary   market   the   countrys   debt  with   a  maturity  of  up  to  three  years.  There   was   strong  opposi�on  to  this   proposal  from  the  Bundesbank,  but   Mr.  Draghi  had  support  from  all  other  countries  as  well  as  German  Chancellor  Angela  Mer-­‐kel.  There   was  a  rally  in   European  debt   and   equity  markets  in  re-­‐sponse   to   Mr.   Draghis   pro-­‐posals   because   investors   per-­‐ceived   it   greatly   lessened   the  risk   of   a   funding   crisis   which  might   compel   countries   to  leave  the  monetary  union.  The   markets   are   now   wai�ng   Source:  Interna�onal  Monetary  Fundfor   Spain   to   become   the   first   Mario Draghicountry   to   seek   a   formal   aid   European Central Bank President Source: wupr.org The  IMF  director,  Chris�ne  Lagarde,  has  said  that   the  current   eco-­‐program   since   the   OMT   an-­‐ nomic   program  is   so   restric�ve   that   it   might   not   be   necessary  to  nouncement.   Spain   is  suffering  from   a   severe   recession   which   is   pursue   any   further   austerity.  The   government   announced   a   new  making  it  difficult  to  achieve  the  countrys  targets  for   deficit  reduc-­‐ fiscal   program   in   late  �on.  Spain  has  also  experienced  massive  capital  flight  during  recent   September   which   pro-­‐months.  In  the  first  half  of  this  year,  there  was  a  net  capital  ou�low   poses   expenditure   cuts  of  €220  billion.  There  were  three  main   channels  for   these  ou�lows.   equal  to   1.12%   of  GDP  in  Foreign   investors   sold   €84   billion   of   Spanish   securi�es,  including   2012   and   0.77%   of   GDP  €32   billion   of   bank   debt   and   €36   billion   of   government   bonds.   next   year.   It   also   pro-­‐Foreign   banks   withdrew  €91   billion   of   loans  and  deposits.  Banks   poses   revenue   increases  located  in  Spain   shi�ed  €61  billion  of  deposits  abroad.  The  Spanish   equal  to   1.43%   of  GDP  in  central  bank   financed  these  ou�lows  and  the   countrys  €17  billion   2012   and   0.56%   next   Christine Lagardecurrent   account  deficit  by  borrowing  €237  billion  from  companion   year.   Director of the International Monetary Fundcentral  banks  in  the  eurosystem  such  as  the  Bundesbank.   Source: gillesjohnson.com Spanish   Prime   Minister  This   borrowing  has   changed   the   composi�on   of   Spains   external   Mariano  Rajoy  would  like  further  clarifica�on  of  what  the  eurozone  liabili�es.   In  June   2011   Spain   had   net   external   liabili�es   of   €990   will   demand   before  he  seeks   a  new  aid  program.  Mr.  Rajoy   must  billion,  or  93%  of  GDP.  Much   of  this  external  debt  reflected  the  fact   now   also   contend   with   Catalo-­‐that   Spain   had   engaged   in   €555   billion   of   net   borrowing   from   nias  request  for   €5  billion  of  aid  foreign  sources   between  1999  and   2011.  During  the  past   year,  the   because  it  can   no  longer   borrow  share   of   Spanish   external   liabili�es   belonging   to   foreign   official   in  the  debt  markets.ins�tu�ons   has  increased   to   nearly  40%.  Bank  of  Spain  borrowing  from  the  eurosystem  now  accounts  for  about   25%   of   Spains   €1.7   Catalonias   president,  Mr.   Artur  trillion  of  external  debt.   Mas,   is  also   talking   about   hold-­‐ Mariano Rajoy ing   an   elec�on   to   support   de-­‐ Prime Minister of SpainThe   Spanish   government   has   been   moving   cau�ously   in   seeking   Source: guardian.co.uk mands   for   greater   Catalan  new  aid   from  the  eurozone   because   regional  elec�ons  are  sched-­‐ autonomy   and   control   over   the  uled   for   late  October.  The  government   fears  that  it  could   suffer   an   province’s  tax   resources.  The   government   in   Madrid   has  rejected   these  demands  because  they  could  cost  it  €16  billion  of  revenue.  6                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        DAVID  HALE    GLOBAL  ECONOMICS
    • MONTHLY    REPORT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    OCTOBER    2012Current   opinion  polls   suggest   that   voters  in  Catalonia  will  support   court   also   ruled   in  favor   of  the  new   fiscal  compact   allowing  some  demands  for  greater  fiscal  autonomy,  if  not  outright   independence.   transfer   of   sovereignty  to  Brussels.   The  only  restric�ve   measure  in  The  province  accounts  for  over  19%  of  Spains  GDP  and  almost  one-­‐ the   ruling   was  a  ban   on   the  ECB  financing   the  ESM  via  debt   issu-­‐sixth   of   the   popula�on,  so   any   a�empt   at   seeking  independence   ance   or   repo   opera�ons.   This   ruling   is   less   important   than   it  would  pose  a  major  challenge  for   Madrid.  Spain  will  probably  pur-­‐ seemed  previously  because  the  ECB   has  now  promised   to  intervene  sue  a   formal   aid   program  in   late  October   or   November   a�er   the   in   European   debt   markets   through   "Outright   Monetary   Transac-­‐regional   elec�ons   are  out   of   the  way.   There  has  recently  been   an   �ons".  