First published: Bloomberg Views, 10/01/2017
The irony of the yuan rally that took bears by surprise last week was that the surge came just days before China announced that its foreign currency reserves shrank by $41 billion in December. The stockpile is now $3 trillion, a decline of more than $1 trillion since its peak in 2014. Authorities have been drawing upon the huge war chest to temper the yuan’s depreciation as capital flowed out of the county amid an economic slowdown and worries over debt levels.
Despite an annual drop of $320 billion, the amount China has at its disposal remains significant by just about any measure. Yet it would be appropriate for investors to start wondering whether the margin of safety is becoming perilously thin. They should also ask at what point the People’s Bank of China would no longer be able to afford to support the currency, which would lead to a much more substantial decline than anyone anticipates….Read more:
10th January 2017
Discussing the UK economic outlook in a TV studio interview recently, the other economist turned to me at one point and said ‘Look, the economy’s fine, you should cheer up’. In one respect, of course, she was right. As the Bank of England’s Chief Economist, Andy Haldane acknowledged last week, the pre-referendum warnings from the Bank, Treasury and others about a post-referendum ‘technical recession’ proved to be way off the mark.
In another respect, though, she was, as the Americans say, whistling Dixie. She meant that I should cheer up about the economic prospects for the UK outside the EU over the next few years. To do that, though, you either have to have belief, which belongs in your preferred place of worship, or you have to have an idea about what drives growth, productivity and living standards. Belief may make you feel better, but won’t make things happen.
In the interim, what is the basis for reasons to be cheerful, and what, if anything, does it portend?. Read more ›
6th January 2017
It’s not for nothing that economics is sometimes called the dismal science. Yet it isn’t always true that economists are gloomy. Now is such a moment, especially compared with this time last year, when equity markets were in free fall, and everyone was concerned about a China meltdown and a US recession, the current environment looks almost panglossian. At the same time, it would be churlish not to highlight the so-called tail risks, or low probability or hard-to-measure events that have far-reaching outcomes if they occur.
Think food poisoning or serious sports injuries – mostly, they don’t happen, but we know they happen often enough to fear very unpleasant consequences. In the world of political economy, think the financial crisis, Brexit referendum result and the election of Donald Trump.
In the good news stakes, the UK isn’t the most obvious, but it isn’t there worst either. The Markit/CIPS manufacturing survey for December rose to 56.1 to put the index at its highest level since 2013-14. This follows upbeat news at the end of 2015 for car production and sales, and housing starts. Self-evidently, the predictions of economic meltdown after the referendum proved wide of the mark. The fall in Sterling, and the incremental easing in both monetary and fiscal policies have all helped, and Brexit, of course, hasn’t happened yet. Most forecasters now expect UK inflation to rise to 2.5-3 per cent this year eating away at stable nominal income growth, and lowering GDP growth to about 1-1.5 per cent. Read more ›