The world in the economic dead end

FROM THE REDACTION

During the first month of summer the temperature in the world economy rose.

We can single out the main feature – against the background of oil prices stably ranging around 70 USD, constant tensions over Iran and in the climate of dollar’s decline, industrial production in the US and Europe is decreasing. The main task for them becomes the settlement of the issues related to Russia’s support of the countries with dictatorial regimes that are rich in raw materials. It is also the main purpose of the G8 meeting, that is why at the parliamentary meeting between NATO and Russia in Sochi Russia once again fixed its claims to former soviet countries and separatism, and NATO fixed its interests in the South Caucasus and accused Russia of supporting separatism. There is a latent world war for economic control and the right to possess the resources. The meeting of the Georgian President with George Bush in the US had to do with these issues, and it will be an important reference point for Georgia’s further development.
The following trends have become apparent in the US economy:
– Steady decline of dollar
– Unprecedented increase of trade deficit
– Slowing down of economic growth
– Rising of the consumer index and inflation rate
– High level of budget deficit
– Increase of corporate income and, at the same time, a catastrophic reduction of private, personal savings
– Rising of foreigners’ activity on the securities market. The increase in purchasing of bonds by foreigners and growth in purchases of US corporate shares
It is also confirmed by the fact that Ben Bernanke takes rather intensive steps. The increase of the inter-bank credit rate of the Federal Reserve System has approached the historical maximum – 6.5%.
And what then? The dead end? That is what the world market is worried about. Inflationary boom and cessation of production growth.
Let us start a detailed analysis:
Dollar’s exchange rate is steadily declining and, according to the leading traders, this trend will continue throughout the year in spite of the measures being taken the Federal Reserve System (FRS) aimed at raising of the inter-bank credit rate in order to hold up the economy’s growth and restrain inflation. If we analyze the level of interest rates fixed by it since 1995, it has been ranging from 1 to 6.5%, that is the upper historical boundary is 6.5%.

Alan Greenspen’s successor Ben Bernanke is already approaching this historical boundary and he has 4 meetings left till the end of the year, at which he will reconsider the monetary policy once again. In any case after the last raising dollar retained a firm exchange rate only for two weeks and started to decline at the end of June.
This is stipulated by the following circumstances:
1. Increase of the budget deficit in 2007 budget and unprecedented level of military expenditure
2. Increase of the trade balance deficit
3. Reduction of the indicator of private persons’ savings
4. Slowing down of the economic growth rate
5. Growth of inflation, including core inflation indicator
6. Reduction of the employment indicator
7. Increase of the foreign and the internal debts
The following budget year in the US will start in October. Its project, with which the Congress agreed for the most part envisages the deficit of 354 billion USD, in 2006 this indicator made up 423 billion USD, it included 50 billion USD as the additionally requested sum for the operations in Iraq and Afghanistan. The main direction of the 2007 budget is increasing of direct military expenditure by 6.9%, i.e. to 439.3 billion USD, of public spending – by 2.35 USD to 2.771 billion USD.
Direct spending on education and healthcare is decreasing, as well as aid to the agriculture, while the incomes are mainly represented by direct taxes (see Table 1).
Raising of the income tax and reduction of the corporate one is planned. President Bush’s administration took the course for reduction of the tax burden in order to give incentive to business and investors and, by doing so, settle the employment problem in 2006-2007. Budget calculations of governmental structures for the next 5 years are based on the indicator of 3.2% economic growth and, according to their opinion, the US budget in 2012 will be with proficiency. Today the country with the largest budget has an unprecedented deficit and the year 2006 will be a difficult and hard one. Thus, it will not able to return the former firm position to the dollar and restrain inflation. One of the reason for this is that the deficit of the trade balance acquires a structural character in view of the fact that industrial production is being transferred from the US and Europe to Asia-Pacific region. It is China, India and Vietnam (see Table 6). Another perturbing fact is artificial regulation of currencies in these countries, for instance of Chinese yuan, which makes their import to the US cheap and creates a seriously negative trade balance (see Table 2). On the other hand, since the interest rates are rising, the US becomes the most attractive country for capital export by foreigners, and that is why bringing of capitals in this country and the index of its bonds’ purchasing are increasing. In the first quarter of 2006 the deficit of the US trade balance increased to 868 billion USD, and in May and April – by 68 and 72 billion USD. In relation to the GDP the deficit increased to 6.7%. On the other hand, investments of foreign central banks to the US economy have increased, over the past 30 years internal private savings have unprecedentedly decreased, but the undistributed corporate profit has increased to 890 billion. This means that prices are increasing, life is becoming more expensive (see Table 5), and accumulation of savings in USD does not take place because of declining of its exchange rate. Credits become more expensive, including consumer ones, and the population’s purchasing capacity is decreasing.
Of course, it has a negative effect on the GDP indicator, which declined still more in May (see Table !4).