If  the   ECB  plays  a  direct  role  in   the  debt  markets,  there  will  up�ck  in   Spanish   bond   yields  because  of  the   markets  impa�ence   be  less  need  to  rely  on  the  ESM  for  interven�on.with   Mr.   Rajoy.   If   yields   con�nue   to   rise,   they   will   increase   the  pressure  on  him  to  seek  an  aid  program.   Greece  is  s�ll   locked   in   nego�a�ons   with   the  Troika   on   its  deficit   reduc�on   plans.   Greece   reduced   its   deficit   by  €5.3   billion   during   the   first  eight  months  of  the  current  fiscal   year,  but  as  the  govern-­‐ ment  is  out  of  cash  it  has  been   accruing  new  liabili�es  from  unpaid  OTHER  PERIPHERAL  COUNTRIES  STILL   bills.   Greece   has   asked   the   Troika   to   give   it   two   more   years   to  FACE  A  DAUNTING  ROAD  TO  GROWTH achieve  its   deficit   reduc�on   targets   because   of   the  severity  of  its   recession.  It   needs   to  do  a  deal   with  the   Troika   in  order  to   obtain  Italy  has  raised   its   deficit   targets   for   2012  and   2013   to   2.6%   and   the   financial   assistance   which   was   promised   several   months   ago  1.6%  of  GDP  respec�vely.  It   had   previously  hoped  to   meet  deficit   when  it   signed  a  new  EU/IMF   austerity  program.  The  Germans  are  targets   of  1.7%  and  0.5%  of   GDP.  Italy  has  fallen  behind  because  of   reluctant   to   make   new   concessions  which   would   require   further  a   recession   which   is   crippling   the   growth   of   tax   receipts.   Prime   financial   assistance,   but   President   Hollande   of   France   has   been  Minister   Mario  Mon�  has  not  yet   shown  any  interest  in  pursuing  an   suppor�ng  the  Greek  request  for  more  �me.  As  a  result   of  the  se-­‐aid  program  with  the   EFSF  in   order   to   qualify   for   ECB   interven�on   verity  of   the  Greek  downturn,  the  odds  are  high  that  the  Troika  will  in   the  Italian  bond  market.  It  is  difficult  for  him  to   seek  a  mul�-­‐year   give  Greece  addi�onal  �me  to  carry  out  its  program.aid  program  because   Italy  must   hold  an  elec�on  by  next   April.  At  the  present  �me,  it   is  far  from  clear  who   will  win.  It  is  possible  that   Greek  Real  GDP:  1999-­‐2012a  fragmented  parliament  could  emerge  which  would   ask  Mr.  Mon�  to  serve  another   year  as  prime   minister.  As  the  poli�cal  outlook  is  so  cloudy,  Mr.  Mon�  is  reluctant  to  announce  a  new  EU-­‐sponsored  austerity  program.   Italian  Budget  Deficit  as  a  Share  of  GDP:  1999-­‐2013 Source:  Interna�onal  Monetary  Fund WILL  HOLLANDE  ADDRESS  FRANCE’S  OWN   COMPETITIVENESS  CRISIS?Source:  Interna�onal  Monetary  Fund French   President  Francois  Hollande   appears  to   have  developed   an   effec�ve   working  rela�onship   with   Angela  Merkel   a�er   she   boy-­‐The   German   cons�tu�onal   court   has   ruled   in   favor   of   the   new   co�ed   him   during  the   elec�on   campaign   and   supported   his   rival,  European  Stability  Mechanism,  but   it   limits  Germanys  exposure  to   Nicolas   Sarkozy.  Mr.   Hollande   has  tried  to   reach   out   to   Italy   and  €190   billion   unless   the   Bundestag  approves   a   larger   number.  The   Spain  to  play  a  more  ac�ve  role  in  euro  decision  making.  7                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        DAVID  HALE    GLOBAL  ECONOMICS
    • MONTHLY    REPORT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    OCTOBER    2012The  Germans  ini�ally  resisted  such  ac�ons,  but  now  regard  a  more   year.  The  deficit   is  likely  to  be  £129   billion  this  year  compared  to   a  inclusive  system  of   decision   making   as   posi�ve.   Mr.  Sarkozy   had   target   of  £120  billion.  This  overshoot  will  pose  a  difficult   challenge  avoided  the  Southern   European   countries   for   fear   that  an  alliance   for  the  Chancellor  when  he  has  to  issue  a  new  report   on  fiscal  pol-­‐with  them  might  damage  Frances  own  credit  ra�ng.  Mr.   Hollande   icy  in  early  December.  He  will  have  to  choose  between  introducing  is  also  trying  to   impress  the  Germans  by  s�cking  to  his   promise  to   new  fiscal   austerity   equal   to   1.0%   of   GDP  or   change  the   rules  to  reduce  the  French  fiscal  deficit   to  3%  of  GDP.  Mr.  Hollande  has  yet   avoid  a  further  squeeze  on  the  economy.  As  the  economy  is  weak,  to  announce   any  policies  to  improve  Frances  compe��ve   posi�on,   he  is   likely  to   change   the  rules  and   delay  the  governments  deficit  but   they  will  be   essen�al   to  enhance  his  credibility  as   a  European   target  one  year  to  2016-­‐17.   leader.   Officials   in   the   new   French   government   promise   that   they   will   UK  Public  Sector  Net  Borrowing  as  a  Share  of  GDP:  1955-­‐2012 pursue   policies   to   bolster   Frances   compe��ve   posi�on,   but   there   could   easily   be   tensions   with   the   trade   un-­‐ ions   on   such   reforms.  The   ques�on   is   whether   a   Socialist   president   can   be   more  effec�ve   at  liberalizing   the  econ-­‐ omy  than   a   conserva�ve   such   as   Mr.   