Saturday, 14 May 2005

Main pillars of economic growth under threat

Reuters reports that the University of Michigan's measure of consumer sentiment in the US slipped to 85.3 in early May from 87.7 in April, business inventories rose 0.4 percent in March, while import and export prices rose 0.8 percent and 0.6 percent respectively in April after rising 2.0 percent and 0.6 percent respectively in March.

Price pressures are also strong in China. Producer prices rose 5.8 percent from a year earlier after climbing 5.6 percent in March, the Beijing-based National Bureau of Statistics said on its Web site. Crude oil and coal prices surged 37 percent and 26 percent respectively.

Inflation in China is being sustained by continuing strong growth in money supply. China reported that M2 rose 14.1 percent from a year earlier in April. This compares with a rise of 14 percent in March. M1rose 10 percent year-on-year in April compared with 9.9 percent in March.

The Chinese government appears comfortable with this rate of monetary expansion. At least comfortable enough not to contemplate a revaluation of the renminbi any time soon. "Media reports on the expected appreciation of the Chinese currency, renminbi, on May 18 are not correct," said central bank governor Zhou Xiaochuan.

Michael Shedlock seems to agree that a revaluation is not imminent, citing "a collapsing stock market, a certified property bubble, insolvent banks, and hot money pouring hoping to make a quick score" as well as the impending shut-down of "more than 2,000 debt-ridden State-owned enterprises [resulting in] 3.66 million employees needing reallocation".

Not to mention the global economic slowdown. China's trade surplus in April fell -- to US$4.59 billion from US$5.7 billion in March. And China's rich neighbour doesn't seem too optimistic about the economic outlook.

Japan's Cabinet Office reported that core private sector machinery orders, which exclude volatile orders from electric utilities and for ships, rose 1.9 percent in March, well above expectations for a fall of 0.9 percent drop. However, orders are expected to fall 3.1 percent in the second quarter.

So this appears to be a continuation of the story of weak business investment. US consumption -- despite rising indebtedness -- and Chinese investment -- much of which appears to be speculative -- remain the main pillars of global economic growth. And if US consumer sentiment continues to deteriorate and Chinese measures to cool investment (reported yesterday) prove overly effective, that can only mean one thing for the global economy.

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