Credit Suisse Group AG is at odds with Goldman Sachs Group Inc. on the outlook for interest rates in China as analysts differ on the threat from inflation and the government’s likely mix of policy tools.
Increases may be “close to an end” after a quarter-point boost to key benchmarks this week, according to Goldman, the fifth-biggest U.S. bank by assets. In contrast, Swiss lender Credit Suisse estimates the deposit rate will rise by another 1.5 percentage points by year-end, eclipsing the 1 percentage point gain since the global financial crisis.
Credit Suisse sees “limited” room for increases in bank reserve requirements as elevated inflation adds pressure for the central bank to keep boosting rates after four increases since mid-October. Forecasters lack clues to policy makers’ intentions because unlike nations from the U.S. to South Korea, China issues no minutes of monetary policy meetings and the cabinet, not the central bank, has the final say on rate decisions.
“China isn’t a country that solely focuses on interest rates as a policy tool, it also uses quantitative tools, and that makes it harder to predict rates,” said Helen Qiao, a Hong Kong-based economist for Goldman. “The PBOC isn’t independent, it can’t always raise interest rates as it wishes.”
HSBC Holdings Plc is among banks that disagree with the Credit Suisse assessment.
Reserve requirements will continue to climb as so-called quantitative tools are “dominant” in tightening and rate increases play a secondary and “moderate” role, Qu Hongbin, Hong Kong-based chief China economist for HSBC, said by e-mail.
Faster Inflation
China’s statistics bureau may report on April 15 that the annual rate of inflation quickened to 5.2 percent in March, the fastest pace since July 2008 and more than the government’s full-year target of 4 percent.
The Shanghai Composite Index has climbed 7 percent this year as investors and analysts predict the government can sustain growth while taming prices. Credit Suisse, HSBC, Macquarie Group Ltd. and Citigroup Inc. advocate China stocks.
Credit Suisse describes its forecasts for rates as “the highest on the street” and Hong Kong-based economist Tao Dong said in a note this week that the central’s bank’s latest move is “one step closer towards our direction.”
Tao sees the one-year lending rate climbing 1.35 percentage points to 7.66 percent by year-end, a level higher than when Chinese officials were trying in 2007 and 2008 to cool an overheating economy before the financial crisis struck. The central bank has already boosted reserve requirements for banks by 4.5 percentage points since the start of last year and Tao sees “only limited further upside.”
Goldman says officials may increase rates once more in the first half, increase reserve requirements as “a regular tool,” allow more currency gains and maintain controls on bank lending and the property sector. Tightening measures have reduced inflation pressures and officials may be able to loosen policies in the second half, economists Qiao and Yu Song said in a note.
The reserve ratio for the nation’s biggest banks stands at 20 percent, excluding any extra requirements for individual lenders not publicly announced.
–Chinmei Sung. Editors: Paul Panckhurst, Nerys Avery.
To contact Bloomberg News staff for this story: Zheng Lifei in Beijing at +86-10-6649-7560 or lzheng32@bloomberg.net Chinmei Sung in Taipei at +886-2-7719-1543 or csung4@bloomberg.net
Japan’s central bank pledged to ensure financial stability after the strongest earthquake in at least a century forced Toyota Motor Corp. (7203) to shut some plants, knocked out oil refineries and sparked a plunge in stocks.
The magnitude 8.9 earthquake struck off the coast of Sendai, a city of 1 million in the northeast, unleashing a tsunami as high as 10 meters (33 feet) that engulfed towns along the coast. The Tohoku region, which includes Sendai, accounts for about 8 percent of the country’s gross domestic product, according to Macquarie Securities Ltd.
The disaster may slow a recovery from a contraction in the fourth quarter as Prime Minister Naoto Kan struggles to convince credit-rating companies he will get a grip on the world’s largest public-debt burden. While the Finance Ministry said it’s too soon to gauge the quake’s economic impact, the Nikkei 225 Stock Average dropped 1.7 percent and insurers Munich Re and Swiss Reinsurance Co. led declines in European trading.
“It’s early days,” Stephen Gallo, head of market analysis at Schneider Foreign Exchange in London, said in an e-mailed note. “But the horrific events in Japan bear very close watching from a financial perspective, given the bloated problems in Japan’s public sector.”