Sarkozy.   Frances   weak   compe��ve   posi�on   is  eroding  the  country’s  power   within   the   European   Union,   so   it   is   François Hollande essen�al   that   it   pursues   reforms   in   President of France order  to  revitalize  the  industrial  sector. Source: wikipedia.orgEUROZONE  GROWTH  SHOULD  TURN   Source:  UK  Office  for  Na�onal  Sta�s�csPOSITIVE  IN  2013The  real   GDP  of  the  eurozone  is  likely  to   contract   0.5%   this  year.   WHY   THE   JAPANESE   ECONOMY   COULD  There  is  both   fiscal   drag  and  high  interest   rates   in   the  peripheral  countries   depressing   growth.  The  ECB   has   the   poten�al   to   boost   CONTRACT  IN  THE  THIRD  QUARTERgrowth  by  cu�ng   its   core   lending  rate  (0.75%)  and   reducing  bond   The   Japanese  government   lowered   its  es�mate   of   second  quarter  yields   in   the   debtor   countries.   There   will   be   less   fiscal   drag   in   real   GDP   growth   to   0.7%  from   a   preliminary  es�mate   of   1.4%.  It  Southern   Europe   next   year.   In   Italy,   fiscal   �ghtening   diminishes   made   large   downward   adjustments   in   its   es�mates   of   capital  from  3.0%  of  GDP  to  1.0%  while  in  Spain   it   declines   from  3.6%  of   spending   and   government   consump�on.   It   appears  that   real   GDP  GDP  to  1.5%.  The  reduc�on   in   fiscal  drag  coupled  with  ECB   easing   could   contract   during   the   third   quarter   because   of   weaker   auto  should   be   able   to   produce   modestly  posi�ve  growth   in   the  euro-­‐ sales  a�er   the  expira�on  of  tax  incen�ves  for  fuel  efficient  vehicles  zone  during  2013. and  a  con�nued  downturn  in  exports.   METI  (the  Japanese  Ministry   of  Economy,  Trade  and   Industry)   es�mates  that   industrial  produc-­‐ �on  declined  1.3%  during  August  and  could  decline  a  further   2.9%  WILL  AUSTERITY  BE  DEFERRED  IN  THE  UK? during  September.  The  Bank  of  Japan  announced  in   late  September   that   it   would   expand   its   asset   purchase   program   to   ¥80   trillion  The  UK   economy  has  benefited   from  surprising  employment  gains   from  ¥70  trillion.  As  a  result  of  this  change,  the  asset  purchase  pro-­‐and   signs   of   a   modest   up�ck   in   retail   sales.   The   minutes   of   the   gram   will   expand   to   approximately   ¥65   trillion   at   year-­‐end   2012,  Monetary   Policy   Commi�ees   September   mee�ng   showed   a   ¥75   trillion   by  June   2013,  and   ¥80   trillion   at   year-­‐end   2013.  The  unanimous  vote  to  maintain  the  current   policy  of  asset  purchases   BOJ  move  was  prompted  by  concerns  about  weakness  in  the  econ-­‐and  to  possibly  increase  it   further  in  November.  The  government   is   omy  and  the  Federal   Reserves  decision  to  pursue  a  new   quan�ta-­‐finding  it  difficult  to  achieve  its  deficit  targets  because  of   the  weak-­‐ �ve  easing  program.  Japanese  poli�cians  have  lobbied  the  BOJ  for  ness   of  the  economy.  During  the  first  four   months  of  the  new   fiscal   more  expansionary   policies  whenever   the  Federal   Reserve   adopts  year,  borrowing  was  £10.6  billion  higher   than  during  the  last   fiscal   more  s�mula�ve  policies.8                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        DAVID  HALE    GLOBAL  ECONOMICS
    • MONTHLY    REPORT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    OCTOBER    2012The  new  leader  of  the  LDP,  Shinzo  Abe,  has  been  calling  upon  the   China  rose   74%  to   $12.6   billion   in   2011.  METI  data   indicates   that  BOJ   to   accept   an   infla�on  target   as   high  as   2-­‐3%  compared   to  its   China  accounted  for   19%  of  the  total  sales   of  Japanese   foreign  sub-­‐current  goal  of  1.0%.   sidiaries   as   of   March   2011.  The   Chinese   government   may  regard   the  upsurge  of  na�onalism  as  a  posi�ve  development  during  a  �me   Japanese  Diffusion  Indices  of  Business  Conditions:  1997-­‐2012   of  poli�cal  transi�on,  but  it  will  have  to   proceed  more  carefully  if  it   wants  to  maintain  the  close  economic  rela�onship  with  Japan. WILL  CHINESE  LEADERS  HIT  THEIR  7.5%   GROWTH  TARGET  FOR  2012? The   Chinese   economy   has   been   weaker   this   year   than   most   economists  expected  nine  months   ago.   The   downturn  has  resulted   from  weaker  exports  and  a  clampdown  on  property  lending  to  stop   real  estate  infla�on.  Chinese  leaders  say  they  have  plenty  of  policy   op�ons  available  to   achieve  their   target  of  7.5%  growth  this  year.   The  central  bank  cut  interest   rates  twice  earlier  this   year  and  could   act  again.  There  is  ample  poten�al  to  reduce  reserve   requirements   from  their   current   level   of  19.5%.  The  Na�onal  Development   and  Source:  Bank  of  Japan Reform   Commission   has   been   accelera�ng   many   infrastructure   projects  in  order  to  sustain  a  high  level  of  investment.  