Asia is not immune to emerging-market woe
Currencies and stockmarkets have tumbled, though growth rates are solid
Sep 20th 2018| HONG KONG AND SINGAPORE
THERE are many ways to defend a currency. Ayam Geprek Juara, an Indonesian restaurant chain that serves crushed fried chicken, has offered free meals this month to customers who can show they have sold dollars for rupiah that day. The restaurant has provided more than 80 meals to these “rupiah warriors”, according to Reuters, a news agency.
Perhaps it should extend the offer to the staff of Bank Indonesia, the country’s central bank, which is only about 20 minutes away from one of the restaurant’s branches. To defend the rupiah, it has been selling billions of dollars of foreign-currency reserves, which have fallen from over $125bn in January to less than $112bn in August. Despite these sales, and four interest-rate rises since May, the rupiah has lost almost 10% of its value against the dollar this year, returning to levels last seen during the Asian financial crisis of 1997-98.
India’s rupee has fared even worse, reaching a record low against the dollar. And even where Asia’s currencies have remained steady, its stockmarkets have faltered. Hong Kong’s Hang Seng index fell by 20% from late January to September 12th, meeting one definition of a “bear market”. Mainland China’s markets are struggling.
A person returning from Mars would assume that something horrible had happened in the region, says Chris Wood of CLSA, a brokerage. But in fact Asia’s emerging economies are enjoying a happy spell of respectable growth and stable consumer prices. Only Pakistan has a combined trade and fiscal deficit as devilish as Turkey’s or Argentina’s. And not even Pakistan has anything like their double-digit rates of inflation. India’s GDP grew by over 8% last quarter, compared with a year earlier. Indonesia’s expanded by over 5% (as it almost always does). And China’s grew by over 6% (as it always does). Nor is a widespread slowdown expected this quarter.
The trade war (see next article) has soured the mood in China and Hong Kong. But China’s exports to America still grew by over 13% in August, and the Canton trade fair was at its busiest for six years, according to the Institute of International Finance, an industry group. Many American customers are obviously keen to shop before the broader tariffs take effect. Some of China’s neighbours, especially Vietnam, believe they can win the trade war by taking in its refugees: the manufacturers that move out of China to escape tariffs.
India and Indonesia are largely insulated from the trade war, thanks to the strength of their domestic demand. But that same strength leaves them exposed to two other dangers—the higher oil price and America’s remorseless monetary tightening. India’s oil-import bill for the past five months was more than 50% higher than a year ago. Its current-account deficit could widen to 3% of GDP this fiscal year (which ends in March), according to some forecasts. Indonesia’s could expand similarly.
These gaps would be easy to finance if foreign investors were in an indulgent mood. But they are not. As American interest rates have risen, emerging markets have looked less rewarding and more dangerous by comparison.
In response India’s government is tweaking taxes and regulations to attract more foreign capital and fewer foreign goods. It will, for example, suspend a tax on rupee-denominated “masala” bonds sold outside India. It has also decided to curb imports of inessential items, without yet specifying what those may be.
In Indonesia the government is encouraging state firms to dilute imported fuel with biodiesel, extracted from local palm oil. It has delayed big infrastructure projects. And it has increased import tariffs on over 1,000 goods, including perfume, stuffed toys and tomato ketchup. The life of a rupiah warrior is not without sacrifices.
In theory, such ad hoc measures should be redundant in two economies that have embraced flexible exchange rates. If the trade deficit is unsustainable, a floating currency is supposed to weaken, thereby discouraging imports (and encouraging exports) automatically. By this logic, the declining rupee and rupiah will eventually resolve the problem they reflect.
But Indonesia worries that its foreign-currency debts will be harder to sustain with a weaker rupiah. These debts amount to about 28% of GDP, far below Turkey’s and Argentina’s totals, but are still too large to ignore. Moreover, about 40% of its rupiah-denominated government bonds are held by foreigners, according to Joseph Incalcaterra of HSBC, a bank. That “presents a sizeable outflow risk,” he says, which is one reason why Indonesia’s central bank has raised interest rates faster than India’s.
Both countries also worry that falls in the currency will beget further falls. After fighting the rupiah’s slide in 2013, Chatib Basri, Indonesia’s finance minister at the time, argued that a sharp drop in the currency would have revived memories of the crisis in 1997 and led to investor panic.
That wobble in 2013 followed some stray remarks from America’s Federal Reserve, which suggested it might soon slow its asset purchases. The subsequent spike in Treasury yields caused turmoil in emerging markets and threatened America’s fragile recovery, prompting the Fed to clarify and soften its position. The more recent increase in Treasury yields is different. It reflects a robust American expansion, reinforced by generous corporate-tax cuts. This time, there is little reason to expect a rethink at the Fed. America does not feel emerging markets’ pain.
