The US Economy Recovery - Essay Example

?Country Risk >> United s Economic Analysis - Weak Recovery Story Continues United s - Economic Activity - 31 May BMI View: A poor real GDP reading for Q111 has forced a downward revision in our US real GDP growth forecast for 2011 to 2.6% from 2.9%. We also see fewer rate hikes in 2012. Our overall view that the US recovery will be relatively weak and erratic is unchanged. Our US real GDP growth forecast has been revised down to 2.6% from 2.9% for 2011. It has been revised up slightly to 3.0% from 2.9% for 2012. This is the second consecutive downgrade in our US forecast, which came into the year at 3.1%. We are clearly less optimistic now than we were even a few months ago, but the overall view is the same as it has been for the past three years: the US recovery will be characterised by fairly weak and erratic growth and low inflation, but we do not expect a double-dip recession. We continue to expect growth between 2.5-3.5% over the coming couple of years, which is way below where it 'should' be coming out of such a bad recession. Occasionally, the US economy may post some great quarters, and may post some really poor ones. The Q111 real GDP growth estimate, of 1.8% q-o-q annualised (as per the second estimate released on May 26), could be lumped into the latter category. Deceleration Across The Board In Q1 US - Real GDP Growth By Expenditure Category (q-o-q SAAR) Source: BEA, BMI Below Trend, Par For The Deleveraging Course Growth really should be somewhere north of 4.0% just to get the overall level of output back to trend. Without faster growth, the unemployment picture will remain bleak. With such a disappointing pace of growth recovery, the US economy is roughly tracking the trajectory of other countries that experienced a major financial crisis and a prolonged period of deleveraging. We see some similarities in this respect to Japan, Sweden in the mid-90s, South Korea post-Asia crisis, etcetera. There is a rebalancing going on in the US away from consumption and housing and toward manufacturing and exports. We reiterate that this makes it an unusual US recovery, if only because American recoveries typically consist of residential investment and consumption picking up the slack, and this time around it is going to be, and has been, net exports and business investment. Not only was Q111 data pretty poor, it also revealed a downward revision to private consumption, and a boost from inventories, making the composition of growth pretty poor as well. This was especially a disappointment because the payroll tax cuts announced in December were expected to give a strong boost to consumption in the first quarter, but it looks like their effect was offset in part by higher oil prices. The house price double-dip and high unemployment obviously haven't helped. Our new forecasts have lowered our expectation for private consumption in 2011, if only modestly (from 3.1% to 3.0%; we had already revised down our estimate earlier in the year). On the upside, credit growth is showing some signs of life, and the labour market is slowly healing, so we do not believe that there is sufficient reason to get too pessimistic on the consumer. If oil prices drop in H211, and this is reflected by lower prices at the pump, real private consumption could get a boost. But if oil prices head higher again, expect more bad news from the consumer. High Oil Prices Remain A Risk US - Real Retail Sales (% chg y-o-y) Source: BMI Investment: Healthier, Ex-Housing Residential construction remains a drag on overall growth (just under 0.1pp in Q111), and data since then have not been good either. We would expect at least some contribution from residential investment later in the year, however, if only because the homebuilding industry cannot mathematically sink too much lower. Non-residential structure investment is also very weak (subtracting 0.48pp from growth in the quarter). We see few prospects for improvement in this sector in this environment. On the upside, though, equipment and software investment contributed 0.81pp to headline growth, the eighth consecutive quarter in which such investment had a positive contribution, which is basically the most consistent thing you will find in the GDP series. Big businesses are flush with cash and are putting some of it to work, though unfortunately they are not putting many people to work, at least at this stage. Due mainly to the construction sector's weakness, we have lowered our fixed investment growth forecast for this year to 6.5% from 7.8%, contributing 0.8pp rather than 1.0pp. Still, the medium-term outlook is reasonably healthy here, and if housing gains traction, then growth could eventually begin to surprise on the upside. That scenario is probably a long way out, though. Housing A Shadow Of Its Former Self US - Categories