MacroScope

Mixed evidence from Germany

German trade data, already out, showed both exports and imports rose more than expected in April – up a sharp 2.3 and 1.9 percent respectively. That suggests that its fabled industrial base is in reasonable shape but also that domestic demand is holding up, possibly helped by some above-inflation pay deals. The figures represent a significant bounce from the first quarter when Europe’s largest economy just managed to eke out some growth.

Let’s not get carried away, though. Germany’s PMI survey earlier this week showed a slight decline in export orders in May and the Bundesbank has just released its latest set of economic forecasts, cutting its 2013 growth forecast to 0.3 percent, adding that risks are largely skewed to the downside. It expects a healthy bounce in growth in the second quarter then a marked throttling back.

Trade figures from France, Britain and Portugal give an opportunity to see if there is any “rebalancing” going on within Europe – the argument being that the euro zone in particular can only thrive if Germany’s massive surpluses shrink a little just as the high debt countries try to pare their deficits. That requires Europe’s largest economy to buy a little more from its currency area peers. The German data showed imports from states in the single currency bloc up 5.4 percent year-on-year in April so maybe there are glimmers of movement.

German industrial output, due later this morning, will be another important snapshot after industry orders dropped sharply in April. Elsewhere, Spanish industry output data, which showed the slowest fall in 19 months in March, will indicate whether a deep recession is close to hitting bottom. Spain has enacted painful cuts and reforms but the resultant easing of its labour laws has helped its export base, and inward investment, pick up.

In summary, we clearly need a German trunk pulling together all the various strands and it may well be we could take a look at euro zone imbalances via the trade data too, maybe centred on Paris.

Small rays of hope brightened Canada’s economic outlook last week

 All data released last week point to a far better first quarter growth in Canada than previously expected, prompting economists to revise up their predictions.

In a Reuters poll conducted early last month, forecasters predicted that Canada’s economy expanded by just 1.6 percent on an annualised basis in the first three months of this year.

But that consensus could prove to be too low, with many now expecting growth to be close to 2 percent or even higher, likely a welcome sign for Stephen Poloz who was named Bank of Canada’s new governor last Thursday and will replace Mark Carney on June 3.

Not again, please! Brazil and India more vulnerable now to another crisis

After bad economic news from Germany, China and the United States over the past few weeks, here are two more. Brazil and India, two of the world’s largest emerging economies, are increasingly vulnerable to another crisis or to the eventual end of the ultra-loose monetary policies in developed economies after five years of a severe global slowdown.

Weak demand for Brazil’s exports and the voracious appetite of local consumers for imported goods widened the country’s current account deficit to 2.93 percent of GDP in the 12 months through March, the widest gap in nearly eleven years. In dollar terms, that amounts to $67 billion.

To help fund this gap, Brazil could at first loosen the currency controls adopted in the past few years and let more dollars in. But if the dollar flows change too swiftly, Brazil would find itself with three other options: curb spending by growing less, allow a decline in the foreign exchange rate at the risk of fueling inflation, or burn part of its international reserves – which are large, at $377 billion, but not infinite.

Brazil: Something’s got to give

How about living in a fast-growing economy with tame inflation, record-low interest rates, stable exchange rate and shrinking public debt. Sounds like paradise, doesn’t it? But Brazil may be starting to realize that this is also impossible.

Inflation hit the highest monthly reading in nearly eight years in January, rising 0.86 percent from December. It also came close to the top-end of the official target, accelerating to a rise of 6.15 percent in the 12 months through January.

That conflicts with key pillars of Brazil’s want-it-all economic policy. The central bank cut interest rates ten straight times through October 2012 to a record-low of 7.25 percent, saying Brazil no longer needed one of the world’s highest borrowing costs. The government also forced a currency depreciation of around 20 percent last year, aiming at boosting exports and stopping a flurry of cheap imports.

The fading strength of U.S. exports

U.S. exports posted their biggest drop in nearly four years in October, pushing the U.S. trade deficit higher despite a decline in imports to their lowest level in 1-1/2 years.

The data reveal that U.S. exports of goods and services have now decelerated to a year-on-year growth rate of just 1 percent compared with 2.8 percent in the third quarter of 2012 and 11.5 percent last year at this time, writes Deutsche Bank Securities chief U.S. economist Joseph LaVorgna in a research note.

