OUR MACRO OBSESSION

Our central Bank has taken its eye off the essential Ball of growth and is fixated with fighting inflation...and returning impressive macro economic data Headline Inflation Headline consumer price inflation which rose steadily to 18.4 percent in June, eased back to 17.9 percent in September, showing three (3) consecutive months of decline in the third quarter of the year. Price developments within the quarter saw monthly growth rates especially for the non-food category slow down relative to trends observed for the same period in 2007. Food prices also decelerated during the quarter mainly on account of improved food supply situation during the quarter. As a result, the average price increases of food in the third quarter improved relative to trends a year ago. Non-food prices also turned in better than a year earlier. Cumulatively for the year as a whole, inflation, by the end of the third quarter had registered an increase of 5.1 percentage points, moving from 12.8 percent at the beginning of the year to 17.9 percent at the end of September 2008. The increase in the year so far has been driven by both food and non-food prices. Food inflation which stood at 10.5 percent at the end of December 2007 increased to 17.9 percent by the end of September 2008. Non-food prices, on the other hand, also increased from 14.4 percent at the end of December 2007 to 18.5 percent by the end of September 2008. Details of the annual inflation rates within the various sectors of the economy for the periods September 2007 and September 2008 are reported in Table 2. Inflation rate varied across sectors. Some key sectors experienced sharp increases were the food sub-group, alcoholic beverages and tobacco, clothing and footwear, housing, and utilities, imported household goods and equipment, transportation costs, and educational costs. Inflation has turned in better than expected during the third quarter of the year with prospects of continued easing. At the last policy meeting, the Central Bank raised its key policy rate by 1 percentage point in an effort to dampen inflationary pressures and expectations. The response to the rate rise has been elastic with economy wide rates moving by more than a percentage point. Credit conditions tightened and crude oil prices have since retreated significantly and crude oil is trading at around US$60 per barrel (in the early weeks of November). The significant drop has occurred in the midst of the financial turmoil in the world economy with concerns about the depth and duration of recession in the global economy. At the July 2008 MPC meeting, the expectation was that crude oil prices would continue to rise and stabilize at around US$150 per barrel for 2008. That assumption combined with initial conditions at the time, including spiralling food and energy prices and a relatively faster pace in the depreciation of the

A martyr for the cause

The Man who may say defined the art of Central Banking admits "he didnt understand the financial Markets"! People say the former Federal Reserve chair is just trying to save his own skin – I think he's trying to save ours First they came for the short-sellers, and I did not speak up because I wasn't a short-seller. Then they came for the bankers, and I did not speak up because I wasn't a banker. Then they came for Alan Greenspan, and he rolled over, said sorry and provided some much needed confidence in a crisis-laden market. Yesterday, Greenspan told the House oversight committee that he took some of the responsibility for the current turmoil by admitting his prior lack of elucidation on the subject of regulation. Today, the press has mostly been deciding not only whether he was right or wrong but whether he actually admitted he was right or wrong. The thing with the economy is that because it involves money, it is seen as a science – a thing to be right or wrong about. Yet the variables in the economy – indicators such as consumer confidence or unemployment – are just extrapolations of theories that give a general idea of the state of the economy, not a definitive answer to its problems. Obviously much of the press attention has been devoted to the dichotomy of blaming Greenspan for the current turmoil, having previously worshipped him as the god of all things shiny and bling. Yet very little has been devoted to why he has made this confession – why a retired official, two years out of office, would return to take some of the current deadweight on his shoulders. It is interesting to look at Greenspan's reputation. He is almost universally seen as the man who led the way through the stock market crash of 1987 and the dot.com boom/bust crisis of 2000. However, according to the New York Times, he says he refuses to accept blame for the crisis. Is it not strange for a man so universally revered for the biggest period of growth in capitalism's history to suddenly step up and take responsibility? At 82 years old, with an almost religious following, would you take responsibility for an international financial crisis the likes of which we haven't seen for 80 years? I hope so. At this stage in the meltdown, people like Greenspan know better than anyone else the options available to US, European and UK banks and treasuries. The options are limited. They can ban short-sellers, but to what end? It quickly became clear that the short-selling ban was merely an attempt to prove that something was being done. So what else is there to do? The injection of billions of dollars into banks might allow some further liquidity to allow business to continue but it does little to allay panic. Greenspan has martyred himself for the cause. He has presented himself to congress as a part of the problem. By suggesting he has made mistakes he is allowing for the recognition that his absence from the Federal Reserve might precipitate some positive changes to the economic system. Greenspan's most important role at the Federal Reserve was to inspire confidence through bad times: a job that he continues, unpaid, today. Many people say he's just trying to save his own skin; I think he's trying to save ours. Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.” — Alan Greenspan in 2004

Can China help power the global economy out of a crisis?