There   have   recently  been   an�-­‐Japanese   demonstra�ons   in   China  which   have  forced   some   Japanese  companies  to   shu�er   their  op-­‐ US-­‐China  Exchange  Rate:  2008-­‐2012era�ons.  The   two  countries  are  at   loggerheads  over  the  ownership  of   some  uninhabited   rocky  islands   which   Japan   first   took   posses-­‐sion   of   in   1895.   These  disturbances   have   the  poten�al   to  be   dis-­‐rup�ve   because   of   the   close   economic   rela�onship   between   the  two   countries.   China   is   Japans   largest   trading   partner   and   took  $162   billion   of   exports   last   year.   Japan   is   Chinas   fourth   largest  trading  partner  and  sent  $147  billion  of  exports  there  in  2011.   US  and  Chinese  Share  of  Japanese  Exports:  1979-­‐2012 Source:  Board  of  Governors  of  the  Federal  Reserve  System The   September   Markit   PMI   rose   modestly  to   47.8   from   47.6   in   August.  The  output   component   fell   to   47.0   from   48.2   in   August.   The   new   orders   index,   by   contrast,   rose   to   47.6   from   46.1.   The   stock  of   finished  goods  component  fell   to  51.1  from  54.0,  confirm-­‐ ing  that  China  is  in  the  midst  of  a  major  inventory  adjustment. China  pursued  an  aggressive  fiscal   and   monetary  s�mulus  program  Source:  Ministry  of  Finance  (Japan) during   the   2008-­‐09   global   downturn.   It   now   believes   that   this   s�mulus   was  excessive,  so  it   is  reluctant   to  pursue  highly  s�mula-­‐China  is  also  Japans  second  largest  FDI  des�na�on  a�er  the  US  and   �ve  policies  this  year.  33,000   Japanese  firms   have   opera�ons  in   China.  Japanese   FDI  in  9                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        DAVID  HALE    GLOBAL  ECONOMICS
    • MONTHLY    REPORT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    OCTOBER    2012It   has  not,  for   example,  yet   indicated  how  it  will  finance  proposed   ADVANCED  ASIA  IS  LAGGING  BEHIND  new  transporta�on   infrastructure  projects.  It   is   requiring  that  the  sponsors  of   these  projects  come   up  with   capital   equal   to   20%  of   EMERGING  ASIA’S  GROWTHthe   project.  As  local   government  revenues  from  land  sales  fell  28%   The   weighted   average   of   East   Asian   PMIs   fell   1.2   points   during  in  the  first  half  of  this  year,  the  banks  are  reluctant   to  provide  loans   August,  confirming   that   regional   output   will   remain   so�   through  for   new  projects.  The   NDRC   may  increase  its  quota  for   enterprise   the   third   quarter.   There   are   significant   divergences   in   na�onal  bonds  to   help  fill   this  gap,  but  the  size  of  this  market   is  too  small  to   growth  rates  because  of  differences  in  public  policy.  make   a   major   difference.  The   issuance   of   enterprise   bonds   may  reach  800  billion  rmb  this  year  versus  new  bank  lending  of   8.2  tril-­‐ Malaysia  appears  capable   of  a  growth   rate  exceeding  5%  this  year  lion   rmb   and   total   fixed   asset   investment   of   36   trillion   rmb.  The   because   of   government   spending   in   the   run-­‐up   to   a   pending   na-­‐cau�on   on   new   lending   suggests   that   the   China   will   have   a   U-­‐ �onal   elec�on.   Exports   have   weakened,   but   there   is   s�ll   a   large  shaped   recovery  in   the   year   ahead,   as   it   did   during   1998-­‐2001,   trade   surplus   because   of   oil   exports.   The   trade   surplus   from   oil,  rather  than  a  V-­‐shaped  recovery,  as  occurred  during  2008-­‐09. LNG,  and  crude  palm  oil   was  $17.9  billion  during  the   first  half  while   the  non-­‐energy  balance  saw  a  deficit  of  $1.3  billion.There  are  signs  that   China  is  experiencing  capital  flight   because  of  market   uncertainty  about   the   outlook  for   the  renminbi   exchange   Koreas  real  GDP   grew  by  only   1.1%  during  the  second   quarter   be-­‐rate.  China  had  a  current  account  surplus  of  $83.2  billion  during  the   cause   of   weaker   exports   and   domes�c   demand.  The   government  first   half   of   this  year   and   net   foreign   direct   investment   of   $87.5   announced   some   modest   s�mulus   measures   to   bolster   domes�c  billion,  but   the   capital   account   registered   a  deficit   of   $71.4   billion   demand   during  mid-­‐September,   but   they  come   from  the   exis�ng  during  the  second  quarter.  These   capital  ou�lows  reflect  a  market   budget,   and  thus  do  not   represent  new  spending.   The  Bank   of   Ko-­‐percep�on   that   the   government   will   not   want   to   encourage   cur-­‐ rea   surprised   the  markets  by   cu�ng  interest  rates  during  July   and  rency   apprecia�on   at   a   �me   when   export   growth   has   slowed   is  hin�ng  it   could  ease  further  because  of  a  recent  decline   in  infla-­‐sharply.   The   capital   ou�lows   will   sharply   curtail   the   growth   of   �on.   Real   GDP   is  likely  to   expand   by   2.6%   this  year   compared   to  foreign  exchange  reserves,  and   thus  reduce   a  source  of  liquidity  in   3.6%  last  year.  the  financial  system.  