The price of crude oil fell 3 percent to $99.64 per barrel. The temblor set ablaze a Cosmo Oil Co. refinery near Tokyo and closed at least three others, temporarily curbing demand for crude in Asia’s second-largest oil-consuming nation.
Disaster Response
“I call on citizens to act calmly,” Kan told reporters in Tokyo after convening his emergency disaster response team. He also declared a state of “nuclear emergency,” Kyodo News reported, citing Chief Cabinet Secretary Yukio Edano.
Policy makers will hold a policy board meeting on March 14 and announce their decision on the same day instead of March 15.
“The BOJ considers it’s better to make a policy decision earlier, following the big earthquake,” said Seiichi Tsurumi, a spokesman at the Tokyo-based central bank. Governor Masaaki Shirakawa will hold a press conference on March 14.
Kobe Quake
The earthquake struck less than half an hour before Japan’s stock market closed. The yen initially dropped before paring its losses and later advanced at least 1 percent against all 16 of its most actively traded peers. The Stoxx Europe 600 Index slid 0.7 percent at 2:52 p.m. in London. The Standard & Poor’s 500 Index was little changed at 9:52 a.m. in New York.
Munich Re and Swiss Re, the world’s two biggest reinsurers, lost 5.4 percent and 5.4 percent, respectively.
“It’s difficult to estimate the economic impact right now,” Takuji Okubo, an economist at Societe Generale SA, told Erik Schatzker on Bloomberg Television’s “InsideTrack” from Tokyo today. “I’m sure this earthquake will reduce Japanese manufacturing output.”
The economy may nevertheless weather the shock, which evoked memories of the Great Hanshin Earthquake that hit the port city of Kobe in January 1995, said Richard Jerram, Singapore-based head of Asian economics at Macquarie. While Japanese industrial production dipped 2.6 percent in the month that the Kobe quake hit, it rebounded 2.2 percent the following month and 1 percent in March.
‘Fiscal Crisis’
The area around Sendai “is a lot smaller part of the economy than Kobe, so we would expect the damage to be much less serious on the economy,” said Jerram. “The early indications are that it’s not probably going to be all that destructive from an economic point of view.”
Japan’s economy contracted 1.3 percent in the fourth quarter of 2010 on an annualized basis. It shrank 2.7 percent in the same period of 1994.
“The timing of the disaster could not have been much worse,” Julian Jessop, an economist at Capital Economics Ltd. in London, wrote in a note. “The greater the social and economic damage, the larger the threat to the government’s ability and willingness to ward off a fiscal crisis.”
This year’s quake is disrupting a region that’s a center for auto making in the world’s third-largest economy. Toyota, the world’s biggest carmaker, said it and its affiliates closed three factories, with locations outside of northern Japan operating normally. Nissan Motor Co. said it extinguished two fires at factories and Kyodo reported that the Yokohama-based company halted production at four factories.
Aftershocks
“The Tohoku region is one of the major production areas of cars and other products in Japan, so the quake may affect economic activity mainly through this sector,” said Tohru Nishihama, economist at Dai-ichi Life Research Institute Inc. in Tokyo. “In addition, it’s possible to affect food prices as agriculture is another major industry in the region.”
Nippon Paper suspended three Japan plants after the shock, Kyodo reported. All Nippon Airways Co. said 32,700 people were affected by flight cancellations.
The quake struck at 2:46 p.m. local time 130 kilometers (81 miles) off the coast of Sendai, north of Tokyo, at a depth of 24 kilometers, the U.S. Geological Service said. It was followed by a 7.1-magnitude aftershock at 4:25 p.m., the service said. Aftershocks continued to affect office buildings in Tokyo.
Televised footage showed a tsunami striking northeast Japan. Outside of Tokyo, Narita airport, the area’s main international hub, closed, Kyodo News reported. Haneda, the main domestic airport, was reopened after closing earlier, it said.
