A fall in the dollar could unleash a chain reaction

The trend in the US dollar’s exchange rate is becoming a source of concern. The dollar has lost nearly 15% of its value since the year-end 2016 high it reached following the election of Donald Trump, and it might now fall toward its 2011 and summer 2014 levels, i.e. 10-15% below its current value.

Confidence in the US administration is withering, and this is largely responsible for the exchange-rate situation. In addition, doubts are accumulating about how much latitude Jerome Powell, the future Fed chairman, will have to exercise his mandate, as he will be operating in the shadow of an invasive executive branch and increasingly demanding financial valuations. The risk of a dollar crash, which would consist of a significant, across-the-board fall in the currency’s value, is real.

What kind of impact could we expect if this were to occur?

The US dollar occupies such an important position in the international economic monetary and financial system that the consequences of a potential pronounced drop in the dollar are particularly complex to analyze. It is the number one reserve, payment and financing currency – both bank and non-bank – and it is used as a peg by more than 70 countries. The size and strength of the US economy as well as the accumulation of deficits vis-à-vis the rest of the world have made dollars abundant outside the United States and contributed to a level of supremacy that neither the euro nor the yuan can challenge. At the end of 2017, the US economy’s net external debt to the rest of the world was nearly $8 trillion, of which $6.4 trillion was financed by treasury bonds held by non-residents the world over. The presence of the US dollar in every nook and cranny of the world economy does not make the analysis any easier. What would be the net effect, for example, of a drop in the dollar on the Chinese economy? Chinese companies would become less competitive, but their debt, much of which has been contracted in dollars in recent years, would decline. At the same time, the country’s war chest of $3.1 trillion in currency reserves, half of which is invested in US treasury bonds, would erode fast... Lire la suite…

China – The mortgaged future of the world’s biggest economy and the authoritarian temptation

During the five years of President Xi Jinping’s first term, Chinese economic growth was 7.1% p.a. on average, the lowest of the last 25 years, but the strongest of all emerging markets and even stronger when compared with developed countries. After climbing to first place in the global ranking in 2013, the Chinese economy has only widened the gap with the United States. Its GDP in purchasing power parity terms was 20% greater than that of the US in 2016. China has no lack of first-place distinctions. With more than 18% of the world’s GDP and a population of 1.4 billion, the highest in the world, China has taken first place in many areas as its economy has grown. And it is probably not ready to stop, even if its growth is showing structural decline.

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After the ECB’s big flop, is there a life raft to cling to?

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Too little too late or simply lacking credibility, the ECB’s announcement was a flop. While for many observers, the measures were supposed to drive the euro down, give stock markets a shot in the arm (particularly banking and cyclical stocks) and increase the level of long rates by brightening the euro area outlook, by all accounts, they failed to win over the markets. The stock markets are stumbling, bank stocks sagging, bund yields have hardly budged and the euro is about where it was prior to the June 6th announcement. Of course, all is not lost but it seems that we’ll have to look elsewhere: the US, China or even Iraq, which, at the time of publication, was the most pressing concern. Everywhere markets look, the rosier scenario is simply not materializing.

China: Population Decline on the Horizon

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The issue of population probably didn’t make it onto the agenda of the November plenary meeting held by the Chinese leadership to discuss future economic policy. Yet of all the economic challenges China will be compelled to address in the next few years, accelerated population aging definitely tops the list. In any case, the U.N.’s authoritative projections leave no room for doubt about where the country will be in 2040. Between now and then, the U.N. expects the median age to rise by more than eleven years to 46; the working-age population to shrink by 10 percent; the 15-to-44 age group to lose 200 million members, with the 65-and-over group gaining as many; and the ratio of workers to retirees to plummet from 18 to 2 at present to just 5 to 2. So the graying of China is likely to go extremely fast—even faster, in some respects, than the process under way in Europe. 

Outlook 2013-2014 : No Spectacular Upswing in Sight

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The Eurozone outlook looks brighter and this is good news. Unfortunately the world economic outlook remains constrained by structural weaknesses. Our forecasts, at respectively 3.1% and 3.3% for 2013 and 2014, remain in the low range established for 2012, thus removing any doubts about the risks of inflationary pressures or of a bond crash.

On the positive side: the concerns we had in the beginning of this year are no longer looming over us

–  In the Eurozone, consumer confidence is picking up as austerity policies get phased out.  Intra-regional trade should progress and the Eurozone should recover from recession by the end of the year.
– The U.S. pulls back from the fiscal cliff and real estate market recovery is no longer in doubt. Household wealth and corporate profits are at a historic high, while unemployment is declining.

On the negative side: structural restraints to growth are multiplying

– Europe is out of the woods, but not on the path to growth. The economic policy shift came too late and is too fainthearted. The crucial questions on the euro area’s future have yet to be answered.
– The U.S. outlook is penalized by insufficient productivity gains and low savings rate. High profit levels won’t be able to considerably accelerate job growth and the wealth effect is constrained by the historic-low level of personal savings. We revised downward our forecasts from 2,7% to 2.2% for 2014.
– The lack of coordination has limited the impact of monetary policy moves and there was no real considerable global economic stimulus.
– The structural inadequacies of emerging economies have become an increasing handicap. The Chinese transition will take time as it can’t be as rapid as the rate at which exports decrease. Endemic inflation in other major emerging markets is coming back.

Outlook for 2014: too little improvement to take risk off the agenda

– Not much change in our scenario for 2013, but a sharp downward revision for 2014.
– Global growth revised down to 2.9% in 2013 and 3.3% in 2014, from an earlier estimate of respectively 3.1% and 4.1%.
– Our forecasts regarding China and Brazil growth have also been downwardly revised. They are respectively at 7% and 3%, instead of, as predicted in January, at 7.5% and 4%
– Bond market crash? Not in the short run.
– Flagging U.S. growth in the second half of the year will keep the Fed from pulling back too soon.
– Long-term yields in the U.S. will stop rising, settling in below the 2.50% mark until year-end. Instability of the bond market will be on the increase next year despite low growth, as U.S. unemployment falling to around 6.5%.
– The euro will remain firm, at 1,35 USD by the end of the year. Our forecasts have been upwardly revised for 2014.
– Stock markets should become more vulnerable to weak structural growth.