Can China help power the global economy out of a crisis? The usual economic powers are still struggling and help is sorely needed. so will China prove that help. from all indications they are doing just that. They are currently providing almost all the funding for the US government's $700bn bail-out plan. After five years of double-digit expansion, the world’s fastest-growing economy has succumbed to the economic chill wind sweeping across the globe. China’s economy slowed to an annual growth clip of 9 per cent in the third quarter from 10.1 per cent in the previous quarter ¬– well below the consensus forecast of 9.7 per cent. With the credit crisis buffeting global economic growth, China’s industrial production and construction declined due to weaker export orders, factory closures for the Beijing Olympics and the sagging property market. However, retail sales growth remained strong, while inflation eased amid falling commodity prices. Nevertheless, Dominic Barton, Asia Pacific chairman of consultancy firm McKinsey & Company, is “very bullish about where China is going to be over the next two to three years.” Speaking at the World Knowledge Forum in Seoul, Barton says that while consensus economic forecasts point to a likely two-percentage point drop in China’s economic growth in 2009, its underlying growth drivers remain formidable ¬¬– due to its large consumer base, significant infrastructure expenditure and the Chinese government’s strong fiscal position. For its part, the government, which has currency reserves of US$1.9 trillion, has announced a raft of measures to address the darkening economic outlook. The government will increase infrastructure spending, raise export tax rebates, reduce property transaction fees, encourage banks to lend more money to small- and medium-sized companies, and introduce new programmes to support farmers. Furthermore, economists expect the central bank to cut interest rates for the third time this year. “We think growth will continue in China in almost every sector; there are some sectors where it will be zero,” says Barton, adding that some sectors and companies are growing at a rate of 40-45 per cent. For instance, steel manufacturers supplying construction companies in Shanghai, Shenzhen and Guangzhou are being hit hard by the property market slump, but companies in the software and pharmaceutical sectors are growing rapidly. Notably, the International Monetary Fund estimates China’s economic growth in 2009 at 9.3 per cent, compared with virtually zero growth in the US, euro area and Japan. To be sure, the forecast growth rate of 9.3 per cent is “still a very strong number,” says Steven Xu, chief representative of the Economist Group in China, who adds that inflation in China is “not a threat”. Xu, who was also speaking at the World Knowledge Forum in Seoul, cites three key cyclical reasons for his belief. Firstly, there are severe excess capacities in many of China’s business sectors – so businesses would have to lower prices in the domestic market at a time when China’s exports to the US, which accounts for 21-23 per cent of China’s goods and services, are slowing down. Secondly, the Chinese currency, which is loosely pegged to the US dollar, has been rising in tandem with the greenback, which has been counter-intuitively boosted by the credit crisis. This is due to fears that the financial crisis in Europe is even worse than in the US. The strengthening of the renminbi against most currencies is therefore deflationary for China, Xu says. Lastly, in terms of China’s equity markets, the A-share market has fallen from its peak of 6,300 points to a recent low of 2,000 points. “So the equity market has done certain things the central bank wanted to do but was not able to do as far as inflation-fighting,” explains Xu. In any case, China has accounted for a significant portion of global economic growth for many years. From this perspective, China’s economic ascent in the past two decades is a “re-rise”, says Barton, who has lived in Korea and China in the last eight years. Far from reaching a plateau, China’s economy will continue to soar, as 350 million Chinese will migrate from the rural areas to the urban areas in the next twenty years. Consequently, China will reach a “critical inflection point” as an estimated 270 million people will enter the middle-class bracket (per capita GDP of US$5,000), which will drive an exponential growth in demand for goods and services. This seismic macroeconomic shift is, in turn, fuelling a massive infrastructure boom: China is building 24 new airports by 2010; Beijing Airport’s new third terminal, which has a floor space of 986,000 square meters, is alone larger than the combined size of London Heathrow Airport’s five terminals. And according to Barton, China is building power generators with capacity thirty times that of New York City. “The power sector, just the energy it needs to fuel that growth … you’ve got to have the water systems, the energy, the electricity, all of that to go with it,” “We’re talking roads, bridges, 50,000 skyscrapers, over 200 cities with a million people. That all has to be built, so you’re going to see in many sectors – over half the world’s consumption of those products being there – that’s why commodities prices long term, I don’t see the pressure coming off. They may not be as spiky high as they are now, but that demand will continue.” Attracted by China’s explosive growth, foreign investment is still flooding in. “We are seeing a very substantial increase in the number of European and North American companies that are saying: ‘How are we getting our footprint right here? How do we participate in the growth?’” Barton says. Even so, foreign direct investment (FDI) has not been a major factor in China’s growth, which has been driven more by its domestic investments and consumption, says Barton. Indeed, China does not need FDI because of its huge domestic savings (of individuals, corporations and the government). But FDI has nonetheless aided China’s growth by bringing in advanced technological capabilities. Chinese companies are also starting to come of age. “These companies are getting the scale where they can actually buy other companies,” says Barton. “We’re seeing M&A activity. We’re seeing geographic expansion within China like we haven’t seen before, and encouragement from the government.” By his reckoning, probably 70 or 80 firms are “on deck and ready to go global” for a myriad of reasons – to access and compete in new markets, find new sources and enhance supply chains. “They’ve got the ambition, they kind of know where they want to go. The challenge is how do you do it because there are not a lot of role models in terms of how to do that. Probably more in India, than there are in China, but they are there. They are just getting to the scale now where they can do it.” But for all the hype over China’s role as an emerging driver of the global economy, it bears remembering that while China’s economy is larger than that of the UK, it is still smaller than the economies of the US, Japan and Germany. As such, China, by itself, would not be able to offset the global economic downturn caused by the US credit crisis. “It’s difficult to expect that China’s going to power us out. I think they can play a role definitely and I think they will,” says Barton. “And I think they can play a role in Asia because they can help the Koreans, they can help the Japanese, they can help the Southeast Asians in terms of the growth as well, so I think they definitely can be helpful but I don’t think we should look at them as the pillar that’s going to pull us out. They’re just not big enough yet.”