Asia has long dreamed of “decoupling” from America so it can prosper even when the world’s biggest market does not. Instead, it is suffering even when America is not. And partly because America is not.
America and China are in a proper trade war
Donald Trump announces another wave of tariffs. China retaliates
Sep 20th 2018| WASHINGTON, DC
ANOTHER week, a further ratcheting up of trade tensions between America and China. On September 17th President Donald Trump announced that he had approved a further wave of tariffs on Chinese imports. From September 24th, imports of products which in 2017 were worth as much as $189bn, including furniture, computers and car parts, will be hit with duties of 10%. The Chinese have promised to retaliate on the same day with duties on $60bn of American exports. Unless peace breaks out before the new year, the American rate will increase to 25% on January 1st.
Mr Trump frequently rants about how the Chinese have long taken advantage of Americans. But American bureaucrats stress that the duties come after careful deliberation. The Office of the United States Trade Representative (USTR) took seven months to write a report detailing China’s unfair trade practices. Each tranche of tariffs has been consulted on and then revised. The latest set came after the USTR’s office had received 6,000 written submissions and held six days of hearings.
Compared with an earlier proposal, the latest tariff list excludes products worth up to $30bn. Child-safety seats and safety headgear were exempted. Antiques more than a century old were spared, too. (Some had pointed out that the Chinese government restricted their export anyway.) Despite Mr Trump’s warning on September 8th that prices of products made by Apple may increase as a result of his tariffs, smartwatches and bluetooth devices were removed from the list.
The Trump administration claims that these deliberations have helped to minimise the impact on the American consumer. The staggered tariff rate is supposed to give importers time to change their suppliers. Wilbur Ross, the commerce secretary, was mocked online for claiming that, because the tariffs are spread over thousands of products, “nobody’s going to actually notice it at the end of the day”. But in support of his claim, economists at Goldman Sachs, a bank, estimate that the 10% tariff rate will boost inflation by only around 0.03 percentage points, and the increase to 25% by a further 0.05 next year.
Still, this diligence was not welcomed by all. More than three-quarters of the products that will be affected on September 24th are intermediate and capital goods, which means the most immediate impact will be to push up American businesses’ costs. Mr Trump’s announcement triggered complaints from industry representatives including the US Chamber of Commerce, the American Chemistry Council and the American Apparel and Footwear Association, all of which warned that Americans would end up footing the tariff bill, and pleaded for a different approach.
Although it claims to be following due process, the Trump administration’s actions are far removed from the procedures of the rules-based global trading system. Ordinarily, members of the World Trade Organisation (WTO) would take their complaints to the body’s judges. If such accusation are upheld, then those judges allow limited retaliation.
In 2012, for example, the American government complained to the WTO that the Chinese government was breaking the rules by restricting the export of rare-earth elements. China’s dominance in their global supply meant that this hurt American manufacturers by pushing up prices for their inputs. After the WTO’s judges sided with the Americans, the Chinese government dropped the measures.
The Trump administration claims that the WTO’s incomplete rule book makes it incapable of dealing with China’s alleged misdemeanours, which include forcing foreign companies to hand over their technology. But, even as it complains, America is simultaneously weakening the system by which the WTO’s rules are enforced, by blocking the appointment of judges to the body’s court of appeals. From October, only three will be left—the minimum needed to rule on a case.
On September 18th Cecilia Malmström, the European Union’s trade commissioner, unveiled a “concept paper” outlining reforms that could plug some of the gaps in the WTO’s rules, as well as ways to reform dispute settlement. But it is far from clear whether either Mr Trump or the Chinese government will take the bait.
And without the multilateral rules-based system to contain the conflict, the trade war between China and America could get much bloodier. In his announcement on September 17th Mr Trump threatened to hit another $267bn-worth of Chinese imports if China retaliated against his latest tranche of tariffs. For their part, the Chinese show little sign of backing down, and have promised to use fiscal policy to soften any domestic blow.
Although they are running out of American exports to target, they have other ways to fight. On September 17th, for example, reports emerged of a Chinese official musing about China repeating its trick of imposing export restrictions on raw materials that American manufacturers depend on. The next day, Craig Allen, president of the US-China Business Council, warned that the WTO had made clear its opinion that such restrictions were illegal. But why, when America is acting outside the rule book, should others stick to it?
America is pushing the labour market to its limits
Low unemployment and inflation complicate economic policymaking
Sep 13th 2018| WASHINGTON, DC
BY MANY measures, America’s economy is powering ahead. GDP is on track to grow at around 3% this year, and the unemployment rate is an impressively low 3.9%. For President Donald Trump, it is an unmissable opportunity to gloat. On September 10th he described the economy as “soooo good” and “perhaps the best in our country’s history”. But for others the very same figures present an economic puzzle.
