Country by country macro update, September 2014
This is the first time I am doing this, so let’s see how much value it adds. I thought I would quickly run through a number of countries in the news and give my perspective on the macro picture in each. I am just going to give a summary here of the key points of interest and will do a deep dive on some at a later date. Let’s start with the US.
United States. The numbers coming out of the US have been good. US retail sales, driven by cars, was up 0.6% in August. Jobless claims are still hovering around 300,000 though the last week was 315,000. The jobs number for August was disappointing at 142,000 but it was likely a one-off and the unemployment rate still went down to 6.1%. Overall, the US economy is projected to grow 1.5% in 2014, which is better than Europe, in line with my predictions but still fairly weak. Other bullish signs in the US include the increase in revolving credit in the latest Fed Flow of Funds survey. Hotel occupancy up 5% and RevPAR up 11% y-oy. And factory output, the ISM data and capacity utilization were all up. Q3 is poised to be a decent quarter in terms of GDP growth, especially in view of inventory builds.My contention here is that the reality underneath the numbers is murky due to the weakness of consumer balance sheets and wage growth/income statements. Either the balance sheets or income statements of many households will be challenged in any downturn that could happen in 2015 or 2016. And that means that as weak as 1.5% growth is, the medium-term trajectory cannot be much better.
United Kingdom. In the UK, the economy is doing even better than in the US. Retail sales continue to grow well. And growth forecasts are in the 3% range for 2014, double the US number. There are a number of weak spots here though, chief among them housing. If you look at the Economist’s latest housing survey, Britain is among the frothiest of markets despite the post crisis collapse in prices. On a price-to-rent basis, the market is 43% overvalued and 24% on a price to income basis. These two stats point to income or cash flow as well as balance sheet indicators for households. If price-to-rent is elevated, it is a market signal of low yields for best alternative use and the best signal that prices are out of line. Price-to-income ratios show vulnerability to debt stress in a potential downturn. Here, the ratio is not meaningful until incomes and/or house prices recede. Then a high level of household debt becomes an accelerator to the downside. What is clear then is that Britain’s recovery is very much a housing boom related story. The US, for example has markets that are fairly priced. To the degree prices are driven by the London market and housing in the Greater London Area, prices could be a sign of capital flight. Nonetheless, the vulnerabilities are real. I don’t need to mention the Scottish referndum here because it will have a muted effect economically.
Germany. My call on Germany at the beginning of the year was that it would decelerate to a level below Spain. And that has happened – though the last round of data on industrial production and factory orders was good. It bears watching what happens in Germany, because to the degree Germany slows, there is no real locomotive to the European economy. And that brings everything much closer to where debt deflation and sovereign default scenarios come back into view. Let’s wait and see how the ECB’s limited QE program performs. I think it is too little and too late and that fiscal restraint in Europe is what is driving the downward trajectory. It is hard to make a go at things when you are one of many countries undergoing internal devaluation and fiscal restraint as we see now versus the 1990s and 200s when Germany was among the few trying this approach.
Spain. I am less enamoured with Spain’s economic trajectory than I was at the beginning of the year. We got the basing effect and the internal devaluation-induced bounce. Plus lower bond yields has helped stabilize credit markets. Inter-business loan defaults are at 12-year lows and Spain grew at the fastest quarterly rate since 2007 in Q2, the fourth straight quarter of growth. That’s very good but is it enough? I am not sure it is.
Overall, North America looks good with the US at 1.5% for 2014 and Canada just above 2.0% growth. In Europe, Britain is even better at 3%. But, Europe will grow less than 1%, with even Germany at under 2% and decelerating. Italy will contract outright.If you add in the deceleration in the BRICS outside of India, then there is almost no country that can pick up the slack. We are again in a phase of global growth deceleration. For now, the deceleration is not too severe. But Europe is already at stall speed. It is the most vulnerable to crisis politically and economically.
Today’s a short post.