The good news for the U.S. economy came at the very end of 2010. Claims for jobless benefits fell to their lowest level in two years to 388,000 in the week to December 25, marking the first time since 2008 that the number fell below 400,000.
“Other data showed businesses expanded this month [December] at the fastest pace in two decades and pending home sales climbed in November for the fourth time in five months,” reported Bloomberg
“Firings may keep easing as a pickup in consumer spending prompts employers to retain staff, a necessary step toward increases in employment that will sustain demand,” Bloomberg added. “Gains in business investment and exports to growing emerging economies may keep factories churning out goods in the coming year, while more jobs may also help housing stabilize.”
So is the U.S. – and by extension, the global economy – really on the road to full recovery in 2011? Perhaps, but expect continued stormy weather. “Batten down the hatches,” Merrill Lynch warns in its year-end global economic analysis report
. “With [the U.S.] still wounded by the recent crisis and with policy stimulus nearly maxed out, the economy remains vulnerable to premature fiscal tightening, a commodity shock and a variety of other downside risks.”
For CFOs in Asia trying to read the economic tea leaves in 2011, the U.S. is, of course, a key concern, particularly for companies that export there (as most Asian enterprises are, directly or indirectly) and those that have American subsidiaries. The recent spate of positive numbers is beginning to look convincing to many economists.
“The most significant shift in 2011 and 2012 is likely to be stronger growth in the US,” Goldman Sachs concludes in its own year-end report.
Describing its outlook as “a genuine shift in view,” the investment bank has decided to raise its previous forecast for 2011 by nearly one percentage point, to 2.7%. This is higher than the consensus forecast of 2.4% by major forecasters, as tracked by macro-economics research organization Consensus Ec
What has changed? “Most strikingly, the performance of underlying final demand, or ‘organic growth,’” Goldman explains. Stripping out the short-term effects of inventory swings and fiscal stimulus, the resulting core measure it terms organic growth “is now showing an impressive acceleration and seems to be on track for a 5% (annualised) growth rate in the fourth quarter [of 2010].”
That said, Goldman has caveats. “We are not saying that the US economy will now embark on a V-shaped recovery,” it makes clear. “We are also not saying that deleveraging is over. Indeed, private-sector debt/income ratios are still likely to decline further. But it is the pace of deleveraging – which corresponds to the level of the private-sector balance – that matters for GDP. As the pace of deleveraging slows, the private-sector balance falls, and this implies a positive impulse to GDP growth.”
“Finally, we are not saying that the economy will feel good from a ‘Main Street’ perspective. We only expect a gradual decline in unemployment as growth moves above trend, to 9¼% by the end of 2011 and 8½% by the end of 2012. This is still very high by any absolute standard and far above our 5½% estimate of the structural unemployment rate.”
In other words, Asian exporters that are counting on the return of the American consumer should temper their expectations. There may be improvement in demand, but it will be slight and not likely to goose revenues and the bottom line to a great extent.
The Crisis Ain’t Over
And the modest recovery in economic growth and consumer demand in the U.S. is vulnerable to external shocks. “One of the great myths in business media and some policy circles is the idea that the crisis is over and that it is time to normalize policy,” Merrill Lynch believes. “In fact, while capital markets are (relatively) stable, the economic crisis is far from over.”
The Merrill Lynch report ticks off the outstanding issues:
- The distressed economies can do little now with countercyclical measures because policy rates are near zero while budget deficits approach record levels
- Global imbalances are still very large and the “awkward vendor financing from emerging markets to developed economies continues”
- Local governments in the U.S. and in Europe’s periphery remain deeply distressed
- The U.S. home foreclosure process has a long way to go
- Banks in Europe and the U.S. continue to struggle, the former under a cloud as Ireland’s economic problems cast doubt on the efficacy of Europe’s bank stress tests and the latter held back by high unemployment in the U.S. job market
- Japan is in deflation, and the U.S. and Europe can join it if a recession hits them again
- Asset and consumer price inflation stalks emerging markets as hot money pours into them
Then there are the security and other uncertainties bubbling ominously in the background. “Add in the usual geopolitical concerns – such as terrorism and North Korea and Iranian nuclear ambitions – and there is plenty to worry about,” Merrill Lynch concludes.
But Merrill and Goldman, like the consensus, remain positive on Asia. For China, Merrill forecasts 9.1% GDP growth in 2011, the same as consensus. Goldman is more optimistic at 10%. It does expect China’s GDP growth to slow appreciably in the second quarter as China takes “a more pronounced tightening effort,” including rate hikes and administrative guidance to slow lending. But Goldman says growth should edge higher later in the year.
The consensus forecast for India, according to Consensus Economics, is 8.5% growth in 2011. Merrill thinks it will be 8.5% as well, while Goldman is slightly more upbeat at 8.7%. Even Japan is seen as expanding next year, though at an anemic pace – 1.2% on consensus, a bit higher at 1.5% according to Merrill, and lower at 1.1%, according to Goldman.
With growth, though, comes inflation – and higher interest rates. “While we are below consensus on inflation in the developed world,” says the Goldman Sachs report, “we are above for most emerging markets.” It forecast 2011 inflation in China at 4.3% (consensus: 3%) and 6% in India (consensus: 5.8%). Goldman Sachs also sees quickening inflation in Indonesia (6.2%), Philippines (5%), Hong Kong (4.1%), Thailand (3.9%), Singapore (3.6%), Malaysia (3.4%) and South Korea (3.3%).
Asia’s CFOs have to watch consumer price increases because expenses can spin out of control in an inflationary environment, particularly if the company does not have pricing power or is unable to effectively manage rising costs. If monetary authorities are compelled to raise interest rates to head off inflation, CFOs must be ready to tackle issues such as higher interest expenses, rebalancing of financing sources and other financial implications.
Interest and Currency Rates
Australia, India and New Zealand have already gone through several rounds of interest rate rises since 2009. They were followed by China in October 2010 and South Korea the following month. The People’s Bank of China increased interest rates a second time, by 25 basis points to 5.81%, on Christmas Day. “With inflation pressures brewing, other central banks around the region will be soon forced to follow suit and move to normalize interest-rate settings,” predicts Moody’s Analytics
, a sister company of credit ratings agency Moody’s Investors Service.
Higher interest rates and the fact that Asia’s economic fortunes are brighter than those of many Western markets can also mean a stronger currency as hot money flows into the region, looking for higher yields and other investment opportunities. “Many emerging market currencies have risen by over 10% or above on a real trade-weighted basis over the last three years,” noted Moody’s Investors Service in October
Stronger Asian currencies can pose headaches to exporters, whose products become more expensive to produce at home and sport higher price tags abroad, even as their U.S. dollar and euro receipts fall in value in local currency terms. There may also be the added complication of government policy measures that can have an impact on company financial management, such as capital controls and other interventionist actions to try and stem the inflow of short-term foreign money.
Financial management in Asia, in other words, will continue to be as complicated as it was in 2010. But forewarned is forearmed. Knowing the likely shape of things to come, Asia’s CFOs will do well to anticipate the risks and arm themselves now for the battles ahead.
About the Author
Cesar Bacani is editor-in-chief of CFO Innovation.