Political Controversy
For Kan, managing the aftermath of the disaster may deflect immediate public attention from his becoming embroiled in a political-donation controversy. Earlier today, he told lawmakers he “had no idea” a political contributor to his office wasn’t a Japanese citizen, violating campaign rules. The Asahi newspaper reported Kan received 1.04 million yen ($12,500) from a South Korean resident. A similar charge prompted the foreign minister to resign March 6.
With opposition parties already calling for Kan to step down and refusing to pass bills authorizing sales of deficit- financing bonds, the tumult had risked prolonged paralysis. Political failure to set a path for reining in the world’s largest public debt has spurred credit-rating firms to lower, or put on notice for a cut, Japan’s sovereign grade.
The head of the Liberal Democratic Party, the biggest opposition group, said it would cooperate with the government to approve extra spending to cope with the disaster.
‘Worst Time’
“We will probably need a supplementary budget to work on this,” LDP leader Sadakazu Tanigaki told reporters after Kan convened a meeting of party leaders. “We will cooperate with all our might.”
Boosting fiscal spending on any reconstruction effort in the wake of the temblor would risk adding to the nation’s borrowing without cuts elsewhere or an increase in taxes. Government debt is set to reach 210 percent of GDP in 2012, the highest among countries tracked by the Organization for Economic Cooperation and Development, compared with an estimated 101 percent of GDP for the U.S.
‘There will be fiscal stimulus to reconstruct but Japan already has a budget deficit of close to 10 percent of” GDP and an aging population, Nouriel Roubini, the economist who predicted the global financial crisis, told Bloomberg Television in an interview from London today. “This is certainly the worst thing that can happen in Japan at the worst time.”
Move over, Mickey D’s, and bring Ronald McDonald with you — there’s a new fast food king in town.
Subway has surpassed McDonald’s to become the world’s largest restaurant chain in terms of units, the sandwich company confirmed Monday.
Subway had 33,749 restaurants around the globe at the end of 2010, said company spokesman Les Winograd. McDonald’s had 32,737 at year end, according to a February regulatory filing from the burger giant.
"Last year was actually pretty average for us, growth-wise," Winograd said. "We aim to open between 1,000 and 2,000 locations globally each year."
A McDonald’s (MCD, Fortune 500) spokeswoman said in a prepared statement that her company "continues to be focused on our business, and serving our customers. Our business continues to be strong and we are growing by being better, not just bigger."
As of Monday, Subway has 34,218 locations globally — all of which are owned by franchisees.
About half of the company’s unit growth is overseas, Winograd said no teletrack payday loans. Subway now has more than 1,000 locations in Asia, and it just opened its first store in Vietnam. Other high-growth nations include Brazil, Mexico, India, China, Russia and France.
"A lot of our growth has been in non-traditional spaces that our competitors might not touch," Winograd said. "We have really unique ones, like on a riverboat in Germany, a church in Buffalo, car dealers, bowling alleys and casinos. We’re not just in strip malls."
Fast food as a whole has gotten a boost from the recession — even in unexpected demographics. Last month, an American Express survey showed quick service restaurants saw a bigger rise in spending by ultra-affluent consumers than any other restaurant type last year.
"It’s a feeling of accomplishment, for sure," Winograd said. "But we didn’t set out to surpass anyone in particular."
The German air force evacuated 132 people from the Libya desert in a secret military mission, the country’s foreign minister said Sunday.
Two German military planes landed Saturday on a private runway belonging to the Wintershall AG company and evacuated 22 Germans and 112 others, Foreign Minister Guido Westerwelle said in Berlin.
“I want to thank the members of the Germany military for their brave mission,” he added.
The military planes later landed safely Saturday night on the Greek island of Crete.
German military missions abroad need approval by parliament, and Westerwelle said he had spoken to all party leaders in parliament Friday to tell them about the upcoming military mission. He said the coalition government led by Chancellor Angela Merkel had evaluated the situation in Libya as “very dangerous” and therefore ordered an immediate evacuation by the air force.
The head of Wintershall, Rainer Seele, thanked the government.
“we are all relieved and grateful,” he was quoted as saying by the DAPD news agency.
Westerwelle said another 18 German citizens were rescued by the British military in a separate military operation Saturday that targeted remote oil installations in the Libyan desert.
He said around 100 other German citizens were still in Libya and the government was trying to get them out as quickly as possible.