The  decline  in  the  growth  of  foreign  exchange  reserves  will   be   one   more   factor   encouraging  the   central   bank  to   Korean  Export  Growth  Rate:  1992-­‐2012ease  reserve  requirements.   Chinese  Current  Account  Surplus  as  a  Share  of  GDP:  1991-­‐2011 Source:  Bank  of  Korea Indonesia  appears  capable  of  a   growth   rate   higher   than  6.0%  this   year  because  of  resilient   consump�on  and  investment.  The   major  Source:  Interna�onal  Monetary  Fund weakness  is   exports.  They   subtracted   1.2%   from  first   half   growth   and   are  likely  to   remain   weak  during  the  second   half.  The   current   account   is   swinging   from   a   modest   surplus   to   a   deficit   equal   to   3.2%  of  GDP.  The  current  account  has  made  the  central  bank  more   cau�ous   and   it   is   using   macro   pruden�al   tools   to   restrain   credit   growth.10                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        DAVID  HALE    GLOBAL  ECONOMICS
    • MONTHLY    REPORT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    OCTOBER    2012The  government   of  Taiwan   has  reduced  its  es�mates  of   this  years   INDIAN  REFORMS  COULD  PROPEL  FUTURE  growth  to  1.7%  from  2.1%.  Taiwans  exports  could  decline  by  5-­‐6%  this  year  a�er   a  gain  of  4.3%  during  2011   and  26.5%   during  2010.   GROWTH  IF  FULLY  IMPLEMENTEDConsumer   spending  could   grow  by  2.5%   this   year   while   fixed   in-­‐ A�er   a   long   period   of   paralysis,   the   Indian   government   has   an-­‐vestment   could   decline   2-­‐3%   a�er   a   contrac�on   of   3.9%   during   nounced  some   radical   reforms   to   rejuvenate  the  economy.  Prime  2011.  The  government   announced  a  $333  million  support  program   Minister  Manmohan  Singh  wants  to  reduce  fuel  subsidies  by  raising  for   tradi�onal   industries  during  September   while   the   central   bank   diesel  prices  14%,  open  the  mul�-­‐brand  retail  sector  to  51%  foreign  could  reduce  its  overnight  lending  rate. ownership   and   the   avia�on   and   power   exchange   sectors   to   49%,   and  raise  $4  billion  by  dives�ng  some   public  sector  assets.  The  pol-­‐Thailand  had  a  sharp  recovery  from  last  years  floods  with  a  growth   icy  changes  followed   the  appointment   of   Palaniappan   Chidamba-­‐rate   of   10.8%   during  the   first   quarter.   Growth   remained   firm   at   ram   as  finance   minister.   The  announcement   of  the  measures  trig-­‐3.3%  during  the  second  quarter  as  domes�c  demand   compensated   gered  an   immediate  rally  in  the  stock  market  and  the  value  of   the  for   weakness   in   exports.   Consumer   spending   could   increase   by   rupee.  The   changes   produced   a   nega�ve   response  from   Mamata  6.0%  this   year  while  fixed  asset  investment  could  expand  by  13.5%.   Banerjee,   the   leader   of   the   Trinamool   Congress   of   West   Bengal.  The  government  has  bolstered  business  confidence  by  reducing  the   She   withdrew   nineteen   MPs   and   six   cabinet   ministers   from   the  corporate   tax   rate  from  30%  to   23%   and   plans  to   drop   it   to   20%   United  Progressive  Alliance.  Parliament  is  in  recess  un�l  November,  next   year.   The  government   is   boos�ng  consump�on   by  increasing   so  she  cannot  force  a  vote  of  confidence  on  these  issues.  There  are  the  minimum  wage  in   the  face  of  a   �ght   labor   market.  As   a  result   other  regional  par�es  which  Congress  can  turn  to  in  order   to  avoid  of  the  resilience  of  domes�c   spending,  the  central  bank  is  likely  to   losing  a  vote  of  confidence.  One  possibility  is   the  Samajwadi  Party,  leave  interest  rates  unchanged.   which   has  twenty-­‐two  seats   and   supports  the   ruling  coali�on  with-­‐ out   being  a  formal   member.  The   leader   has  expressed  some  con-­‐ Thailand  Private  Consump�on  Index  Growth  Rate:  2001-­‐2012 cern  about   the  proposed  reforms,  but  has  not  rejected  them   com-­‐ pletely.  The  challenge  for   Mr.  Singh   will   be   to   find  a  compromise   that  eliminates  the   risk  of  a  no   confidence   vote  that   could  force   a   general  elec�on,  which   would   be  highly  inconclusive.  The  Reserve   Bank   recently   delivered   a   25   basis  point  reduc�on   in  its  cash   reserve  ra�o  to  4.5%,  but  it  has   le�  its  repo   rate   at  8.0%.  Infla-­‐ �on  in   India  is  high  and  there  is   a   risk   that   rising   food   prices   could   push   it   higher   late   this   year   or   early   next   year.   The   Reserve  Bank  is  therefore  likely   to   remain   cau�ous   despite   the   sharp  slowing  in   Indias  growth   Manmohan SinghSource:  Bank  of  Thailand Prime Minister of India rate  to  5.5%. Source: canindia.comSingapore  is  a  country  which  has  been  directly  hit  by  the  downturn  in   global   trade.  Growth   will   probably  come  in   at   the   lower   end  of  the   governments   forecast   of   1.5-­‐2.0%.   Industrial   produc�on   fell   AUSTRALIAN  GROWTH  OUTLOOK  REMAINS  2.2%   year   on   year   in   August   because   of   weakness   in   electronics  and   transport   engineering.   