Doomsayers on Beijing have the wrong idea
Two pieces of economic news emerged last week that I can’t avoid mentioning in this weekend’s column. The first is that China’s economy grew by 7.6pc during the second quarter, its weakest rate since 2009. This GDP growth slow-down, albeit to what remains an enviably buoyant pace, has caused some angst on global markets. China, after all, is the second-largest economy on earth.
With the US still sluggish, the emerging markets, China the powerhouse among them, have replaced America as the world’s economic locomotive. The “non-West” now accounts for half of all commerce and a massive four-fifths of global growth. If China tanks, we’re in for another world-wide slump.
I remain optimistic, though, about the medium-term outlook for the People’s Republic. Beijing has responded to signs of a downturn with a raft of “pro-growth” measures – aggressive interest rate cuts, liquidity injections and more state-directed loans.
In June alone, new lending totaled Rmb 920bn (£93bn), some 16pc up on the month before. That was one reason Chinese domestic investment was 20.4pc higher during the first six months of this year than the same period in 2011. China can make these policy moves, of course, not only because it’s state-driven, but mainly because it’s solvent – unlike the West. Having run years of current account surpluses, and now with $3,200bn of reserves, Beijing can fund its policy stimuli not from borrowing, but from cash.
Falling inflation, down from a peak of 7pc in 2011 to 2.2pc last month, has cleared the way for yet more policy easing. I don’t think Beijing will unleash the kind of massive stimulus program we saw in late-2008, not least because the debt concerns and property bubble that mega-boost produced have not yet fully abated. But I reckon those of us who’ve been predicting a Chinese “soft landing” will be vindicated.
The other must-mention development, to my mind, relates to food prices – and commodity prices more generally. With the price of agricultural staples such as corn, soyabeans and wheat soaring for the third summer in five years, the risk of another food price shock is now looming.
Just a few weeks ago, the expectation was of bumper crops. But America’s on-going hot, dry summer means the US Department of Agriculture last week slashed its 2012-13 corn crop and season-end inventory forecasts by 12pc and 37pc respectively, the deepest prediction downgrades in 25 years. The world’s largest producer of staple grains, supplying a third of all corn, wheat and soyabeans sold on global markets, America’s scorching summer has pushed corn and wheat prices for year-end delivery more than 40% higher over the last month. Corn and soyabean prices are now above their 2008 peaks, the year that saw food riots in more than 30 countries.
Food price spikes are dangerous, not only because of potential social and political unrest, last year’s Arab spring being a case in point. Expensive food also drives inflation, making it even tougher for central banks to keep the economic show on the road.
Where soft-commodity prices go, other resource prices often follow. Brent crude prices broke back above the $100/barrel barrier last week, another blow to struggling Western oil-importers. Iranian sanctions apart, oil is edging up again amid yet more evidence that, however weak energy demand may be in slow-growth “advanced” countries, fuel consumption in the emerging markets will keep rising.
The International Energy Agency last week predicated that oil use in nations outside the OECD would reach 45.7m barrels a day in 2013, over-taking OECD consumption for the first time. Global crude use grew by 0.7m barrels a day in 2011 and the IEA sees this increase accelerating to 0.8m this year and 1.0m in 2013.
As these demand realities focus oil traders’ minds, the prospect of yet more QE money-printing in the US, UK and eurozone means investors are, once again, increasingly using physical crude and synthetic oil derivatives as “safe haven” investments, hedging against inflation and Western currency debasement. That’s another reason why I still think oil will average significantly more than $100 a barrel during 2012.
Yet I want to devote this column neither to China nor commodity prices. The subject I really want to address, in the space I have left, is Ireland. Amidst the litany of woe that is the eurozone, the Republic stands out as the one country among the profligates that is taking, and being rewarded for taking, its austerity medicine.
Last week, the European Central Bank and International Monetary Fund confirmed that Ireland, half-way through its bail-out program, is meeting its fiscal targets. The economy grew by 1.4pc last year and, during the first quarter, GDP was 1.2pc up on the same period in 2011.
Ireland has now endured two years of harsh public spending cuts and economic adjustment, meeting the conditions of the EU-IMF program which, in 2010, pumped €64bn into its bloated banking sector. This is the main reason why yields on the country’s 10-year sovereign bonds have, in recent months, plunged from around 15pc in early 2011, all the way down to 5-6pc.
Since the recent Rome summit, though, Irish borrowing costs have dropped to pre-bailout levels and are now below those of Spain. That’s because if the European Stability Mechanism, the eurozone’s €500bn bailout fund, takes a chunk of Spain’s bank-related debt onto its balance sheet, it will have to do the same for Ireland.
Many in Dublin feel this would only be just. During the early stages of this eurozone crisis, the Irish government, originally wanting to impose write-offs on bank bondholders, was forced by Brussels to take the losses on the state balance-sheet instead, while accepting a bail-out. This was in the name of preventing eurozone-wide “contagion”. Having “taken one for the team” back then, the Irish could now benefit from any moves to help Spain.
Ireland’s austerity program is “working” because, unlike many of the other eurozone “peripheries”, the country has a very strong export sector, that means it can pay its way. Irish exports rose 6pc last year, to an all-time record, following 8pc growth in 2010 – and it’s not all whiskey and stout.
Ireland is the largest net beef exporter in the northern hemisphere. It is the world’s second-largest net exporter of pharmaceuticals. The Republic, in fact, is Europe’s third-biggest net exporter overall in absolute terms – not bad for a country of less than 5m people. This trade performance has helped convince bond investors that, over time, the Irish can service their debts because, when all is said and done, they’re selling more than they’re consuming.
Last week, Ireland returned to international capital markets for the first time since September 2010, selling €500m of three-month Treasury bills at 1.8pc in an auction that was almost three-times over-subscribed. This was an important milestone on the country’s path to recovery. On longer-term loans, yields have halved in 12 months, making Irish bonds the eurozone’s best-performing sovereign instruments over the last year.
Ireland has a long way to go. Its budget deficit remains huge, consumer spending is still 10pc below 2008 levels and, even with the natural “migration valve”, unemployment is almost 15pc.
Dublin’s EU-IMF bail-out is due to expire at the end of 2013. Almost immediately, the country then faces an €8bn bond repayment. To fund this, Ireland will have to do a lot better than selling short-term debt worth a few hundred million, as it did last week. But thanks to its own efforts, the Republic is now in with a fighting chance.