Thailand’s economy strengthened in the fourth quarter on exports and consumer spending, capping the fastest annual expansion in 15 years and adding to the central bank’s case to raise borrowing costs further.
Gross domestic product rose 1.2 percent from the previous three months, the National Economic and Social Development Board said in Bangkok today. That compared with a revised 0.3 percent decline in the third quarter, which reflected a mid-2010 slump stemming from political unrest and flooding, and the 0.9 percent median estimate in a Bloomberg News survey of 10 economists.
The Bank of Thailand is poised to extend interest-rate increases after saying inflation is a threat, as counterparts from Indonesia to China also strive to damp jumps in the cost of living. Prime Minister Abhisit Vejjajiva has raised the minimum wage and will boost civil service pay, which may push up prices ahead of an election he plans to hold by the end of June.
“A recovery in developed economies toward the year-end supported external demand and export-oriented countries like Thailand will continue to see benefit from that,” said Tohru Nishihama, an economist at Dai-ichi Life Research Institute Inc. in Tokyo.
The baht climbed 0.1 percent to 30.56 per dollar as of 11:06 a.m. in Bangkok from Feb. 17 and has risen about 3.2 percent in the past six months, the least apart from the Hong Kong dollar and Indonesia’s rupiah in a basket of 10 major Asian currencies tracked by Bloomberg, excluding the yen.
Asian Tightening
On a year-on-year basis, the expansion slowed to 3.8 percent from a revised 6.6 percent advance in the three months through September. Growth also eased last quarter from a year earlier in neighbor Malaysia while quickening in Indonesia, the Philippines and Vietnam. Thailand has joined Indonesia, South Korea, India and China in boosting borrowing costs this year.
The central bank is expected to raise rates further to tame price pressures, Arkhom Termpittayapaisith, secretary-general at the development board, told a news conference in Bangkok today.
Economic “growth momentum will continue this year,” supported by the global recovery, rising incomes and agricultural prices, Arkhom said, adding the board assumed borrowing costs would rise a total of 1 percentage point in 2011 so that they exceed the pace of inflation.
The agency raised its consumer-price growth forecast for this year to a range of 2.8 percent to 3.8 percent from the 2.5 percent to 3.5 percent estimated in September. The board said the baht would trade from 29.5 to 30.5 per dollar in 2011.
Rising Rates
Private consumption rose 3.8 percent last quarter from a year earlier, manufacturing expanded 4.8 percent and total investment advanced 6.4 percent, according to today’s report payday loans for bad credit.
Exports climbed 22.3 percent in January from a year earlier and may gain 15 percent in the first quarter of 2011, the commerce ministry said separately today.
The Bank of Thailand raised its one-day bond repurchase rate for the fourth time in seven months on Jan. 12, by a quarter of a percentage point to 2.25 percent.
Stocks and bonds across Asia have declined this year amid concern that accelerating inflation will erode purchasing power and spur further rate increases. The MSCI Asia Pacific Excluding Japan Index is down approximately 1.3 percent. Asian local- currency bonds have lost about 0.2 percent, based on an index compiled by HSBC Holdings Plc.
Central bank Governor Prasarn Trairatvorakul said last month the monetary authority needs to raise rates to damp inflation. Consumer prices increased 3.03 percent in January from a year earlier, compared with 3 percent the previous month.
Political Risk
The economy grew 7.8 percent last year, the strongest pace since 1995, today’s report showed. The development board, also known as the state planning agency, maintained its 2011 growth forecast of 3.5 percent to 4.5 percent. The agency, the finance ministry and the central bank release separate projections.
Disputes over the outcome of the last election in 2007 have fueled protests in the country of 67 million citizens, killing about 100 people and souring the investment climate. The government said this month a vote will be held within the first half of 2011, as Abhisit moves to ease the political turmoil.
“Politics remains the main question mark for the Thai economy. It’s very hard to predict what will come out,” said Santitarn Sathirathai, a Singapore-based economist at Credit Suisse Group AG.
Still, rising private consumption backed by higher agricultural prices will help the economy expand 4.6 percent this year, according to the company’s projections. Government efforts to boost incomes and curb costs will help, he said.