Despite   the   slowdown,   infla�on   has   NEAR  TREND  RATESbeen   s�cky   because   of   rising   housing   costs   and   new   taxes   on   The  Reserve  Bank  of  Australia  has   lowered  its  official   cash  rate   150  automobiles.  The  labor   market   is  also   rela�vely  �ght.   The   Mone-­‐ basis  points  since   November  2011.  It  has  acted  in  response  to  con-­‐tary  Authority  is  cau�ous  because  of   the  higher  infla�on  rate,  but  it   cerns  about  the   global  economy,  including  the  debt  crisis  in  Europe  could  decide  to   ease  if  the  downturn  in  the   global  economy  inten-­‐ and  signs  of  slowdown  in  China.  The   economy  grew  by  0.6%  during  sifies  because  of  problems  in  Europe  or  the  fiscal  cliff  in  the  US. the   second  quarter   or   3.7%  year   on  year.  Household  consump�on,   business   investment,   and   public   spending   were   the   key   growth   drivers.  11                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        DAVID  HALE    GLOBAL  ECONOMICS
    • MONTHLY    REPORT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    OCTOBER    2012There  are  now  expecta�ons  that   the   investment   boom   in   the  re-­‐ ernment   debt   stock  is  now   foreign-­‐owned.   Foreign   central   banks  source   sector  will  slow,  but  there  is  s�ll  a  large  backlog  of  projects   probably  account  for  a  large   share  of  this  ownership.  If   foreign  cen-­‐to  be  completed,  especially  the   LNG  projects  in   the  northwest.  The   tral   banks   con�nue  to   buy  Aussie   securi�es,   the   dollar   could   re-­‐official   statement   from   the   latest   Reserve   Bank   policy   mee�ng   main   firm   despite   the   deteriora�on   occurring   in   the   countrys  showed   that   officials   were   generally  sa�sfied   with   the   economys   terms  of  trade.performance.   They   used   familiar   phrases   such   as   that   growth  would  be  "close  to  trend"  and  that  infla�on   will  be  “consistent  with   IS  THE  CANADIAN  HOUSING  MARKET  the  target".  Their  stated  ra�onale  for   cu�ng  the  cash  rate  in  Octo-­‐ STARTING  TO  DEFLATE?ber   was   the   deteriora�on   in   the  global   economic   outlook.   They  expect   that  resource   investment  spending   will   peak  next   year,   and   The  Canadian  economy  appears  to  be  tracking  a  growth  rate  close  that  it  may  do  so  below  the  previously  expected  peak  of  about  9%   to   2.0%.   Domes�c   demand   has   been   resilient,   but   exports   have  of  GDP. weakened   and   are   producing   a   monthly  trade   deficit   of   over   $1   billion  compared  to  a  $5.5  billion  surplus  before  the  global   financial  One  of  the   great  surprises  during  the  past   three  months  has  been   crisis.  There  are   signs   that   the   housing   market   is   cooling  a�er   a  the  resilience  of  the  Australian   dollar   in   the  face  of  a  large  decline   period   of  strength   which  drove  the  residen�al   construc�on   share  in   iron   ore   and   coal   prices,   which   are   Australias   largest   exports.   of   GDP   to   7.3%   compared   to   2.4%   in   the   US.   Home   re-­‐sales  fell  There  are  two  explana�ons  for  this  resilience.  First,  there  has  been   5.8%  between  July  and   August   because  of  the   government  impos-­‐an  upsurge  of  FDI   in   the  resource  sector   which  has  given  Australia   ing   tougher   rules  on  government-­‐backed  mortgage  insurance.  The  its  first  basic   balance  surplus  since  the  early  1970s.  (The  basic  bal-­‐ level   of   new   home   sales   in   Toronto   fell   to   a   record   low   during  ance   is   the   current   account   plus   FDI).   Secondly,   foreign   central   August.  Retail  sales  rose  0.7%   during  July,  and   thus  fully  offset   the  banks  are  increasingly  regarding  the   Aussie   dollar   as  a  safe-­‐haven   contrac�on  of   0.3%  during   June.    The  most   robust  sector  was  auto  reserve  asset.  There  has  been  buying  of  the  Australian  dollar  during   sales.   The   Canadian   economy   added   34,300   jobs   in   August   a�er  recent   months   by  the   Swiss   Na�onal   Bank,  the   Bundesbank,  the   losing   30,400   jobs   in   July.  The   service   sector   added   70,600   jobs  Peoples  Bank  of  China,  and  other  East  Asian  central  banks.   while   construc�on   employment   fell   by   44,000  jobs   and   manufac-­‐ turing   clipped  2,700  jobs.   Construc�on   employment   is   now   down   Relationship  Between  Australian  Terms  of   30,000  from  one  year   ago  while  manufacturing  employment  is  s�ll   Trade  and  Industrial  Input  Prices:  1980-­‐2012 93,000  above  its  November   2011   low.   The  Canadian  central   bank   con�nues   to  pay  lip  service  to  the  no�on  it   could  withdraw  mone-­‐ tary  s�mulus,  but  with   the   Federal   Reserve   commi�ed  to   holding   interest  rates   close   to   zero   un�l   mid-­‐2015  it  is  difficult   to   imagine   any   moves   to   �ghten   monetary   policy   during   the   next   several   months. BRAZIL’S  ECONOMY  IS  REBOUNDING The  Brazilian   economy  is  showing  signs  of  recovery  and   could  re-­‐ turn   to   a  growth   rate  close  to   4.0%  from   0.4-­‐1.3%  annualized  dur-­‐ ing   the   past   three   quarters.   