Six Economists Discuss the Crisis That Won’t Go Away: Tom Keene
What will 2012 bring? We are in the fifth year of a financial crisis, and it would be wonderful to forecast a strong global recovery. Yet Europe is still trying to right itself, joblessness stays high in the U.S., and China’s ability to escape the malaise in the West remains an open question.
What follows is not a series of set-in-stone predictions. Instead we offer the results of careful conversations that link economics with finance and finally, to investment.
The economists who speak here are not in search of single-point certitude. That would be a foolish quest in this uncertain era. Yet we are rewarded with insight from around the world, insight that speaks to real interdependencies between economics and politics, Bloomberg Businessweek reports in its Nov. 7 issue.
Among those interviewed, Bruce Kasman, chief economist for JPMorgan Chase & Co., discusses unemployment in the U.S., while Jonathan Anderson, chief economist for emerging markets at UBS AG in Hong Kong, talks about China, and Neal Soss of Credit Suisse provides a global perspective.
Kasman reflects on the role of labor, housing, fiscal austerity, and capital investment in spurring a U.S. recovery
Question: How do you see the U.S. economy from now through next year?
Answer: As we turn into the fourth quarter, the economy is showing I think more strength than we had expected. What is interesting is as we are picking up some steam, some of the things that hurt us earlier in the year were temporary drags, while we are now obviously facing a new set of drags, mostly emanating from Europe. And we also have this uncertainty about where U.S. fiscal policy is heading.
Question: Do you think that labor has been pushed aside by technological progress, and corporate profits will forever be stronger?
Answer: I’m not sure I buy that. In the early stages of this recovery, corporations used every effort they could to get productivity gains and not meet demand with extra labor. That was normal behavior. I think that was changing as we went into this year. Private payrolls did not weaken nearly as much as you might have thought. At the same time, we have a government sector, which is a fifth of the labor force and which is continuing to shed workers. The other thing is we have an economy that is not generating that much demand. If we get 3 percent growth for the third quarter, I think we will get 150,000 to 175,000 private payrolls. Obviously with the unemployment rate where it is, we are not going to get the utilization of labor up anywhere near where we would like it to be.
Question: What happens to U.S. growth if Europe slips into a recession?
Answer: The U.S. is sensitive to Europe, but I do not think the U.S. is critically dependent on Europe for its growth. I think Europe is a piece of the story, and unless they really mismanage and create a true global financial event here, I think the European recession will have impact on the U.S. but it will not be dominant in terms of U.S. performance in the next few quarters.
Question: You see 3 percent growth for the third quarter. Take us through to this time next year.
Answer: So much depends on policy. If we don’t change the fiscal path we are on and we allow all the tax cuts to expire and the other spending to expire, we will have the economy skirt recession but grow at something like a 1 percent pace. And then where we are next year I think depends a lot on how Europe manages its problems. If we can avoid the fiscal tightening, if we can kind of switch from having near-term tightening to more medium-term adjustments and keep fiscal policy neutral, I think the economy could do O.K. here -- I would say 2 percent, 2.5 percent growth.
Question: Do we need an investment policy to generate jobs?
Answer: We need to make sure fiscal policy is not hurting demand in the next few quarters, and right now it is scheduled to do so. I think we need credible adjustments in the more medium term, and obviously the supercommittee has the opportunity to deal with that. And I think we would like to see policies geared toward structural growth improvements here. There are definitely things that can be done here both in terms of the tax code as well as on the spending side that would be favorable, although I do not think anything here is an immediate boost in terms of significant size. This is not going to be an economy that is going to get back to normal unemployment rates anytime soon. I am not optimistic. Our basic mantra right now is, yes, we can, no, we won’t.
Question: How do we jump-start investment?
Answer: The point to make is that we have had good investment. Obviously, investment in real estate and structures have been hurt. But equipment and software spending has been averaging double-digit gains for the last two years. We are running the best recovery in terms of capital spending since the early 1980s. So there is strength in that area. I think the problem in the economy right now is tied to real estate and consumers, who I think are in the midst of post-traumatic stress disorder coming out of this very bad event. And those are difficult things to come back from very quickly. I do not have any policy ideas that are going to dramatically change the healing process in the housing market.
Question: Can you remain optimistic about Australia in 2012 considering the slowdown in China, Australia’s chief customer for iron ore and other commodities?
Answer: We are optimistic in a relative sense. We think the Australian economy will grow 2.5 percent in 2012. But a lot of that is catch-up from the huge disruptions in exports that we had in the first half of this year from the flooding in Australia. The domestic part of the economy that is not exposed to mining actually is struggling at the moment. Retail sales, the housing market, and house prices are falling slightly in Australia, and unemployment has started to rise. And with inflation very benign, we think the Reserve Bank will begin a sequence of interest rate cuts.
Question: How linked is Australia to Europe and the U.S.?
