Apoc­a­lypse post­poned

‘The odds are in­creas­ing that US growth at mid-year will ex­ceed 4%’

Finweek English Edition - - Economic trends & analysis - BY HOWARD PREECE howardp@fin­week.co.za

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.


Source: JP Morgan

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