The Federal Reserve has been raising its benchmark interest rate since December 2015, and will probably do so again this month, from a range of 1.75-2% to 2-2.25%. This is the central banker’s version of twiddling the bath taps, but on a national scale. It requires a delicate touch. Too much cold water, in the form of higher rates, will choke off demand and hence jobs. Too much hot, and rising inflation will eat away at people’s spending power. The aim is to find the perfect temperature, where employment is as high as it can be while inflation stays subdued.
But as Jerome Powell, the chairman of the Federal Reserve, reminded his listeners in a speech in Jackson Hole on August 24th, no one knows what that perfect temperature is. Policymakers must make their best guess of what “full employment” looks like, or when the “output gap” (the difference between where the economy is and its long-run potential) is zero. Inflation and employment are affected by temporary shocks and structural shifts, as well as by economic policy. Errors take time to show up. It is as if the rate-setters must adjust the flow of hot and cold water not only without knowing what temperature is most comfortable, but also without knowing how hot the bath is to begin with—or when they will be getting in.
Over time, those best guesses have changed. Six years ago the central estimate among members of the Federal Open Markets Committee (FOMC), the body that sets interest rates, was that in the long run, unemployment would settle at 5.6%. Now their estimate is 4.5%. Weak productivity growth has led them to cut their estimate of America’s long-run growth rate, too, from 2.5% in 2012 to 1.9%.
Whether they were right to do so is the subject of much debate. Some economists think policymakers have been too quick to conclude that dismal growth after the financial crisis indicates a new normal. A recent paper suggests that the standard ways of estimating an economy’s potential are overly influenced by blips in its performance. Others think that running the economy hot could spur productivity-enhancing innovation, as wage growth forces firms to economise on labour. Sceptics of that argument point out that the productivity slowdown started before the crisis, suggesting that it is unrelated to labour-market conditions.
As the Federal Reserve’s mandate refers to employment, not output, members of the FOMC must consider a narrower question: what does full employment look like? Here, the puzzle of the past few years has been why, even as the unemployment rate has plunged, inflation has been so stubbornly low. Hawks think that hidden inflationary pressures are building; doves, that behind that headline unemployment rate there is still excess labour capacity.
Until very recently, the doves have had the best of the argument. The most obvious interpretation of such a low unemployment rate is that the labour market could not improve much without pressing prices upwards. However, it has been soaking up not only job-seekers, but also people who reported that they had not been looking for work, or who had been working fewer hours than they wanted.
But arguing that the labour market still has hidden slack is becoming harder. Data released on September 11th revealed that Americans are quitting their jobs at the highest rate since 2001. For each job opening, there are just 0.82 hires and 0.9 unemployed people hunting for a slot. All of the main measures of labour underutilisation reported by the Bureau of Labour Statistics are at or below their pre-crisis trough, and near to where they were at the peak of the dotcom boom.
It is possible that still more people will be drawn into the labour market. The prime-age employment rate in August was 79.3%, a little below the pre-crisis peak of 80.3% and below the high of the past 70 years, of 81.9%. But those benchmarks may no longer be appropriate: male labour-force participation has been drifting downwards for decades.
Recent data have also favoured the hawks. Headline inflation has been above target for five months. Inflation excluding food and energy prices, generally regarded as more useful than the headline figure when it comes to predictions, is rising. It hit 2% for the first time since 2012 in July. According to a survey by the University of Michigan, inflation expectations appear to be rising gently, too. Even average hourly earnings seem to be accelerating, up by 2.9% in August compared with 12 months ago (though admittedly, that is not much more than inflation, and still below the pre-crisis norm).
Olivier Blanchard of the Peterson Institute for International Economics points out that over recent decades, inflation has become less influenced by the jobless rate, and is therefore less useful as a signal of whether the economy has hit full employment. Nevertheless, he sees enough evidence from the labour market to conclude that the economy is very close to full employment, and predicts an end to all the head-scratching.
One way to interpret the recent trends is as a vindication of the FOMC’s approach to interest rates. As the economy seems to be heating up, they are twisting the bathtap to what they think is a neutral position. So far, they have managed not to overdo it. Some have called for faster action, fearing a repeat of the 1970s, during which inflation, and inflation expectations, rose in a mutually reinforcing spiral. But as Mr Powell pointed out in his speech, although inflation has recently moved up to near 2%, there are no clear signs of an acceleration above that.
Whether congratulations are warranted will depend on whether recent trends are sustained. If they are, the debate between hawks and doves will not end, but change. Central bankers have managed to train the general public to expect low inflation, meaning that, for now at least, any fears of spiralling prices seem unjustified. But that may imply that the risks of running the economy hot have fallen. In other words, the stronger central bankers’ promises to control inflation, the more tempting it may be to break them. It’s enough to make you want a long, hot bath.
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