DGAP-News: Silvia Quandt&Cie. AG, Merchant&Investment Banking: In between the lines 12.08.2010
(firmenpresse) - Silvia Quandt&Cie. AG, Merchant&Investment Banking / Miscellaneous
12.08.2010 14:49
Dissemination of a Corporate News, transmitted by
DGAP - a company of EquityStory AG.
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Silvia Quandt Research GmbH
Bernhard Eschweiler
eschweiler(at)silviaquandt.de
+49 69 95 92 90 93 51
www.silviaquandt.de
In between the lines
- Double-dip or not, .
- . the US matters less, .
- . but China's model, while working now, is no guide for the West
Dichotomy ruled markets in recent weeks. Equity markets have generally
recovered from the spring woes, reflecting better than expected corporate
results. Yet bond markets performed also well, thanks to weaker economic
data from the US. The word 'double-dip' is back in fashion and the fear of
a second downturn rose with the latest US labor market report.
In contrast, economic data in Germany is coming in stronger than expected,
forcing economists to raise their forecasts for 2010 (look out for at least
6% q/q saar GDP growth in Q2 to be released this Friday). However, most
analysts warn that the boom will be short-lived. Renewed weakness in the
US, fiscal tightening in Europe and a slowdown in Emerging Markets are
feared to reduce German growth markedly. Silvia Quandt concedes that Q2
will be the high mark in the quarterly growth pattern, but momentum is
expected to be sustained into 2011 (see also From 2010 into 2011, 1. July
2010).
Strong corporate sector - weak labor market
How weak the US economy is or feels depends on the viewpoint. The overall
economy has recovered 3.2% since the trough and GDP is just 1% below the
pre-crisis high. This is not as good as some previous recoveries, but not
the worst on record. The big contrast is between the corporate sector and
the labor market. Corporate profits are back to pre-crisis levels, thanks
to very aggressive cost controls. The labor market, on the other hand, has
hardly benefited from the recovery. How sluggish the US recovery really is
becomes evident when considering the fiscal stimulus applied so far, which
has been three times larger in terms of GDP than on average in the previous
three recessions.
Striking is also the comparison with Germany. Corporate profits in Germany
are also back to pre-crisis levels, but this has been achieved with
very little labor shedding.
In fact, German corporates are hiring and unemployment has been shrinking
for 13 consecutive months. And all this has been accomplished with far
less fiscal stimulus - the German government spent less than half in terms
of GDP than the US to revive the economy. So, where is the difference?
The answer is probably more complex, but two points stand out.
- First, German corporates had started the restructuring much earlier
before the crisis and, thus, had to do less cost cutting.
- Second, the German economy is much more open. While many US corporates
already operate from global platforms, the US economy as a whole is far
less open, dominated by an oversized and over-indebted household
sector.
Thus, whereas Germany is fully leveraging its export potential, the US has
to restructure its economy further to become more open and less dependent
on domestic demand. This means more cost cutting and sluggish growth, but
a double-dip is less likely (second downturns are typically caused by a
shock, such as the sudden monetary tightening under Paul Volker in the
early 1980s). The government has little or no room to provide additional
stimulus. Thus, all eyes are on the Fed, which has already responded with
a new round of quantitative easing. Buying government bonds is unlikely to
create many new jobs, but it keeps the system afloat, while the economy is
restructuring.
Emerging Markets have replaced US
Important for the global growth outlook and Germany's prospects in
particular is the fact that the US matters less than it used to. In the
1990s and early 2000s, US domestic demand has been the engine of global
growth. At its peak in 2002, US domestic demand accounted for one third of
global GDP. Since then, the contribution of US domestic demand to global
growth has been in decline. Today, US domestic demand accounts for just
about a quarter of global GDP.
US domestic demand as the driver of global growth has been replaced by
domestic demand in the Emerging Markets, which rose from 23% of global GDP
in 2002 to an estimated 35% in 2010. Important, domestic demand growth in
the Emerging Markets is not the result of unsustainable fiscal or monetary
policies (as many would argue was the case in the US). It is the product
of a period of reform and deregulation in the domestic sector. The shift
in domestic demand also shows that global rebalancing is already well
underway.
China shifts from investment to consumption
Emerging Markets' debt cycles are largely history, but overheating and
inflation are a concern. Policy makers in Emerging Markets, most notably
central bankers, are responding. At the center of the market's attention
is China. Many argue that it is tightening too slowly (including its
willingness to let the RMB appreciate) and that more will have to be done
to avoid overheating. At the same time, many others fear that the
government has slammed the breaks too hard to cool the property sector.
As argued before (see In-between the lines from 17. June 2010), Silvia
Quandt believes that the Chinese government will be able to engineer a
soft-landing at high altitude, using its many policy tools and, more
importantly, direct means of control. The July figures show that the
economy has sufficiently slowed to avoid overheating. This allows the
government to shift its growth policy from investment to consumption
China's model suits China now but not the West
China's ability to avoid the mistakes of the West and keep the economy
running at a stable high pace despite global
financial turmoil and recession has caught people's attention. The talk is
now of a China Model and whether the West could learn from it or even adopt
it (see the current debate on www.economist.com). What people exactly mean
by the China Model is not so clear. Clear is, that China is neither a
democracy nor a free-market economy. The government is benevolent, yet
national priorities count more than individual rights. The economy has
changed dramatically since its opening more than 30 years ago. Still, the
state has retained a high level of economic control at both the national
and regional level as well as through ownership of key sectors, which it
uses to manipulate the direction of the economy.
When measured in terms of standard development indicators, China's
achievements have been impressive. Critics argue that there is too much
inequality and too little freedom. But exactly that may be part of the
success recipe. Important is to put China's achievements into context.
China is a developing economy. In the catch-up process, the goal is not to
reinvent the wheel, but to produce it more efficiently. The lesson from
China and other emerging economies in Asia is that this may be better
achieved in a more authoritarian system. However, once the developmental
frontier has been reached, innovation and creativity become more important.
These virtues require more freedom, as Asia's Tigers such as Singapore have
discovered. Thus, the challenge for China will eventually be to adopt more
western-style democracy and free markets. This is probably some time away,
but worth trying earlier than too late.
Disclaimer
This analysis was prepared by Bernhard Eschweiler, Senior Economic Advisor,
and was first published 12. August 2010, Silvia Quandt Research GmbH,
Grüneburgweg 18, 60322 Frankfurt is responsible for its preparation. German
Regulatory Authority: Bundesanstalt für Finanzdienstleistungsaufsicht
(BaFin), Graurheindorfer Str. 108, 53117 Bonn and Lurgiallee 12, 60439
Frankfurt.
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Frankfurt am Main, 12.08.2010
Silvia Quandt Research GmbH12.08.2010 14:49 Ad hoc announcement, Financial News and Press Release distributed by DGAP. Medienarchiv atwww.dgap-medientreff.deandwww.dgap.de---------------------------------------------------------------------------Unternehmensinformation / Kurzprofil:
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Datum: 12.08.2010 - 14:49 Uhr
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