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Economic playoffs: Greece vs Japan vs China vs the US
Goldman Sachs' Jim O'Neill cautions that unless the fall out of the Greek debt restructuring results in fresh challenges for Italy and Spain, it’s best to remain unexcited about it.
February 12, 2012 4:19 by kippreport
This past week, the sixth in the year 2012, has displayed a slightly different character to the previous five weeks with the equity markets losing their strong upward momentum. There have been some understandable reasons for this, not the least of which is the never-ending saga of Greece, which I shall discuss a bit more below, and the related challenges about resurrecting a credible and permanent European Monetary Union (EMU) from this mess.
Despite this, my main message is – once again – to please keep this in perspective. Greece’s economy is somewhere between $300 to $350 billion. Last year alone, China’s GDP increased by $1.4 trillion, to $7.3 trillion. I reckon that means China has created the economic equivalent of another half of Greece in the six weeks of 2012 to-date. It is also the case that the evidence about a self-sustaining recovery in the US continues to build after yet another decline in weekly job claims, a rather reliable indicator.
For all those of you with persistent bearish tendencies, which seems to include most inhabitants whose lives have been dominated by the bond markets, take another look at Japan, where things seem to be getting more and more intriguing.
GREECE AND EMU
For much of this week, markets have been glued to screens and TVs waiting to hear the latest news about who said what on Greek debt restructuring and their economic policies. As I remarked above and on many occasions, the world economic relevance of this is close to non-existent. What is relevant is both the precedent it may set for other so-called developed nations for debt restructuring as well as the future of the EMU. I don’t want to devote this Viewpoint to this extremely important issue, but will offer a couple of brief thoughts.
Firstly, in terms of precedent, for me, the Greek rescheduling is ultimately relevant for what constitutes a benchmark in financial bond markets. So, of course, it is really important for the future structure of the EMU. But it is probably more important for all major bond markets, especially given the reality that the fiscal deficits and debt of the UK, US and Japan are much worse than the average of the Euro Area. As I shall return to below, this is especially important for Japan.
Secondly, with respect to the EMU, there is a most interesting article by Quentin Peel in Friday’s FT in which he explores the mind of German Chancellor Merkel and the long term game plan. It is an important read. It essentially argues that she has decided to try and push for not just more fiscal union, but also political union. This will be a road full of potholes and remarkable challenges, but it is what I feel is the most likely path. The notion that the EMU will end because of Greek’s immense challenges is not one that I think should be given too much attention.
SOME FRESH SOFTER DATA
One additional complication for us all is that, after weeks of positive data surprises, some of it turned more mixed this last week outside of the US. China’s January CPI , while dismissible partly due to seasonal issues, came in higher at an awkward 4.5 pct year-on-year, and if it doesn’t fall sharply in February, that would give me pause to reflect, and probably others. At the other end of the spectrum, M2 money supply was softer than expected, which along with a weak PPI, suggests underlying inflationary pressures are weakening.
A number of Asian countries reported somewhat disappointing export data for January, which is obviously not a great sign (although it is not impossible that some of them, especially China and Japan, are losing competitiveness). (CONTINUED TO NEXT PAGE)