Glass is both half full and half empty

Allister Heath
GLASSES can either be half full – or they can be half empty, depending on one’s temperament: optimist or pessimist. But when it comes to economic conditions, and prospects for investments, jobs, incomes and growth, there is enough material to make both sides happy. My own take is moderate medium-term optimism, combined with longer-term pessimism. Another debt and macroeconomic crisis is brewing, but there are also plenty of good things going on in the world.

Let’s first look on the bright side. Surveys show that G7 economic activity in the coming months will be strong. It remains to be seen how much the UK rebounded in the first-quarter, but growth is back, despite falling take-home pay and retail sales. The global economy remains solid, despite a slowdown in China, the Eurozone’s woes, the geopolitical crisis in North Africa and the Middle East and Japan’s nuclear catastrophe.

American credit constraints are easing, with banks increasingly able to lend, as Ian Harwood, an advocate of the bullish case at Evolution Securities, points out. This is documented by Fed loan officers’ surveys, PayPal small business lending data and the monthly NFIB survey (now at its highest since the start of 2008).

In the US, payrolls growth has firmed (despite a setback yesterday), unemployment has begun to dip and there is less talk of a jobless recovery (though there is still a huge way to go and millions fewer jobs than there once were). In Britain, the private sector is creating far more jobs than are being cut by the state. March’s UK composite purchasing managers index showed the strongest jobs growth since October 2007. Companies are generating cash and profits. Business investment and employment are rising. Margins are being squeezed by commodity and oil prices, but earnings and revenues are still growing.

So much for the bullish case. There is also plenty of depressing news. In the UK, inflation remains too high, which is cutting wages, consumer spending and hitting the public finances. Voters seem unaware that interest rates will eventually have to rise as monetary policy is normalised. The sovereign debt crisis in the Eurozone’s periphery is intensifying – and while Barack Obama is finally trying to cut the massive US budget deficit, neither he nor the Republicans seem really serious about acting. Eventually – perhaps in ten years’ time – the US will either have to act or face a crisis that will make the sub-prime debacle look like a walk in the park. Closer to home, three-year yields on Greek debt hit a monstrous 18 per cent yesterday. Greece will eventually have to default on part of its debt. But the fact that this could happen before new European procedures are in place in 2013 means that there will be no mechanism for a forced restructuring. It would have to be “voluntary”, which will be interesting.

Last but not least, China’s forex reserves soared 24 per cent over the past year to $3.04 trillion, with the cash recycled into securities, pushing down yields on US and other government debt and stoking future bubbles. This very process was one of the key drivers of the boom and bust – yet nothing has changed. The reserves will come in handy when Beijing eventually sorts out the Chinese banking system, which is nursing lots of bad debt – but in the meantime the much-needed repricing of credit and risk is not taking place. Have a great weekend.
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