Stable Growth likely to Continue

Posted by Tim Congdon in News Archive | 0 comments

In my last monthly e-mailed note (on 28th June) I said that money growth patterns in the four leading advanced country jurisdictions (USA, Eurozone, Japan and the UK) were more or less perfect. To recall, “4% a year is a more or less ideal rate of broad money growth in developed countries, with a trend rate of output growth of 1% – 2% and an aim to keep inflation around 2%. Amazingly, and no doubt more by happenstance than design, 4% a year is at present common to the USA, the Eurozone, Japan (just about) and the UK.” Well, not much has happened since then to alter the assessment. The picture is as follows,2016-08-25_11-45-20The numbers  for China and India, the two big developing countries (both with trend growth rates of output of over 5% a year), are as follows2016-08-25_11-47-55In both these countries the current rates of broad money growth are appreciably below those that have been typical in the last 10/15 years. When allowance is made for the tendency of banking systems to grow faster than national output during economic development (which causes broad money to rise 3% – 5% a year faster than national output), the roughly 10% annual growth rate of broad money in China and India is roughly consistent with price stability. An observer might say that there is not much wrong with that, and I would agree. However, China and India have had inflation most of the time in the last decade or two. My verdict is that neither economy will grow at an above-trend rate in the next year or so.

The right verdict for the world economy  (which fits in with leadinng indicator signals as well) is that late 2016 and 2017 should seee stable growth, with negligible inflation in the main economies. As ever, specific features and particular countries will have their problems and generate discussion points, but I cannot see grounds for much alarmism on the macroeconomic front. (Yes, I know about the ghastly Donald Trump and China’s adventurism in the South China Sea, and they are not my areas of expertise. Yes, they could upset things.) The scare-mongering from the Bank for International Settlements, the Organization of Economic Cooperation and Development and others at the start of 2016 was unjustified and, in my view, disgraceful. It is not the job of supranational bodies to stir up trouble.

The oil price has dropped abruptly, by about 20%, from its local peak in early June of $53 a barrel. Increased production from Saudi Arabia and Iraq may be much of the explanation, as the price war within OPEC (between the Sunnis and the Shias, apparently) continues. Iraqi production has recently been at 4.8 m. barrels a day, almost twice that in 2010. Saudi Arabia is reported to have produced 12.5 m. b/d in June, also a record, and – as with Iraq;  up by about 2½ m. b/d on 2010 levels. With Iran also carving out market share, the oil price weakness is easy enough to interpret. Again, this is good for inflation and consumer spending in the advanced economies overall in the rest of 2016 and into 2017, although wretched for the engineering industries that supply oil and gas exploration and development. It deserves to be emphasized that world oil consumption is still moving ahead by about 1½ m. b/d every year, and that in 2017 and 2018 non-OPEC production will be falling.

What would happen to the oil price if Saudi Arabia and Iraq decided to cut production to their combined 2010 levels, i.e., from the current almost 17½ m. b/d to 12½ m. b/d?

Banking and money developments in the individual countries among the top six are discussed in the usual monthly note. The video has a discussion of post-EU-referendum business surveys in the UK. It looks to me as if the respondents to these surveys have, to a degree, been replying to them as they judge they are supposed to reply. Fear of fear itself, and all that. My expectation is that any dip in activity will be temporary and unimportant. But it does seem, for example, that transactions volumes in commercial real estate have dropped sharply. (Residential mortgage demand has not been affected at all.) Perhaps too many property investors read the Financial Times and take it seriously.

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