DABERIAM LXXIV

February 2013

2013 has started well around the world. Taking the three parts of the world that I described in December, and beginning with the first part, comprising Greater Asia, China and Australia – these countries continue to gain confidence following the Chinese election. The political tensions between China, Japan and Taiwan have subsided for the time being and, hopefully, as there are no imminent elections, the spat over the Spratly Islands will continue to remain in the background. 

Continental America, North and South, is gaining momentum. The USA, in particular, is recovering steadily and the Washington rhetoric has subsided, and while the Federal deficit will remain a problem for the next few years, one can only hope that as the excitements of the Presidential elections pass Congress will settle down and get its act together. In the meantime State government budgets are improving as the economic recovery boosts tax revenue, along with a greatly reducing number of state employees. The private sector in every area is gaining confidence. Property prices are improving steadily and house building is picking up rapidly. Corporate employment is rising and capital expenditure is beginning to pick up, and there is no reason to think this trend will not continue.

The pessimists are emphasising a lack of overall pick up in GDP. This makes for good press headlines and discussion for the pontificating pundits. The GDP is inevitably being depressed as the Government deficit is reduced; an inevitable situation as the GDP numbers have been greatly over-stated for a number of years as they include the mostly non-productive deficit expenditure. The numbers will start to genuinely improve as the momentum of US re-industrialisation picks up; starting from a low base, the numbers won’t have a major impact until towards the end of the year.

If it is possible to predict a black swan, this might come along in the form of an unexpectedly rapid hike in interest rates. The US balance of trade is improving, leading to a slower accumulation of dollars in China and Japan. If Asian buying of Government debt slows, and interest rates start to rise, there could be a flight from bonds by pension funds and insurance companies etc. These are heavily overweight fixed interest securities encouraged by regulators and the flight to apparent safety. 

The third sector of the world, Russia through Europe down to South Africa is for the time being off the exciting news agenda. The European Central Bank has done a great job in flooding the Government Bond market with cash. However, the cracks in the system are only papered over. The really good bit of news, and a great feather in David Cameron’s cap, is a first time agreement to reduce the overall EU budget. Could this be a trend reversal moment? 

In Europe there is a bevy of swans: policy uncertainty, energy supplies, banking bad debts, Cyprus and Greece. Individual governments in Europe, including the UK, are raising the level of policy uncertainty. When major companies do not have a clear view of the direction of government policy, they tend to stall on their investment decisions. The top of the list on uncertainty, particularly in the UK and France, is taxation. Legislature rhetoric attacking large companies on the basis of “you are not paying enough tax” even though they are doing nothing illegal is very Third World behaviour. 

This leads on to energy supplies. Germany’s announcement that it is abandoning nuclear energy is likely to be reversed after the elections as the new government will face the reality of looming supply shortages. This is only one issue. Europe (Germany and the UK in particular) is becoming critically dependent on Russian gas (hardly a secure supply). The situation is made even more dangerous by the UK government’s inability to create a coherent energy policy. The dash for windmills without a policy of creating any back-up supplies, or base load capacity, is an abrogation of political responsibility; but then we now have had ten to fifteen years of Government without a long term policy on rail, road and airport infrastructure. The lack of acknowledgement of banking bad debts in southern Europe is a considerable worry and the spotlight has moved from Greece to Cyprus where a huge amount of Russian money is deposited. 

Overall, we can hope for quite a few months of a dull political landscape while the private sector around the world gets on with growing the economy. In spite of the noise made by politicians, they cannot create “jobs” but they can very rapidly destroy them.

The outlook in general is looking a lot better than it has for a number of years; the days are getting longer and a great many of the economic road blocks that appeared in the third quarter of 2012 have been avoided.