Abhisit increased the minimum wage last month and will raise the salaries of civil servants in April. The administration subsidizes the cost of diesel, cooking gas and electricity, and in January approved price controls on 39 products including pork and eggs.
Consumer confidence is rising, climbing for the second consecutive month in January. Central Group, controller of the nation’s biggest operator of shopping malls, said this month it plans to lift investment by 57 percent to tap into higher consumer spending. Sentiment fell in November after the worst flooding in five decades affected a 10th of the population.
At 38 years old, Jill Skorochod seemed to have a pretty comfortable life.
She had a well-paying government job and ran a small business training dogs, owned a small but comfortable house in North Toronto, and drove a new car. She also had three dogs of her own, all bull mastiffs.
That house, however, had two mortgages on it, the car had an expensive lease, and she lay awake at night worrying about the $40,000 of debt she
South Korea’s unemployment rate rose to a four-month high in January as the number of workers in agricultural, fishery and forestry industries declined.
The jobless rate rose to 3.6 percent from a revised 3.5 percent in December, Statistics Korea said today in Gwacheon, south of Seoul. The median estimate in a Bloomberg News survey of eight economists was for a rate of 3.7 percent.
South Korea’s economic recovery may limit further job losses while also stoking price pressures, with Bank of Korea Governor Kim Choong Soo signaling a pause in interest-rate increases last week may be temporary. Growth has spurred hiring at firms including Seoul-based LG Electronics Inc., the world’s third-largest maker of mobile phones.
“It’s not unusual to see the jobless rate going up during a recovery, as many people sitting idle decide to find a job,” Jun Min Kyoo, an economist at Korea Investment & Securities Co. in Seoul, said before the release. “Given economic growth is solid and that inflation pressures are mounting, the central bank will likely raise rates next month.”
The won rose 0.3 percent to close at 1,119.25 per dollar in Seoul yesterday, according to data compiled by Bloomberg. The benchmark Kospi stock index dropped 0.2 percent.
Private Sector Hiring
The Bank of Korea kept borrowing costs at 2.75 percent on Feb. 11, refraining from a second straight monthly increase this year even after inflation breached its 4 percent ceiling. “We will move ahead with normalizing interest rates at a pace that’s not too slow, nor too fast,” Kim said the same day. The central bank raised its benchmark by half a percentage point last year.
Private sector hiring has led an improvement in the jobs market, the central bank said after last week’s decision. It forecasts economic growth of 4.5 percent this year, slowing from a 6.1 percent pace in 2010, and predicts inflation will accelerate to 3.5 percent from 2.9 percent.
The seasonally unadjusted jobless rate was 3.8 percent in January, compared with 3.5 percent in December, today’s report showed. The number of employed people increased by 331,000 to 23.196 million last month from a year earlier.
Employment in manufacturing climbed 5.7 percent from a year earlier, while the number of people self-employed or working in the public-service sector rose 3.4 percent.
The number employed in construction increased 0.9 percent, while jobs in the agricultural, fishery and forestry industries fell 9.3 percent.
The finance ministry projected in December that the annual average unemployment rate will probably fall to 3.5 percent in 2011 from 3.7 percent last year, as the nation adds 280,000 jobs.
WRIGHT, Wyo check cash advance.
Waste Management Inc. turned to a staffing company, Seaton Corp., to recruit 5,500 permanent employees this year, cutting annual hiring expenses for the trash hauler by $1.9 million.
Using Seaton has been “much more scalable and flexible for me than to have to find recruiters and get them on board, which may take weeks, if not months,” said Brent McCombs, Waste Management’s vice president of talent. It’s a “relatively risk- free way” to expand.
While U.S. hiring by private companies last month was the weakest since January at 50,000, the staffing industry is experiencing a boom in demand as employers retool their workforces to be more flexible and reduce expenses. That’s helped stocks of these businesses outperform the broader market, with the Standard & Poor’s Supercomposite Human Resources & Employment Services Index rising 47 percent since August 31, compared with 19 percent for the S&P 500 Index.
