MacroScope

Davos Day Two — Rouhani, Lew and Lagarde

Day one in Davos showed the masters of the universe fretting about Sino-Japanese military tensions, the treacherous investment territory in some emerging markets and the risk of a lurch to the right in Europe at May’s parliamentary elections which could make reform of the bloc even harder.

Today, the focus will be on Iranian President Hassan Rouhani (and his main detractor, Israel’s Netanyahu). Presumably he’s there to woo the world of commerce now sanctions are to be relaxed in return for Tehran suspending enrichment of uranium beyond a certain level. Anything he says about Syria’s peace talks, which have so far been more hostile than conciliatory, will instantly be headline news.

Other big name speakers are U.S. Treasury Secretary Jack Lew, IMF chief Christine Lagarde, who is going around warning about the threat of European deflation, Australian premier Tony Abbott, who is running the G20 this year, and a session featuring the BRICS finance ministers.

There is clearly a pervading sense of caution, if not alarm, about emerging markets. That aside, with the U.S. recovering and the existential threat to the euro zone over, perhaps delegates will look most nervously to the east.

Japan has printed huge amounts of money but is still to follow through on promised structural reforms to counter the drag of an ageing and shrinking population and to reduce massive public debts. China’s ability to take excess credit out of the economy without causing a crash is perhaps of even greater importance.

Germany’s economic policy gamble

At first glance, Germany appears to be feeling the global economic downturn harder than many of its European peers: Industrial output fell by nearly a quarter on the year in February — taking a bigger hit than Britain, France and even Italy — and economists expect the economy to contract by as much as 7 percent this year.

Yet two government policy measures are helping insulate ‘Otto Normalverbraucher’ (Joe Public) from the full impact of the downturn: ‘Kurzarbeit’, or short-term work, and the ‘Abwrackpraemie’ — a ‘cash-for clunkers’ car subsidy plan.

By taking advantage of legislation that promotes shortened hours, many German firms have avoided lay-offs, helping limit a rise in the unemployment rate, which now stands at 8.1 percent. And the car subsidy has given a boost to the auto sector, to which close to one in five jobs are linked in Germany.

Fire up the motor

People have suddenly started buying cars. At least that is the implication from recent data that has surprised markets and delighted economists scrutinising the garden for the oft-cited green shoots of recovery.

First it was the United States. Yes, on a yearly basis sales plunged, but on a month-by-month comparison with February, things look a lot better. Eg, General Motors sales plunged 45 percent in March from a year earlier, but it said they were up 23 percent over February. It reckoned that increase was U.S. industry-wide, too.

Then came Germany, Europe’s biggest automaker. Car sales jumped 40 percent in March.