Answer: A lot less than it used to be. But it is still there: If America and Europe stop buying Chinese output, then the Chinese economy slows, and that puts downward pressure on the Australian economy. Australia is the repository of the resources that China uses to turn into things the rest of the world wants. Australia is in a very fortunate position because of that, but it is still dependent upon a healthy global economy.
Question: What about recession in the U.S.?
Answer: We are not forecasting a recession in the U.S. But this is a very atypical recovery, with housing not participating. I have been arguing that the U.S. needs to give green cards to wealthy families in other parts of the world as long as they buy a foreclosed house. That could make a substantial difference in the housing market.
Anderson, UBS’s senior global emerging-market economist, talks about consumer prices, labor, and the equity markets in China.
Question: What has changed in China in the last three months?
Anderson: Fear has changed. We have seen China tightening. We have seen a lot of stress in parts of the economy. People have been selling down over the last two months, and all sorts of horror stories have been floating around the press. We are seeing some small and medium companies and developers and local governments again coming under threat of bankruptcy. There is some cooling of capacity. But the interesting thing is, if you look at the demand side of the economy, for the last six months things have been quietly moving ahead. And as a result, we find ourselves in the soft rather than hard landing camp. And, in fact, we are buying commodities at the moment tactically.
Question: There is volatility in the Chinese equity markets. They are down 28 percent, 29 percent from the 2009 peak. Do you wake up every morning and say there is just incredible equity value?
Answer: There is equity value, and we certainly do like the China market on a structural basis given what we expect to see. The question really is what turns that around and gets people thinking about China in a different way. I do not think there is going to be one big catalyst like a super stimulus easing policy coming down. I think it is really more waking up over the next two to three months and investors gradually realizing that this place is not falling apart.
Question: Tell me about inflation and what you see for 2012.
Answer: Inflation is peaking. It is still up around the 6 percent range for consumer prices. A lot of that is food. Keep in mind core inflation is well below. And the all-important price for the consumer basket is pork, and now what we have are pork prices that are starting to fall again from very elevated levels. We expect inflation to be coming down toward 5 percent, say, by the first quarter next year and staying around that range. We are not looking for inflation to disappear.
Question: Can they create jobs for next year? I mean, is the job machine of China going to be healthy in 2012 and 2013?
Answer: Well, bad news and good news, right? The bad news is a slowing economy. That is going to show up in places like construction. And exports actually are going to be fairly weak in our view. And those are some of the most labor intensive parts of the economy. The good news is that there is not a lot of supply coming into the labor market. China does not need to generate 10 million net jobs anymore. So China for the next five years is an economy that really needs to keep jobs around, not create them en masse.
Euro Crisis Effect
Julian Callow, head of international economics at Barclays Capital in London, explains how dangerous a Greek default would be and why Germany can’t bail out Europe
Question: Why should Americans care about the resolution of the euro crisis?
Answer: If you go to your average person, say on Main Street U.S.A., before the crisis, they might not have heard of Bear Stearns. But you can be sure they would have heard of Greece. If Greece is having a substantial default on its debt, that is very big news. And we cannot really predict exactly what the consequences of that will be in terms of confidence through the global financial system. We have had defaults historically from Argentina, from Russia, but this is a much more significant event.
And if the IMF has to put up some money, that is one thing Americans should care about, because we are going to have to contribute.
Clearly, there is a reluctance on the part of the U.S. to commit a whole lot more IMF funds to Europe. And the problem is that if Italy is in difficulty and needs financing from the rest of the euro area, the rest of the euro area cannot really stump up enough capital to support that. Germany is only 27 percent of euro zone GDP. Italy is 17 percent of euro zone GDP. So Germany isn’t big enough in my view to be able to provide overwhelming support.
Question: That’s the statistic of the week! I would have said 40 percent for Germany.
Answer: We all depend on Germany in Europe to write the checks. Germany has a very successful economy. But ultimately it is not so large that it can just underwrite everything here.
Question: What actually does Barclays feel Europe will do in 2012?
Answer: I think at best we can just hope for GDP to be roughly flat. The danger is that we are, in fact, going to see some weakness emerge and that the economy, therefore, is going to move into recession. We are actually quite cautious about the euro zone right now because there are profound uncertainties regarding Greece.
Marios Maratheftis, Dubai-based head of research for Standard Chartered Bank, discusses the fallout from the Arab Spring and the economic outlook for the Gulf.
Question: When you look forward to 2012, after this year’s Arab Spring, what do you think we will see?
Answer: I think expectations on the political front, especially in the Middle East, need to be managed. Elections, when they do happen, will not necessarily mean full democracy is in place. Countries like Libya will need time to build the necessary institutions to make sure that they eventually become a functioning democracy. A similar case would apply to Egypt, where there are still many unknowns with the elections that will be going ahead pretty soon. Political uncertainty is relatively high.
