Economics, Politics

Global money matters entering 2014

Welcome, 2014?

Welcome, 2014?

USA

  • Real government spending has been increasing steadily since Q4 2012. Back then it was at -6% (annualized rate), and by Q3 2013 it had reached roughly +0.25%. Q4′s numbers should be up from Q3 since Congress managed to agree on a comfortable budget deal for the first time in years.
  • While QE3 will end shortly, interest rates will stay where they are at near zero until “sometime in 2015″, when the Federal Funds Rate should rise to 1% if all remains well (William Strauss, Senior Economist & Economic Advisor at Chicago’s Federal Reserve Bank).
  • Unemployment has been falling quite nicely since Q1 2010 and should hit 6.5% at the start of 2014 (Morgan Stanley US).
  • Spending was up each month of 2013 in core retail sales, and beyond that, growth from equities and real estate has put nominal household net worth above $75 trillion. That’s roughly $10 trillion above its high point in 2007 before the crisis.
  • Trade imbalance numbers look promising—the gap is at its lowest point in 3 years (roughly $-35 billion). More on that from the BEA.

Black swans aside (China?), 2014 should be a year of growth. Most economists think that increased household spending thanks to the falling unemployment rate is enough to keep the economy growing above trend. And with financials looking healthier than they have in a long time, it’s hard to bet against them.

China

  • George Soros wrote an awesome Op-Ed for Project Syndicate in which he painted a grim picture of China’s future. In his own words:

“The major uncertainty facing the world today is not the euro but the future direction of China. The growth model responsible for its rapid rise has run out of steam.”

  • I say this is grim because it’s a bit at odds with current macroeconomic discourse. Yes, we know there’s a debt issue in China. No one is doubting that. But what people are doubting is the notion that it’s going to affect China’s growth in a serious way. (Namely, that their GDP numbers and infrastructure projects will suffer.) It’s only fair to note, however, that the past few times the government has rolled back lending to push companies, cash shortages have occurred. So maybe Soros and others are right about China; maybe Xi Jinping has more work cut out for him than he thought, especially when you consider how little the CPC has been able to do so far.
  • Of course, the one good headline out of China is the central government’s plan to allow the creation of new, privately held banks. A strong private banking sector should give private firms easier access to credit, something they’ve struggled to secure for years now as state-owned firms have dominated industry. Some perspective: Loans to small businesses from China’s largest bank in terms of assets (and customers), the Industrial and Commercial Bank of China, accounted for just under 21% of total lending. That’s not a whole lot, but with a rising industry of privatized banks, those numbers—as well as small business numbers—should be on their way up.

Quick notes on Japan and the Eurozone

  • Abenonmics seems to be working. Klaus Baader, chief Asia Pacific economist for Société Générale, expects the Japanese trade balance to shrink in Q2 2014 even as the Yen stays on track to reach ¥110/$1. That’s good stuff, especially when you consider that national demand grew at an annualized rate of 2.7% from Q1-Q3 2013. Great news for Japan, a nation that has battled stagflation for a few decades now.
  • In December 2013, Core inflation hit its lowest point since the creation of the Euro (0.7%). In fact, inflation has been falling quite steadily since July 2013, but many fear that such a trend will lead the Eurozone into a long period of deflation (just like what happened in Japan). The ECB seems to be quite aware of those implications, but analysts at Nordea don’t think they’ll act just yet.

 

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