According to the data of May only, just 75000 jobs were created, when, according to the forecasts, 175000 ones were expected. The number of people employed in the industrial sphere decreased by 14000, also the sales indicator of such giants as Ford Motors and Motors last moth. (see Table #7)
Bernanke’s fears. – The once growing American economy (according to the information of Financial Times) has stopped. At the beginning of June the Federal Reserve’s President Ben Bernanke said about increasing of undesirable inflation. The stock price declined sharply, after Bernanke’s announcement investors are expecting that the Central Bank will raise the interest rate. At the conference of the International Monetary Fund (IMF) Ben Bernanke said that they would be more attentive towards inflation. The meting of the Federal Reserve’s representatives is planned for June 28-29 and many people believe that the Central Bank will remain the interest rate unchanged for the first time in two years’ period and will finish the 16 series changes, which raised the interest rate by a quarter. Last month employers increased the number of jobs by just 75000 in the whole of the US, but, according to their suppositions, the growth will stop. In his latest forecasts on the situation in the economy Bernanke said that now the economy is in the transitional period, and the credit and finance policy should take a closer look at it. This year inflation at the consumers’ level has increased very much, this was caused by increasing of energy carriers’ prices. The consumer index, core inflation has increased by 3.2% over the past three months, and by 2.8% – over the past 6 six months. “This is an undesired development”, he said. Representatives of the Federal Reserve pay much attention to this index in order to see more clearly in what condition the prices of other goods and services are. Economists are worried that with increasing of the core, the current high prices of energy carriers will rise still more. Oil prices have already reached the record indicator of 75 USD/barrel, and in some places the price of natural gas has made up 3 USD/gallon. After June 2004, the Central Bank changed the interest rate 16 times with the purpose of restraining of the inflation.
Bernanke pointed out that consumers refrain from purchasing and business investment is restrained as well. He also said that the number of jobs had been reduced and had the lowest indicator over the past 7 months.
Bernanke, who took up the reins of government on February 1 after Alan Greenspen’s resignation, started his presidency in unstable time and the issues of his struggle against inflation has become questionable. Some economists say that one of the purposes of the statement made by the chief of the Federal Bank was to strengthen his power in the struggle against inflation.
Richard Yamarone from Argus Research, who believes that in June the interest rate will be raised again, said that Bernanke is trying to strengthen his power in the struggle against inflation.
The statement of the Chairman of the Federal Reserve, who spoke of the growing inflation indicators, caused a real turmoil at the US exchanges. Everybody knows perfectly well Bernanke’s talks about inflation and raising of interest rates on loans. NASDAQ and Dow Jones indices have declined, as well as the price of securities, but in the middle of the month the exchange rate of USD in relation to yen and euro has strengthened in expectation of raising of interest rates, but then started to decrease again. At the conference arranged by the Association of American Bankers the Chairman spoke of inflation that does not include the prices of energy carriers and food products. Many people thought that, after poor data on employment, the federals would let one month pass and would not raise the interest rate. However, after this statement made by the Chairman, a probability of its raising increased. Bernanke says that much attention should be paid to the growing inflation indicator. He asks the committee to care for the struggle against inflation and the economy’s development. Bernanke has also said that there are signs of the economy’s slowing down, which had an effect on the indicators of consumer spending, housing market and employment. The Chairman called the economy as “being in the transitional period”.
In this situation, on June 29, Ben Bernanke said that they for some time would refrain from the old practice of the interest rate’s raising. This means that in July-August the exchange rate of USD against euro will make up 1.2700-1.3500, against euro 1.8500-1.9300, and against Japanese yen – 109-113.
The President is trying to find a cadre way out of the difficult situation
– President Bush appointed Henry Paulson, the Executive Director and President of Goldman Sachs Group, the Secretary of the Finance Ministry. His predecessor John Snow finished a month-long speculation on the market by reduction of the tension.
“American economy is strong, productive and successful. I hope that it will remain the same with Hank Paulson. As the Secretary of the Finance Ministry, Hank will be my personal advisor on the issues of the internal and international economy, which is very important for the well-being of each American”, the President said in the White House.
In case of adoption of his candidacy by the Senate, Mr. Paulson will give the data from Wall Street to the administration and make the economic program. “It will be a wonderful acquisition for the cabinet, his main task will be retention of low taxes”, Mr. President said.
Mr. Paulson said: “I hope that we shall strengthen the American economy together with you, your administration and the Congress”.
The President also praised the period of Mr. Snow’s administration of the economy, during which a number of strong and energetic decisions were taken. Mr. Snow, in his resignation letter, thanked the President for the time that he had spent at that position, and hoped that his successor would worthy continue his activities, and that he had decided to rest.
Mr. Paulson, who is 60 years old, has been the Executive Director of Goldman since May 1999, and the chief operating officer – since 1994. Mr. Paulson was also the President of Financial Services Forum, in Washington Trade Group, the director of which is Donald Evans. He has been the President’s friend for a long time and is content with his friend’s decision.
“Mr. Paulson is a wonderful choice, he is held in high respect in the financial circles and knows the financial market well and the global economy well”, Mr. Evans said.
In spite of the President’s confidence in his economic team, the White House still criticizes Mr. Snow.