Question: This year has been a humbling experience for the Dubai Stock Exchange. What’s the outlook for the United Arab Emirates and other Gulf states?
Answer: I think the performance of the stock market in the UAE has been pretty poor in 2011, not so much in terms of returns, but in terms of liquidity. The performance of the economy, on the other hand, has been much better. There has been a recovery in place since 2010. This year has been even a better year in many respects. But what I have seen in the UAE is that the windfall gains from higher oil prices have not really been spent. In the past, we saw high oil prices trigger an investment boom in these countries. I think a very interesting country is Qatar, which is growing around 18 percent this year. It is mainly driven by an increase in gas production. In 2012 we will see positive growth in the UAE, positive growth in Qatar, but it will be slightly slower than 2011. There is uncertainty regarding oil, and I think we have not seen a significant pickup in projects in the region.
Question: Tell me how the sovereign wealth funds view next year. What is their mood?
Answer: I think the mood has been a very conservative one. Of course, the exception was Saudi Arabia, which went ahead with a very aggressive social spending plan. Qatar and the UAE were probably increasing their savings. As Asian markets become deeper and more mature, I think we are going to be seeing more and more Middle East investments finding a home in the East and not just the West.
Question: We have just seen the passing of the crown prince in Saudi Arabia. Is there any question about stability within the royal family?
Answer: The king is in charge of Saudi Arabia, and he is still the main figure leading the country and leading politics. So there is no power vacuum or leadership vacuum in the country.
Soss, chief economist for Credit Suisse, looks at the world and sees uneven recovery, dangerous joblessness, and struggling central banks
Question: Neal, what is the Credit Suisse view of the global economy for next year?
Answer: For 2012, I think the U.S. is likely to have a persistent recovery -- inadequate in scale, choppy, mixed in terms of sectors -- but nonetheless persistent growth. I think China is in much the same circumstance. Europe is the other big block. There, I think you have to anticipate that they’ll have no growth at best for the early part of the year and potentially, of course, something more severe than that.
Question: What will we see in investment?
Answer: I think in financial terms, the issue that is starting to manifest itself is a great tug of war between two conflicting forces. One force consists of the major central banks around the world -- the Bank of Japan, the Federal Reserve, the Bank of Canada, the Bank of England, the ECB, the Swiss National Bank. These major centers of financial life are all holding rates constant at very low levels. When the rate of return on cash is held fixed at low rates for a long horizon, that pushes down volatility and in principle would, therefore, push up the prices of risk assets all over the world.
On the other side, you have economic recoveries that are half-hearted or worse and that are not getting the benefit of ever-easier credit conditions. If anything, the shocks of the great financial crisis and the reregulation that’s under way mean that credit standards are fluctuating around a much tighter average level than used to be the case. That means the economy is more volatile than it was before. So now you sit there and say, “Now wait a minute. If the economy is more volatile, doesn’t that mean that risk assets should be cheaper?” But then again, if the central banks are telling you that cash is going to be at zero for a long darn time, doesn’t that tell you risk assets should get more expensive? That’s the tug of war.
Question: This issue of unemployment is getting a little old, isn’t it?
Answer: It’s getting a little dangerous, in my opinion. I do really worry about the well-being of our society. You think about America at the moment, we’ve got a Japanese financial system. We’ve got a European labor market, and we have the kind of income distribution that you find in an emerging market. I don’t think any of those problems can be solved unless you solve all three. It’s not obvious to me that there is a magic pill to solve any one of them.
Question: Is there a public policy you’d like to see for 2012?
Answer: One issue is that as the European banks get recapitalized, one of the mechanisms for raising their capital-asset ratios will be for them to reduce their assets. And the assets that I think come most naturally for a European bank to get rid of are their U.S. dollar assets, particularly mortgages. They have to fund them with dollars. Dollars are hard to come by. The return from their point of view once they translate back into their home currency is not that fantastic. Put all that in the soup, and they’re going to be selling mortgages is my guess.
Question: Who is the natural buyer?
Answer: Well, the answer is not our banks here in the states. It’s not clear to me how much the REIT industry can take, so it seems to me that’s why we’re hearing the Federal Reserve already speculating about a third round of quantitative easing, with a special emphasis on buying mortgages.
Now does that clear the housing market?
It doesn’t. But if you don’t do that, then the housing market sure gets worse.
Question: What role will austerity play in 2012?
Answer: The key is credibility over the long run. Telling business leadership, telling households and so forth that we are really serious about getting the public finances under control, that we really are willing to acknowledge that there are dimensions of the standard of living that we can’t afford -- at least right now -- would, in fact, allow people to make their plans for the future with a greater sense of confidence.
I think the U.K. is doing a better job of this than most. I think the states within the U.S. -- not the federal government but the states themselves -- are doing a better job. I think that the half-hearted sorts of measures that you’re seeing in some parts of Europe, and certainly at the federal level in the U.S., have the opposite and negative effect on current economic performance.
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