A New Monthly Report by Dr Neville Bennett
An incisive hard-nosed monthly view of markets, personally prepared for select subscribers by Dr Neville Bennett (London School of Economics).
Economics Editor of the National Business Review, Director of Socrates Fund Management, Director of the Foundation of the Blind, Trustee of the Universities Superannuation Scheme and Consultant to Breaker Bay group.
Available Exclusive by Subcription Monthly from May 2009
An exclusive window into the future from the same economist that brought you the Aviation Index and other unique insights into the workings of the world economy.
Here is what Dr Bennett has said in the past in the NBR –
“The yield curve is rather flat and appears to be flattening ...Every recession has been preceded by a flat curve. There is a massive credit crunch taking place.” JUNE 2, 2006
“The market seizes the good news and runs with it. Sometimes there is somewhat negative news but that is overlooked. (The Dow) now surges every day. So did the Nikkei ... it rose to 28,000 in early 1998. It was convinced it was inspired by infinite expansion ... there is a disconnect between the finance and real world ... I have looked up other bubbles and it always ends in tears.” MAY11, 2007.
With the benefit of hindsight we can now see just how accurate Neville's analysis was back in 2006 / 2007. This report gives you specific in depth insight into the thinking that has produced these columns in the past.
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Dead Parrot Bounce
New Zealand bank economists interviewed by NBR for last weeks front page generally asserted that the economy will turn mildly positive this year. In the spirit of robust debate I will oppose their “dead parrot” recovery. ( refer Monty Python http://www.youtube.com/watch?v=4vuW6tQ0218 )
Essentially, my previously published articles have indicated that New Zealand depends upon the world economy and has never emerged from recession on its own accord. It needs to be pulled out of the mud by a buoyant world economy. Unfortunately, a growth in world trade is unlikely this year.
Sources of resurgence
New Zealand may have fared better than most, but it has had a year’s negative growth. Confidence is falling, and business intends laying off more labour, reducing costs and investment. Moreover, households have reduced spending, so demand and consumption are fragile. An earlier construction boom and shopping-spree have faded away. Internal demand is insufficient to pull this country out of recession.
Could external demand do it? The world economy is slowing. Air travel has been slashed, so tourist receipts will be down. Agriculture? Most prices have fallen. Manufacturing suffers from volatile exchange rates and intensified competition. All exporters of goods and services are battling falling demand, pressure on prices and tense competition. An export boom, strong enough to pull New Zealand into strong growth, is unlikely. There will not be a recession-breaking increase in aggregate demand in the short term. Meanwhile, there are clouds over the world economy.
The US and UK Housing Weakness
Perhaps a second wave of weakness of the housing market will damage the world economy, especially the financial sector, in the months ahead. There are accumulating losses and dysfunctions in credit markets, and accumulating toxic assets. Despite large stimulus packages the world economy is struggling, profits falling and unemployment surging. Global demand is slipping.
Compilers of the UK’s authoritative Halifax Index note house prices fell by 17.7% y-o-y with a huge -1.9% drop in March alone. While houses are only 4.34 p/e, the compilers anticipate a “tough” year ahead because of increasing unemployment, failing confidence and dislocated financial markets.
US house prices are down 19% y-o-y, and more is expected with I–in-8 mortgages “under water’, and 1-in-9 houses vacant. The least risky prime mortgages have shown the greatest jump in serious delinquencies. Downward pressure on house prices in the UK, US, EU and even Australasia is anticipated to mute demand and delay financial recovery.
The US economy
According to the Federal Reserve, industrial production in February was 11.2% lower y-o-y and has fallen to its lowest level since 2002. Consumer goods production has fallen below 2002 levels. Car production has fallen 35% in the year. Capacity utilization is only 70% and this is the lowest figure since December 1982. The US economy has fallen off a cliff.
Source - Federal Reserve - http://www.federalreserve.gov/releases/G17/Current/ipg1.gif
US employment is grim. Official statistics count only the insured, a survey show 1 in 9 are actually unemployed or under-employed. The minutes of the last Fed meeting shocked markets, as it revealed growing pessimism about the downturn.
The US consumer is important. Sales dived in February. 1-in-10 Americans now receive food aid. Since 2000, the population receiving aid has increased from 17 to 32 million.
The IMF has downgraded global growth estimates again by 1%, saying that it is the first global contraction since 1945. It is preparing another assessment of toxic debt which it estimated at $2 trillion in November. The Times says the IMF new estimate is $4 trillion. This toxic debt will be a severe test for Washington’s policy makers. They also have to cope with the up-coming bank “stress-test”.
March saw the largest number of corporate defaults since the Depression, according to The Economist. The default rate is 7%, up from 1.5% a year ago and predicted by Moody’s to top 14.6% in the final quarter. Incredible if nearly 1-in-6 corporations default!
Bloomberg predict that profits will fall by 37%, the seventh straight quarterly fall-- the longest stretch since the 30’s. This is at odds with the stock market’s rally. Bond traders like Mohamed el-erian of Pimco call this an “equity death-trap”.
Other indicators
The UK economy will decline for another year and then take another two years to recover according to the prestigious think tank, The National Institute of Economic and Social Research. It reports that the economy has declined by 4.2% since May 2008. Car sales fell by 35% y-o-y in March.
The World Bank reports that Asian growth has halved this year. It expects East Asia to be very hard hit by the crisis as richer nations cut back their imports—a line of reasoning relevant to New Zealand.
Note that in Japan, our fourth-best customer, GDP fell 5.5% this year.
New Zealand’s biggest market is also showing some signs of stress: Australia’s unemployment jumped to 5.7% in March from 5.2%--its biggest monthly rise in 18 years. St George Bank expects unemployment to jump to 8%-9% in a few months. The Reserve Bank has responded with an interest rate cut, but expects recession.
Other indicators cast doubt on a rebound. The Baltic Dry index fell 96% from May to December last year. It trickled up in February a little but has been down a third in recent weeks. Commodities are still low: indices about half of last year’s peak. Gold has retreated and oil is fluctuating around a $50 a barrel. IATA says the situation is “grim” and our Asia-Pacific Region the hardest hit and expecting a recovery in 2010 “would require more optimism than realism”.
Conclusion
I cannot see any source of domestic or foreign stimulus to NZ aggregate demand sufficient to push the country into strong positive growth. Stock markets are strong but this is ebullient. There are few bargains as the US market’s p/e is 14.5 and the dividends on the S&P500 is 3.2%, and likely to fall. As the Economist observes, investors might be showing exceptional foresight or “they may be spotting imaginary signs of life in a dead parrot”.
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