of GDP (As % of GDP) Source: BEA, BMI We also point out that inventories contributed 1.19pp (two-thirds) of growth in the quarter, meaning that growth of final sales of domestic product (GDP less inventories) was quite poor at 0.6% q-o-q annualised, especially compared to the vaunted 6.7% figure seen in Q410 that convinced many analysts that the economy had finally turned the corner. Payback from government stimulus' contribution in 2009-2010 has begun, with government consumption and investment subtracting from GDP in both Q410 and Q411. To be fair, most of this has been on the national defence side of expenditure for the government (at -0.68pp, while nondefense spending was flat), but state and local investment was also a big drag, of about 0.4pp, about the same as Q411. We expect the non-defense government sector to subtract in the quarters ahead as stimulus fades. Signs Of Softening US - Durable Goods Orders (% chg y-o-y) Source: BMI Unfortunately, Q2 has not started off on a positive note. Durable goods orders, and both manufacturing and non-manufacturing (e.g. services) purchasing managers' indices were down significantly in April from previous months. Meanwhile, initial jobless claims have stayed stubbornly above 400,000 for several weeks, suggesting continued softness in the labour market. Of special note: excluding automobile output, which was exceptionally strong in the quarter, the GDP grew by only 0.5% q-o-q annualised in Q111. There will probably be a hit to auto output in Q2 following the Japan earthquake hitting the supply chain. Overall we are forecasting growth in Q2 in the 2.5-3.0% range, and H2 growth somewhere in the low 3.0% region, but at this point we are willing to accept that there will be a lot of surprises in either direction along the way. Poor Start To Q2 US - Purchasing Managers' Indices Source: BMI Monpol: A Slightly Easier Path We have lowered our Fed funds rate forecast for end-2011 to 1.00% from 2.00% (with considerable downside risks). With weak growth comes a poor employment outlook, which will keep the Federal Reserve cautious. QE2 is going to end as scheduled at the end of June. And QE3 looks very unlikely in our view unless there is a full-out double-dip recession, which we do not believe is coming. The markets do not appear to be perturbed by this, however, with 10-year yields falling sharply mere weeks ahead of the end of QE2. Still, the short end of the yield curve should remain pretty well behaved if nothing else, as the Federal Reserve will have even more unwillingness to raise rates in the face of low core inflation and high unemployment. Given our latest downward revision to 2011 US real GDP growth to 2.6% and our view that Fed funds will not move above 1.00% by end 2012, we still see little fundamental reason for liking the dollar. If we are right about US growth moving at a slow but not recessionary pace, the dollar should continue to head lower. This should help boost exports (which are picking up steam, raising their contribution to GDP growth in each of the past three consecutive quarters), improving the contribution of net exports to headline growth in coming quarters (net exports subtracted 0.06pp in Q1, basically flat). Geography: United States Channels: Economy : Finance : Forex : Economic Activity http://www.businessmonitor.com.remote.baruch.cuny.edu/cgi-bin/request.pl?view=articleviewer&article=476496&SessionID=1B57F0F08D1911E0B77CAAC45948AC4E&service=e&iso=US Business Environment SWOT Analysis Strengths The US boasts the world's largest single internal consumer market, which presents tremendous opportunities for businesses of all types and sizes.  Few countries offer better environments for entrepreneurial activity, with a highly flexible labour force, a legal system that is friendly to business, and significant centres of technological innovation (such as California's Silicon Valley). Weaknesses Much of the country's physical infrastructure is in need of improvement, with congested roads and airways. US corporate tax is, on average, among the highest in the OECD. Opportunities The Obama administration is committed to improving the nation's infrastructure, with stimulus package funds being dedicated to that purpose. The US has often been the origin of new drivers of economic growth booms, and sectors ranging from biotechnology to alternative energy are being discussed as possible catalysts.  Threats Government intervention in the economy puts the country's reputation for free enterprise at risk.  