Some employers who shrank their human-resource staffs during the recession now lack the recruiters to ramp up hiring even modestly, said Tobey Sommer, a staffing analyst at SunTrust Robinson Humphrey, a unit of SunTrust Banks Inc. in Atlanta. He recommends buying Robert Half International Inc., Kforce Inc. and Korn/Ferry International.
“What we are seeing right now in HR departments is a microcosm of the shift to a more flexible labor force” and “more variable cost structure,” said Sommer, who is based in Nashville, Tennessee.
John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina, agrees.
‘Fundamental Change’
“There is a fundamental change under way in the hiring habits of companies, who are not very sure about the strength of final demand and the strength of the economy,” said Silvia, who predicts the unemployment rate will reach 10 percent early next year compared with 9.8 percent in November, even as he has raised his forecast for fourth-quarter growth to 3.5 percent from 2.6 percent. “This certainly suggests more caution.”
Revenue from permanent job placements rose 33 percent in the third quarter at Menlo Park, California-based Robert Half, 50 percent at SFN Group Inc. in Fort Lauderdale, Florida, and 61 percent at Tampa, Florida-based Kforce, according to the companies.
Such outsourcing may expand 40 percent overall next year, said Elliot Clark, chief executive officer of SharedXpertise Media LLC, which held a trade show Dec. 7-8 in Las Vegas for companies interested in contracting out recruiting. The event attracted 270 attendees, up 23 percent from a year earlier, said Clark, a former staffing-industry executive.
‘Wheeling and Dealing’
So many people were “doing deals around the tables,” it was difficult to get them to attend the formal meetings, he said. “There was a lot of wheeling and dealing going on.”
Houston-based Waste Management, which has more than 45,000 employees, cut hiring and employment-advertising costs by consolidating recruiting through Chicago-based Seaton starting in 2008, McCombs said cash advance companies. Openings have been filled in less than a month compared with more than 50 days in 2007, thanks partly to the new process and the weaker economy, he said.
“We have shown a massive improvement,” especially in finding drivers, a career field with continuing strong demand, McCombs said.
Staffing companies are gaining clients even as the unemployment rate remains near a 26-year high. The labor market may not return to normal for five years, Federal Reserve Chairman Ben S. Bernanke said in an interview broadcast Dec. 5 on CBS Corp.’s “60 Minutes” program.
Continuing Recovery
“The economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment,” the Federal Open Market Committee said in its Dec. 14 statement.
Fourteen percent of U.S. employers plan to add to their staffs in the first quarter, while 10 percent anticipate reductions, according to a survey released this month by Manpower Inc. While the survey shows that demand is the highest since 2008, the pickup in hiring will be “slight,” Manpower said.
The jobless rate is likely to average 9.4 percent in 2011 and 8.7 percent in 2012, according to a Bloomberg News survey of economists this month.
Some businesses that are adding employees say outside recruiters may not be able to find people who are the best fit. While Intel Corp., the world’s largest chipmaker, is testing a “pilot program” of outsourcing, the Santa Clara, California- based company has maintained most hiring responsibilities, spokeswoman Gail Dundas said.
“Intel is a complex company with a unique culture, and we have found the best model for us” is “retaining our internal recruiting staff,” she said.
Hiring 500
Tarrytown, New York-based Regeneron Pharmaceuticals Inc. has had a more positive experience with staffing firms. The biotechnology company wasn’t “particularly efficient at hiring,” so it turned to Kenexa Corp. to help it find 500 people this year, more than doubling its staff to 1,500 since 2008, said Ross Grossman, vice president for human resources.
“We have reduced the cost per hire by about half,” Grossman said. Kenexa, based in Wayne, Pennsylvania, also designed a program to help recruit scientists who “really fit into the Regeneron culture,” where researchers are urged to shun bureaucracy and come up with new approaches.
The ad campaign, “Five Reasons You Do Not Want to Work for Us,” has been a hit with scientists, Grossman said. “It is about more than cost savings.”
Looking for a country you can invest in that is both politically stable and likely to grow a lot faster than the global average in the next five years?
Forget the emerging economies of Asia and South America: They score fine on the second point, but not so well on the first. And you can rule out most of Europe: The euro crisis will snuff out growth for years. The U.S. won’t be much better with its budget and trade deficits.