Consump�on   is   benefi�ng   from   the   unemployment  rate  dropping  to  5.2%.Source(s):  Interna�onal  Monetary  Fund,  Australian  Bureau  of  Sta�s�cs It  could  increase  by  over   3.2%  this  year  compared  to  a  GDP  gain  of   1.5%.  Industrial  produc�on  has   been  declining  since   late   last   year  The  Aussie  dollar  has  become  a  safe-­‐haven  asset  because  the  coun-­‐ on   a  year-­‐over-­‐year   basis   because   of   weaker   exports   and   capital  try  s�ll  enjoys  a  triple-­‐A   credit   ra�ng  while  the  yields  on  Australian   spending  as  well  as  increased  import   penetra�on.  The  government  debt  are  much  higher  than   in  the  G-­‐7  countries.   The  Reserve  Bank   is  considering  new   measures  to   bolster   investment   and  is  seeking  does   not   know   exactly  how   much   foreign   central   banks   have   in-­‐ partners   for   large   new   infrastructure   projects   to   prepare   for   the  vested   in   their   currency,   but   they  do   know  that   82%   of   the   gov-­‐ World  Cup  and  Olympics.  12                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        DAVID  HALE    GLOBAL  ECONOMICS
    • MONTHLY    REPORT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    OCTOBER    2012The   finance  minister   has   once  again  expressed  concern   about  the   there   will   be   strong   pressure   to   close   some   mines.   This  Federal   Reserves  new  QE  policy  and  has  vowed  to  hold  the  real  in   development   poses   considerable   risks   for   the   economy   because  its   recent   trading  range  of  2.0-­‐2.10.  In  the  a�ermath  of  the   Feds   pla�num  now  accounts  for  27%  of  mining  output  compared  to  25%  announcement,   the   central   bank   proac�vely   begun   to   conduct   for  coal  and  17.2%  for  gold.  The  mining  share  of  GDP  is  only  around  swaps   in  this  trading  range.   Officials  also  said  they  would  not   hesi-­‐ 5.0%-­‐8.0%,  but  the  sector  employs  over   500,000  people.  The  push  tate   to   use   capital   controls   to   keep   the   recent   compe��veness   for   large  wage  increases  could  lead   to   widespread   layoffs  by  mak-­‐gains   from   being  eroded  by  specula�ve   capital   inflows.  They  will   ing  marginal  mines  unprofitable.  a�empt   to  restrain   the   exchange   rate   un�l   there  is  a  recovery  in  the   Brazilian   economy  strong   enough   to   provoke  concerns   about   South   Africas   economy  has   been   growing  at   a   2.5%   annual   rate  infla�on.   this   year.   The  Reserve  Bank  cut  interest   rates  during  July  because   infla�on   moderated   to   4.9%   as   of   July  from   6.3%   in   January.  The   Brazilian  Investment  as  a  Share  of  GDP:  2000-­‐2016 current  account  deficit  has  widened  sharply  to  6.4%  of  GDP  from   a   trough   of   1.5%   during  the  fourth   quarter   of  2010.  The   rise  in   the   deficit   is  surprising   because   investment   spending  is   s�ll   subdued.   There  has  instead  been   an  increase  in  private  and  public  consump-­‐ �on  resul�ng  from  low  real   interest  rates.  There  is  specula�on  that   the   Reserve   Bank   could   ease   again   early   next   year   because   of   weakness   in   the   global   economy,   but   such   a   policy  ac�on   could   render  the  rand   more  vulnerable  to  a  sell  off   because  of  the  large   current  account  deficit  and  the  uncertain�es  now  gripping  the  min-­‐ ing  sector.Source:  Interna�onal  Monetary  FundSTRIKE  RESOLUTIONS  COULD  SET  A                        DANGEROUS  PRECEDENT  FOR  SOUTH  AFRICAABOUT  US Jacob Zuma President of South Africa Source: time.comThe  South   African  economy  has  been  rocked  by  a  wave  of  strikes  in  the  pla�num,  gold,  and  coal  sectors.  President  Jacob  Zuma  has  said  the  strikes  could  cost  the  economy  4.5  billion  rand  ($563  million)  in  lost   mining   output.   The   strikes   began   at   the   Marikana   pla�num   DEVELOPING  COUNTRIES  CONTINUE  TO  mine   owned   by   Lonmin.   There   was   violence   which   led   to   the  deaths   of   forty-­‐five  people.  It   is   unclear   whether   the  violence  re-­‐ DIVERSIFY  RESERVES  WITH  GOLD  sulted   from   compe��on   between  rival   unions  or   some  other   fac-­‐ The  Federal   Reserves  decision  to  pursue  further   quan�ta�ve   eas-­‐tor.  Lonmin  ended   up   resolving  the  conflict   by  offering  a  22%   pay   ing  led  to  an  immediate  dollar  correc�on,   but   it   has   not  gone  very  increase.  This  se�lement  set  a  dangerous   precedent  for  the  mining   far   because  of  problems  in  other  countries.  The  European  currency  sector  because  workers  will   reclaim   all   their   lost   wages  within  one   has  been  constrained  by  uncertainty  about   when  Spain  will   pursue  year.  In   2011   there   were   strikes   in   the  diamond,   coal,   and   gold   a  formal  rescue  program.  