Geography: United States  Channels: Economy  : Political Risk  Political SWOT Analysis Strengths The US is an undisputed superpower, and therefore occupies centre stage in most international diplomacy. Long-standing democracy with vigorous and open political debate; the US continues to attract large numbers of immigrants committed to citizenship and self-advancement. Weaknesses Political debate between Republicans and Democrats has historically shown a tendency to become more polarised and divisive. As today's superpower, the US attracts the enmity of a wide range of political groups opposed to the current international status quo. Opportunities The changing political mood (as evidenced by the popularity of unconventional candidates in the 2008 presidential election, including Obama's), and the widespread dissatisfaction of the voting public, may encourage both major parties to experiment with more consensual approaches to certain policy areas. Threats The perception of inflexibility and bias in US foreign policy, particularly in the Middle East, may stiffen opposition and at worst provide fertile recruiting ground for radical anti-US groups such as Al Qaeda. Partly as a reaction to foreign policy difficulties, US public opinion may return to isolationist and protectionist modes. The US dollar will continue to weaken over the course of 2011, especially against higher-yielding emerging market currencies. We have revised down our dollar exchange rate forecasts versus the euro. Our new average annual forecasts are US$1.43/EUR in 2011 (previously: US$1.35/EUR) and US$1.38/EUR in 2012 (previously: US$1.27/EUR).  ================================================================== Country Risk >> United Kingdom Political Risk Analysis - Assessing The Likelihood Of Scottish Independence United Kingdom - Domestic Politics - 17 May 2011 BMI View: We believe that the chances of Scotland becoming independent over our 10 year forecast period are around 10%. Weighing against independence is that only about a third of the Scottish electorate is in favour at present, the UK political establishment remains firmly unionist and economic volatility would most likely follow even a 'velvet divorce'. That said, more powers are likely to be given to the Scottish Parliament, especially over economic affairs, in the coming years. The election of a majority Scottish National Party (SNP) administration in the Scottish Parliament has brought into sharp relief the SNP's key policy aim: independence. The issue was firmly on the backburner during the 2007-11 Parliament due to the minority SNP administration lacking sufficient opposition support to push through a referendum bill. Indeed, the three main UK parties - the Conservatives, Labour and the Liberal Democrats - are all opposed to Scottish independence. However, the changed political circumstances in Scotland mean that we are reassessing the prospects for Scotland to secede from the UK. Our core view is that that chances of independence are roughly 10% over the coming decade. This is up from 5% at our last full review in June 2008 based on the SNP gaining an outright parliamentary majority in May 2011. What Would Happen If Scotland Became Independent Should independence actually be declared, which we think is maybe a 10% possibility over the next ten years, the economic, political and financial market ructions would be much greater than when Czechoslovakia split in 1993. These risk scenarios are little changed from the time of our last assessment of the prospects of independence in 2008. The future of Sterling: The pound at present remains one of the world's major currencies. It is the fourth most frequently traded international currency and reserve asset after the US dollar, euro and Japanese yen. In the immediate aftermath of Scottish independence, given the recent experience of country splits, together with indications from the SNP, it would appear likely that the UK pound sterling would continue to circulate in both countries. Foreign exchange market volatility would certainly be the order of the day, probably accompanied by a steep decline in the currency's value. After a transition period, we would expect either a Scottish pound to be floated, or for Scotland to seek membership of the eurozone. Oil: Black gold or a busted flush? A major rallying call behind the SNP's independence cries has been the argument that Scotland is not fully benefiting from oil production in the North Sea. According to the official Government Expenditure and Revenue in Scotland report, Scotland's 'geographic share of North Sea oil' was equivalent to 21% of Scottish GDP in the financial year 2008/09, and full control over the revenue from this production would have meant that Scotland's budget posted a surplus of GBP1.3bn (0.9% of GDP), against an actual deficit of GBP9.4bn (8.0% of GDP). All of this suggests that in an era of stellar oil prices - and prices which are likely to remain elevated into the long-term - Scotland would be a major oil producer for a country its size. Indeed, the report suggests that Scotland would be entitled to 91% of all revenue from the UK's current oil