The country you should be looking at is the U.K.
Its economy has been a mess for the past few years. The nation had an extravagant Labour government that was constantly raising taxes. There was an over-reliance on financial services. The trade and budget deficits kept getting bigger.
Now there are signs the U.K. is turning the corner. Britain’s currency, the pound, has weakened faster than those of most other major nations, allowing exports to become more competitive. Its new coalition government under Prime Minister David Cameron is proving to be skilled at getting the budget deficit under control. Except for a few rioting students, the British are getting used to belt-tightening measures. And the country can only benefit from the financial chaos that is emerging in the euro area.
It wasn’t a coincidence the U.K. economy crashed so badly in the past two years. In reality, Britain’s relative position had been declining for years. For the second half of the last decade, it was only a property and borrowing boom that kept the economy growing. The U.K. was a train wreck waiting to happen.
Good Numbers
Yet this year something striking has happened. The economy has expanded at a decent rate — 0.8 percent in the third quarter, and 1.2 percent in the three months before that. Some credit should go to Gordon Brown’s Labour government, but whichever way you look at it, those are good numbers for a country hit hard by the credit crunch.
It looks set to continue. The Office for Budget Responsibility, the government’s fiscal watchdog, now predicts the economy will grow 2.1 percent next year, and by 2.6 percent in 2012. Again, those are very respectable numbers for an economy emerging from a financial crisis.
But the interesting question is whether the U.K. can outperform those expectations and grow much faster than most other economies. Here are four reasons why it may well do so.
Weaker Pound
One, the pound depreciated early, slumping against the euro as soon as the banking crisis hit. Go back to 2007 and the pound was trading at close to 1.50 euros. By the end of 2008, it dropped as low as 1.02 euros. It has recovered since then, mainly because the euro is so weak. The result, as the textbooks would say, has been that the U.K. is exporting again. September figures showed manufacturing expanding, and the trade deficit shrinking, as the U.K. sells more products to other countries.
It is, of course, just a start. But once a trend gets established, it tends to acquire momentum. And, as any German will tell you, there is no better way for an economy to dig its way out of trouble than to export more.
Two, the budget deficit is being taken seriously for a change. The general election this year looked messy, with no party securing an overall majority. But the coalition put together by Cameron is proving a lot stronger than most people expected. It has set out a five-year program of cuts to public spending that should bring the deficit down to manageable levels. The coalition is finding it a lot easier to make tough decisions than a Conservative government with a small majority would have been able to.
Lower Living Standards
Three, the U.K. is becoming more competitive. Average weekly earnings are rising at an annual rate of 2.2 percent. Inflation is running at 3.2 percent. So, in real terms, the British are accepting a cut in living standards. That’s painful when taxes are being raised. But there is no better way to make your economy more competitive than to reduce wages. It means the country becomes more attractive to global companies.
Four, the U.K. is outside the euro. Britain declined the opportunity to sign up for the single currency when it was introduced. As the euro lurches from crisis to crisis, that looks like a smart call. The U.K. is contributing to the Irish bailout but isn’t on the hook to rescue Spain or Portugal in the way that Germany and France might be.
That will make Britain a great base for global investors. Where’s that Indian or Brazilian company going to set up its European office? In Spain, where it has no idea what the currency will be in a decade’s time? Or Britain? It’s not really a very tough choice.
Royal Wedding
And if that wasn’t enough, there is a royal wedding to look forward to next spring. Last time, a young, photogenic and stylish princess did plenty for the tourist trade. There’s no reason to think Kate Middleton won’t be just as good.
Of course, there are risks. Cuts in government spending still have to bite, and may send the economy back into a slump. A struggling euro area may stop that export recovery in its tracks. Inflation is accelerating, and it may require big increases in interest rates to control it.
Nobody should start talking about an English Tiger — or perhaps Bulldog — just yet. But the U.K. is growing, and doing so without the easy stimulants of government spending and soaring property prices. If those forces gather strength, Britain might be one of the stars of the coming decade.
(Matthew Lynn is a Bloomberg News columnist and the author of “Bust,” a forthcoming book on the Greek debt crisis. The opinions expressed are his own.)
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