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Friday, February 21, 2003

A Raft of Tricky Looking Data

Seeing through the fog, and trying to decide which way the US economy might be heading is proving to be fairly difficult these days. Yesterday's latest batch of figures do nothing to help make matters any clearer. Deficit up, unemployment up, producer price index up, there's little to cheer the faint hearted here. Obviously it's that 'soft patch'. The only interesting sideline is that the spike in producer prices probably pushes deflation back into the distance a bit, a knock-on effect of rising energy and a falling dollar. But don't cheer just yet: in particular remember that the Fed rate is only 1.25 and with inflation creeping up just a little the US could soon be in negative real rate territory, another headache for Greenspan, since negative rates could easily spark house prices and provoke a bubble in property. Yet raising rates would put a brake on recovery. Back to the zone between the rock and the hard place. Nothing in this life ever gets to be easy.

The US trade deficit soared to a new record last year, while wholesale prices surged in January at their fastest pace in more than a decade. The US Commerce Department said the monthly trade deficit rose 10.6 percent in December to a record $44.2bn, as imports continued to grow and exports slumped. The December reading put the annual deficit for 2002 at a record $435bn - a 21 per cent increase over the 2001 level. The widening deficit reflects, in part, the US economy's continuing outperformance of major trading partners, but some economists fear it also represents a big and growing risk to the stability of the US dollar and US interest rates. Separately, the US Labor Department said prices at the wholesale level surged last month. The department said its producer price index jumped 1.6 per cent in January - the biggest increase since January 1990 - after dipping 0.1 per cent in December. The increase was led by rising energy costs, but even after excluding food and energy, the producer price index rose 0.9 per cent, the biggest such since December 1998 and the second biggest in 14 years. The department also said demand for new US jobless benefits last week rose to its highest level this year, and above the 400,000 level generally associated with recession. First-time unemployment insurance claims rose to 402,000 in the week to February 15 - thehighest level since December - from 381,000 the previous week. However, the four-week moving average, a smoother guage of the trend, remained below 400,000, though it rose slightly to 389,000. In another report, the Conference Board said its index of leading economic indicators, a gauge of future growth, was flat last month, its weakest reading since last September.
Source: Financial Times

Looking Forward to the G7

The G7 finance ministers have a meeting scheduled for Paris on Friday. Among discussion items will be the geopolitical uncertainty surrounding a possible Iraq war, the continuing high price of petrol, and.........the desireability of a revaluation of the yuan. Or at least so we are informed by recent reports from Japan, since the rumourology has it that Janapese Finance Minister Masajuro Shiokawa will use the meeting to argue the case for exerting pressure. Personally I think its way to soon to start thinking about this. Chinese growth is currently one of the few bright spots on the global horizon, and the chinese economy - with all the internal strains being produced by the reform process - is in no position to do the heavy lifting on behalf of the rest of us, yet. I'm happy to be in the company of Morgan Stanley's Stephen Roach and Andy Xie on this one. Unfortunately in my book this is simply another example of what hypocrites we are. In the 90's, when things still went well (you do remember those days, don't you?) we lectured the world on the need for reform and the benefits of following the western model, and now that we are finding the going a bit tougher what do we do: start asking for help from one of the countries that actually took our advice seriously. I didn't notice us exactly reaching out a helping hand to China when it really needed one. If Japan, the EU and the US have significant economic problems, perhaps it would be better to start by examining what is happening at home before reaching out to find scapegoats abroad.

Finance Minister Masajuro Shiokawa is expected to urge finance ministers and central bank governors of the Group of Seven industrialized countries to press China to revaluate the yuan, government sources said Friday. At a two-day G-7 meeting, scheduled to open in Paris on Friday, Shiokawa will argue that China's "export of deflation" is one of the factors behind global deflation, and he will insist that China's cheap exports are negatively influencing the world economy, the sources said. The current exchange rate of the Chinese yuan, which is effectively pegged to the U.S. dollar, is seen as being unnaturally low for the country's fast-growing economy.

Shiokawa is expected to point out that restrictions on capital transactions by the Chinese government has led to an expansion of the country's trade surplus, and he will ask G-7 finance ministers and central bank governors to consider calling for the revaluation of the yuan, the sources said. It will be highly unusual for a G-7 member to request discussions on the capital liberalization of a nonmember country like China at a G-7 meeting. Shiokawa is expected to call on China to adopt a policy that pays closer attention to its influence on the world economy, sources said. The finance minister will also request that China relax its regulations on capital transactions as yuan-based fund-raising by foreign banks is restricted in China.

Deflation is eroding not only the economies of Japan, China and Hong Kong but also the world economy, with inflation rates in the United States and Germany slowing down. Conversely, China is accelerating its export drive, which is also affecting the economies of many countries. The U.S. trade deficit with China in 2002, which was announced Thursday, was a record high 103.1 billion dollars. The U.S. economy, which has served as an engine of global growth, slowed sharply in the fourth quarter of 2002 on the back of sluggish personal consumption, expanding a mere 0.7 percent, compared with a 4 percent increase in the third quarter. According to a preliminary report on Japan's trade in 2002 released by the Finance Ministry in January, imports from China rose 9.9 percent from a year earlier, surpassing those from the United States for the first time since World War II. Observers have pointed out that the continued influx of Chinese products, whose low prices reflect the country's cheap labor and manufacturing costs, may intensify the deflation problem. However, as the United States is expected to pay closer attention to China because of the mounting tension in Iraq, the government plans to fine-tune its announcement before the G-7 meeting.
Source: Daily Yomiuri

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