industry. Petro-currency status for the Scottish pound would not be far off. The defence question: At present some of the most important UK defence installations are in Scotland, including the UK's submarine-based nuclear deterrent, several army battalions and air defence installations. At least some of these, including nuclear installations, would have to be removed at great cost, given the SNP's anti-nuclear stance, and post-independence arrangements. The big question would be whether the SNP would stay in NATO, or follow a neutral path akin to Ireland's. Geography: United Kingdom  Channels: Political Risk  : Domestic Politics  http://www.businessmonitor.com.remote.baruch.cuny.edu/cgi-bin/request.pl?view=articleviewer&article=471165&service=e&SessionID=FC20E6FE8D3D11E0B91FEDABEBC61817&iso=GB Political Outlook - Q3 2011 United Kingdom - Political Risk - 27 Apr 2011 Domestic Politics What To Watch For On May 5 On May 5 the UK goes to the polls in a series of elections, which will be the first major electoral challenge faced by the Conservative-Liberal Democrat coalition. We believe the opposition Labour will put in a very strong performance, which may even turn into a rout of the coalition. A Labour 'victory' will not by itself cause intra-coalition ructions, but the extent of the victory will. We lay out the current situation and what would be required for the coalition or Labour to claim a 'win'. Scottish Parliament: With the Scottish National Party (SNP) governing through a minority administration and Labour looking to take control, the risks posed by this poll are limited for the Westminster coalition partners, the Conservatives and Liberal Democrats. Our core view over recent quarters has been for Labour to regain control of parliament and form a majority administration. Having become a widely held assumption within political and media circles, a failure by Labour to gain control would be a major blow to the party, especially as the 2007 elections were held at the near-nadir of its electoral fortunes. Indeed, a recent Yougov/Scotsman poll has put the SNP ahead and First Minister Alex Salmond performed well in the Leaders Debate held on March 29. A More Volatile Decade Ahead? BMI View: The UK faces its most uncertain period in at least a generation, as the Conservative-Liberal Democrat coalition presses ahead with fiscal cutbacks and constitutional reform - both of which will test their ability to work with one another. We see a variety of scenarios ahead, ranging from rapidly shifting governments to stable coalitions, as well as the possibility of electoral reform. Regardless of which party holds power, the government will have to enact spending cuts if it wishes to avoid a fiscal crisis this decade. The UK appears set for greater political volatility over the coming decade owing to uncertainty about the long-term viability of the coalition government and the likely backlash stemming from cuts to public spending. A further unknown at this time is the issue of constitutional reform, which is to be put to referendum on May 5 2011. Overall, the May 2010 election was a landmark event in that it denied both main parties a majority for the first time since February 1974 and ushered in the first coalition since 1945. Thus, Britain's political scene is in relatively uncharted waters. Currency Forecast -  Sterling Poised To Pound The Dollar United Kingdom  -  Economy  -  05 Jan 2011 Short-Term Outlook Having clawed back above US$1.6000/GBP by November 2010, the British pound subsequently lost momentum, trading down to US$1.5599/GBP at the year's close. Following its failure to push through resistance at US$1.5600/GBP, the technical outlook for sterling suggests further weakness in the short-term, with a potential move back down towards the US$1.5300/GBP level. Risks To Outlook The major downside risks facing the pound are inflation and potential fiscal slippage. Confidence in the UK economy could weaken should inflation start to shoot higher or the government relents on its fiscal targets. The latter is especially pertinent given that the government's fiscal consolidation programme was by and large the key factor anchoring confidence in the UK economy through 2010. The upside risks stem from Fed policy action with a more substantial blitz of dollar printing likely to propel the pound sharply higher. Given the significant and conflicting risks, pound volatility will remain pronounced through the year. On the whole, we believe that the balance of risks are to the upside given that the Fed has a strong propensity to devalue the dollar in response to deteriorating economic conditions, and UK fiscal cuts are unlikely to derail the recovery in our view. Geography: United Kingdom  Channels: Economy  Top of Form : Finance  Bottom of Form  : Forex  : Exchange Rate Policy  : Monetary Policy   Read More