We are concerned by this export trend, not only in October, but over the past several months, because exports have contributed an outsized share to economic growth in the current cycle. If exports fade away as an economic driver in the near-to-medium term, other domestic engines will need to accelerate in order to pick up the economic slack and maintain growth near 2.0-2.5 percent. We think this is possible if fiscal cliff concerns are adequately addressed. The domestic offset will come from continued recovery in the housing sector, as well as pent-up demand from households and businesses.

Euro zone perspective – nowhere near out of the woods

After the Easter break, a bit of perspective — to paraphrase the immortal Spinal Tap, maybe too much perspective.

Over the past two weeks, Spanish and Italian borrowing costs have continued to rise – in the former’s case they have now relinquished more than half their fall since December and are heading back into the danger zone. Stocks have also appeared to have given up on their first quarter rally, presumably testament to the realization that the ECB and other top central banks are unlikely to be writing any more blank cheques for banks to reinvest.

Late last year, it was Italy that seemed to have the power to drag Spain into the debt crisis mire. Now, it’s the other way round and after the ECB anaesthesia  wears off, it’s clear the euro zone patient is still sickly.

Revving down

It used to be the low-end stuff like shoes, clothes and furniture that displaced American manufacturing, then cars and consumer electronics.  A new report by Alan Tonelson, a researcher at the U.S. Business and Industry Council which represents 1,500 American companies, now shows that high-end U.S. industry is facing ever tougher foreign competition in its own backyard.

Tonelson has crunched the numbers since 1997 on high-value, advanced manufacturing – the crown jewel of American industry that is capital intensive and depends on technological superiority such as turbines, pharmaceuticals and electrical engineering. He finds that imported products had captured 38 percent of the $1.63 trillion U.S. market for advanced manufactured products by 2010, up from 24.5 percent when the government started collected the data in 1997.  Only six U.S.-based advanced manufacturers have gained market share in the United States in the 13-year period.  Sectors that are more than 50 percent dominated by foreign producers have risen from eight in 1997 to 32 by 2010, he said.

The high-value core of America’s domestic manufacturing sector is suffering chronic and significant weaknesses. They strongly indicate that advanced U.S.-based manufacturing industries as a whole are failing a basic test of competitiveness – thriving in a market that is not only the world’s largest single market for such goods, but the market that they should know far better than their overseas counterparts.

Sharply narrower trade gap revives hopes for decent Q3 growth

Economists busy revising down their third quarter gross domestic product forecasts had to backpedal a bit on Thursday after Commerce Department data showed a steep shrinking of the U.S. trade deficit — despite an unexpected rise in weekly jobless claims. The trade gap shrank to $44.8 billion in July, Commerce Department data showed, down sharply from June’s $53.1 billion deficit and much lower than forecasts around $51 billion. The 13.1 percent decline was the biggest month-to-month percentage drop in the deficit since February 2009.

Argues Pierre Ellis, senior economist at Decision Economics:

The trade numbers are probably sufficiently better than expected to cause some upward revision in the GDP forecast. We’re seeing very strong growth in exports, offsetting some weakness last month, and the strength was in the right place, capital goods, without being centered in aircraft. There’s solid foreign demand for U.S. capital goods exports, so that’s a hopeful sign for the outlook. There’s enough strength abroad going into this apparent slowdown to keep the momentum going.

Or Am Ginzburg, head of capital markets at First New York:

The trade balance was better than expected, and despite worse jobless claims, that could move up GDP estimates and that is why we probably didn’t go down more than what we should have on the number. It was telling you there was no indication of the Hurricane Irene effect.

Argentina set for wheat windfall

Not everyone is upset about the 50 percent surge in wheat prices over the past month.

Wheat’s rise to 2-year highs was caused first by heavy rains in Canada and now by a Russian export ban that was triggered by its worst drought in decades. There are floods in Pakistan, another major wheat grower. But while the wheat market shenanigans are triggering much hand-wringing across developing nations, Argentina, one of the world’s top seven wheat exporters, may be set for a windfall.

Farmers there are increasing wheat plantings, the Buenos Aires Grains Exchange says. The South American country is expected to export around 8 million tonnes of wheat in the 2010-2011 year. With wheat futures on the Chicago Board of Trade at around $8 a bushel, a very simple calculation shows export revenues are going to very significant.

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.