‘The odds are increasing that US growth at mid-year will exceed 4%’
GREAT NEWS FOR SOUTH AFRICA is that the world economy is yet again on course for a year of impressive growth. That follows the stellar rise in global gross domestic product between 2002 and 2006. Overall performance over the past five years was the best in three decades.
The promising international prospects for this year mean that Finance Minister Trevor Manuel can next week once more present his annual Budget (for 2007/2008) in a pretty cheerful mood. That despite the perennial doom-mongers – such as The Economist – of the United States’ economy.
But far more immediately pertinent is the new rising tide of optimism concerning the US’s economic outlook this year. Bruce Kasman, chief economist at JP Morgan, says GDP in the US will probably tick along at only 2% to 3% annualised in the opening quarter of 2007.
However, Kasman adds, vitally: “One of the most consistent features of the US business cycle is that periods in which stock- building stagnates amid strong demand growth are followed by a growth bounce.” Kasman comments: “It’s possible that demand growth is set to disappoint materially. However, a powerful cyclical clock is ticking.
“If final demand growth remains in the vicinity of 3%/year in coming months, the US economy will likely stage a surprisingly strong bounce as inventory drags in manufacturing and housing fade.”
Kasman concludes: “The odds are increasing that US growth at mid-year will exceed 4%.”
Irwin Stelzer, senior fellow at the US Hudson Institute and an economics columnist for the London Sunday Times, writes: “It seems the apocalypse has been postponed. Just a few weeks ago there was an emerging consensus that the US economy in 2007 was doomed to below-trend growth at best and a recession at worst.”
Stelzer observes: “A funny thing has happened on the way to that disaster. Instead of declining to below the third quarter rate of 2%, the rate of economic growth in the US in the final quarter of 2006 is now estimated to have come in at a healthy 3,5%.
“Instead of retreating from the malls, consumers continued to spend. Instead of collapsing, the dollar has merely drifted down, spurring exports (up 10%) and causing imports to fall.”
He notes: “A strong job market, good economic growth, low inflation and oil prices off their peaks are a wonderful offset to falling house prices and unhappiness about Iraq.”
Says Stelzer: “This does not mean the US economy might not yet be in for bumpy ride in coming quarters. But it does mean that even if 2007 proves not to be the very best of times it will certainly not be the very worst.”
Bill Jameson, of Britain’s The Business, takes a similar view. He writes: “Better than expected US numbers for the fourth quarter of 2006, upbeat statistics of consumer confidence and signs that the sharp housing downturn may be past the worst helped the Dow Jones share index in February to get off to a roaring start.”
Jameson says: “After a gloom-tinged start to the year the latest figures have left the bears growling with frustration. But then – as The Wall Street Journal remarked, they’ve been predicting a downturn, if not outright recession, for the past four years.”
Which brings us back to The Economist, New York Times and the rest of the pack who go on and on getting the US situation – and thus the world economic outlook – wrong.
Their follies are ultimately irrelevant, though, except that a surfeit of gloomy predictions can at times – as we’ve seen in SA – depress both business and consumer confidence.
Now, happily, Manuel comes into the 2007/2008 Budget with at least some big global bears in retreat. That justifies some upbeat views in his speech.
Of course, that doesn’t necessarily mean he’ll be handing out massive tax cuts. That applies both to genuine concessions and, as is generally the case, to so-called reductions that are merely the fictitious product of “fiscal drag”. That’s the process where inflation bumps up nominal levels of wages, incomes and profits – and obviously, therefore, the tax take – but where there’s no real gain at all for the recipients until the inflationary deficit is first offset.
Kasman concludes: “The odds are increasing that US
growth at mid-year will exceed 4%.”
In the 2005/2006 and 2006/2007 Budgets, in particular, Manuel was able to make some genuine tax cuts. However, those reductions were hugely less than the total concessions officially claimed and naively reflected in almost all headlines. On 21 February, Manuel will definitely announce tax cuts.
Given, however, the excessive levels that consumer spending has been running at and the pressures that puts on inflation and the balance of payments – thank heavens for the appreciable fall in oil prices – look to Manuel for more smoke and mirrors than hard action where personal and company taxes are concerned.