The  decision   of  the  leader  of  Catalonia  to  sectors   which   produced   far   more   modest   se�lements.   The   risk   hold  an  elec�on  has  added  a  further   element  of  uncertainty  to  the  posed  by  the  Marikana  se�lement  is  that  it  could  encourage  strikes   Spanish   outlook.  The   ECB   cannot   intervene   in   the   Spanish   bond  at  more  mines.  Indeed,  such  strikes  are  now  occurring  at  both  gold   market   un�l   Spain  has   a  program  with  the  EFSF.  The  Bank  of  Japan  and  pla�num   mines.  As  a  result  of  the  decline  in  the  price   of  pla�-­‐ announced   its   own   quan�ta�ve  easing   program  in   part   to   lessen  num,  several   South   African  mines   are   now   opera�ng  on  very  thin   upward  pressure  on  the  yen.  profit   margins.   If   they   are   forced   to   accept   large   pay   increases,  13                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        DAVID  HALE    GLOBAL  ECONOMICS
    • MONTHLY    REPORT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    OCTOBER    2012 The   Australian   and   Canadian   dollars   experienced   modest   rallies,   Eurozone  and  Canadian  Currency  Exchange  Rate  Against  US             but  both  remain   sensi�ve  to  the   impact  of   the  global   economy  on   Dollar:  Aug.-­‐Sep.  2012 commodity  prices.  The  Asian  countries  will  not  want  their  exchange   rates  to   appreciate  at  a  �me  when   they  are  suffering  from  a  trade   downturn. Central   banks   in  emerging  market  countries  con�nue   to  seek  alter-­‐ na�ves  to   the   US  dollar   and  euro   by  purchasing  gold.   The  central   banks  of  Kazakhstan,   Turkey,  and  the  Ukraine  have  purchased  9.9   tonnes  of  gold.  Paraguay  bought   7.5  tonnes  a�er   having  almost  no   gold.  Korea  purchased   an   addi�onal   16  tonnes   a�er   making  pur-­‐ chases   at   various   �mes   last   year.  It   is   not   known   if   the   Peoples   Bank  of   China  has  bought  any  gold  since  2009,  but  China  has  such   large  gold  imports  it  is  possible  the  central  bank  is  quietly  adding  to   its   reserves.  China  is   now  also  the  worlds   largest  gold  producer,  so   the  central   bank  could  simply  buy  domes�c  output.  The  QE  policies   of  the  Federal  Reserve,  the   ECB,  and  the  Bank  of  Japan   are   likely  to   con�nue   encouraging   emerging   central   banks   to   diversify   their   *  Index  is  of  US  Dollars  to  Foreign  Currency Source:  Board  of  Governors  of  the  Federal  Reserve  System foreign  exchange  reserves  into  gold. ©2012  David  Hale  Global  Economics,  Inc. All   rights reserved.   This document   may  not   be   quoted,  forwarded,   disseminated,  distributed,   or   published   without the   express         wri�en  consent  of  David  Hale  Global  Economics,  Inc.IN  THE  NEWSBBC  News  US  &  Canada:  US  elec�on:  Economy  focus  of  TV  debateStephanie  Flanders  reportsWED  02  OCT  12  |  06:30  PM  ETWith  just   five   weeks  to   go  un�l   elec�on   day  in  the  US,  Barack  Obama  and   Mi�   Romney   are   preparing   to   face   each   other   in   an   eagerly-­‐awaited  televised  debate  on  the  economy.  The  president  is  under  heavy  ABOUT  USa�ack   from  the   Republicans   accused   of   failing   to   deliver   strong   eco-­‐nomic   growth   and  much-­‐needed  jobs   a�er   the   recession.  Global   mar-­‐kets  are  most  worried  about  Americas  budget  deficit.Full  Clip:  h�p://www.bbc.co.uk/news/world-­‐us-­‐canada-­‐19809656CONTACT  US ABOUT  US DAVID  HALE   David  Hale   Global   Economics  was  founded   by   David  Hale,   GLOBAL  ECONOMICS,  INC.   a   Chicago-­‐based   macroeconomist.   The   firm   provides   546  LINCOLN  AVENUE  2nd  floor   wri�en   research   and   on-­‐site   presenta�ons   to   clients   WINNETKA,  ILLINOIS  60093  USA   worldwide.   Our   subscribers   include   asset   management   phone    +1  847.386.6009      /  fax    +1  847.386.6011   firms,  hedge  funds,  and  mul�na�onal  corpora�ons.   davidhale@davidhaleweb.com Our   special   focus   is   on   global   monetary   policy.   We   are   davidhaleweb.com also  known  for   our   work  on   emerging   markets,   and  have   a   special   view   on  geopoli�cs   that   is   informed   by   our   in-­‐ Subscrip�on  &  Services:  Sandy  Abraham depth  knowledge  of  economic  history  and  world  markets. sandyabraham@davidhaleweb.com David   Hale   is   a   graduate   of   Georgetown   University   and   14                              R  equests:    M  ark    Z  off                                                                                                    the      London  School      of    Economics.    Mr                          is    recipient      of                                                                              DAVID  HALE    GLOBAL  ECONOMICS Research                                                                                                                                                                                                         Hale                                                   markzoff@davidhaleweb.com the  William  Butler  Award    for  business  economics.