As a result of the inquiry carried out by the Wall Street Journal, 77% believe that the economic situation has deteriorated, in spite of the fact that the data shows that there is growth. The growing oil prices and the situation in Iraq is shading economic achievements.
In the interview that Mr. Paulson gave to Wall Street Journal, he said that he likes his work very much since considers it the best in the world of business. He is going to be at this position for a long time and is ready to accept any challenge.
In the US they are worried by China’s economic policy. According to the data of the Central Bank of China, in 2006 the economy will grow by 10% – says the Bank’s manager Zhou Xiaochuan.
He made this statement during a conversation with reporters at the annual meeting of the heads of central banks in Basel, and said that the growth of GDP in 2006 will make up 10%.
In spite of the measures that are aimed at controlling the economy’s growth, the data shows that China’s economy is developing very fast. According to the data of the first 5 months of 2006, the amount of investments in factories and real estate shares exceeded the last year’s indicator by 30.3%, and in the first quarter of 2006 the GDP grew by 1.3%.
The Research Bureau of China’s Central Bank pointed out that there is a great demand for bank loans in the country, and we can consider it as the result of rising of real estate shares, which causes a rapid growth of the economy.
A report was published in a Chinese magazine, which said that in the first quarter of 2006 the economic growth will make up 10.3%, while the total GDP growth during the year – 10%. Consumer prices will presumably increase by 1.3%, and in the first quarter, and in 2006 this indicator will make up 1.7%.
The US set up a new office that will control the new China’s trade
The new federal office will concentrate on China only in order to make sure whether its trade corresponds to its purpose.
Intolerance towards Beijing is growing in the Congress, Beijing is doing nothing to alter its illegal and unjust trade, and this plan is a direct challenge to its actions.
Opening of the intellectual property office is also planned, since the administration considers China as the main source of misappropriation of intellectual property, which annually costs billions dollars to the US.
These two initiatives represent another step to confirm that the US is active and aggressive in protection of its rights in the trade agreement.
In Washington they speak a lot about trade relations with China, and the issue of its responsibility is considered as important.
A big pressure on the administration on the part of members of the Congress is observed, and they encourage the offensive against China, since it does not fairly fulfill the obligations vested to it by the World Trade Organization and does not open its market for American goods. There are also complaints in relation to the Chinese currency and the US dollar – Chinese currency is not valued properly, because of which China’s profit has record indicators.
Indicators of Japan’s share on the securities market have declined sharply and stopped at the lowest figure over the period of the last six months. Nikkei index decreased by 1.8% and made up 15,096.01, which is the lowest indicator after November. The sharp change of the indicators was preceded by the statement of the Federal Reserve’s Chairman Ben Bernanke concerning growing of the inflation. This statement provoked fears that the interest rates would be raised. Investors believe that growing of inflation in the US can suppress the growth of world’s largest economy, which will have an effect on the global economy as well. High oil prices, which have already inflicted damage to the economy’s growth, aggravate the situation.
Inflation’s shade has left a trace at the exchanges of the US, Europe and Asia and they closed with low indicators. At the beginning of June Dow Jones indicator made up 11.000 for the first time after March, though after the improvement it reached the level of 11.002.
They worry in Japan that, in view of increasing prices in the US, consumer spending will not change for the better, which will cause losses to Japanese exporters of technique and cars. Sony is already out of pocket, and the cost of shares of Toyota, Honda and Nissan has decreased. If the US Central Bank have almost exhausted the reserve for raising of the interest rate, the Europeans and the Japanese still have it, but strong euro jeopardizes the development of production and they, for the same reason as in the US, do not hasten to transfer their production to the Asia-Pacific region – production rates are slowing down there anyway. There the GDP growth made up 0.6% in the first quarter (see Table 8). The forecasts for the future are not consoling either and are ranging around 2% (see Table 10).
Inflation – a mark on the UK economy
Inflation growth threat will make a mark on the UK economy. Analysts believe that the strength of the housing market and increasing of consumer spending will be a locomotive of the economy’s future growth, but they also speak of the real threat of inflation growth, that is why they also do not rule out the possibility of raising the interest rates by the Bank of England. According to the existing data, inflation remains higher than the 2% barrier set by the government.
Researches have shown that firms should prepare for “potential disorder”, since the global economy has problems in view of high oil prices and declining of the US dollar’s exchange rate is not ruled out, which takes place because of the deficit in the US and lack of balance in the world economy. This fact impedes the activities of British exporters.
Experts say that the latest data indicates increasing of interest rates. The Council for Currency Policy of the Bank of England has not changed the interest rates for nine months. Some experts are sure that the inflation indicator will exceed 2%. Economists say that the growth of the UK economy is a pleasant phenomena, but the threat of inflation is gathering dark clouds over the business sphere.
All this means that:
1. In July-August the exchange rate of USD against euro will be 1.2700-1.3500, against British pound – 1.8500-1.9300, and against Japanese yen – 109-113.
2. In summer the process of production growth reduction will intensify in the world and activity at stock exchanges will abate, the basic indices will be marked by declining.
3. The most profitable investment will again be in the US securities.