Tuesday, January 28, 2014

The world economy in 2014 Why optimism may be bad news

ALMOST every year since the end of the financial crisis has started with rosy expectations among American forecasters, and this one is no different. Stockmarkets are buoyant, consumer confidence is improving, and economic seers are raising their growth forecasts for 2014. America’s S&P 500 share index is at a record high, after rising 30% in 2013—the biggest annual gain in almost two decades. Powered by America, global growth of close to 4%, on a purchasing-power-parity basis, seems possible. That would be nearly a full percentage point faster than 2013, and the best showing for several years.

Yet amid the new-year cheer, it is worth remembering that almost every year since the financial crisis upbeat expectations have been disappointed. The biggest danger this time round is the optimism itself.

Fiscal ease

All around the rich world, things are looking better. Britain’s recovery is gathering pace (see article). Japan’s economy seems strong enough to cope with the imminent rise in its consumption tax. Even Europe’s prospects are less dismal. But America is driving this recovery.

America’s growth rests on strong foundations. First, household and corporate balance-sheets are in good shape. Unlike Europeans, who have barely reduced their private debt, Americans have put the hangover from the financial crisis behind them. The revival in house prices is testament to that. Second, thanks to cheap energy, years of wage restraint and a relatively weak dollar, America is competitive. These two factors have combined to produce faster job growth which, along with higher share prices, suggests stronger consumer spending and higher investment ahead. Finally, the fiscal squeeze is abating. In 2013 the federal government took 1.75% of GDP out of the economy with tax rises and spending cuts. The recently agreed budget deal will help cut the fiscal squeeze to 0.5% of GDP this year. All these factors could boost America’s growth to around 3% in 2014, well above its trend rate.

More spending by American firms and households will, in turn, buoy demand for goods and services from everywhere from China to Germany. America’s appetite for foreign wares is not what it once was (the current-account deficit has fallen to a 15-year low of 2.2% of GDP, see article), but its economy is so big that faster spending will push up exports around the globe. The resulting support for growth will, in turn, improve domestic confidence from Europe to Japan.

The trouble is that trade channels are not the only, or even the main, way in which America’s economy affects the rest of the world. Financial markets are a more powerful influence, as today’s share-price surges prove. As America’s economy gains strength, investors may expect the Federal Reserve to bring forward its first rate rise from the expected date of mid- 2015. That could send bond yields sharply higher.

Fed officials have made it clear that, even though the pace of bond-buying will slow, they are in no hurry to raise rates. But the faster the economy grows, the likelier investors are to doubt that commitment. In Britain, speedy growth has already led to expectations that the Bank of England will raise interest rates, even though it insists that it has no intention of doing anything of the sort. If faster growth in America translates into sharply higher bond yields, it could undermine itself. And, given the Fed’s influence over global monetary conditions, it could clobber growth elsewhere too.

A more subtle, but still pernicious, risk is complacency. Politicians are always keener to take credit for growth than to tackle tough reforms. The euro area’s latest fudge on its banking union, for example, reflects an insouciance born of better economic news. That is a problem because, across the rich world, the to-do list is long. America has a huge rump of long-term unemployed (see article), and fast-rising disability rolls. Britain will remain dangerously reliant on rising house prices unless it liberalises its planning rules and invests more in airports, roads and other infrastructure. The euro area cannot enjoy real prosperity until its overhang of private debt is reduced and its young people are brought back to the labour market. Bear that in mind if you start to feel too upbeat.

From the print edition: Leaders

World Bank: Global Economic Growth Will Accelerate in 2014

 Money traders work under a screen indicating update of U.S. dollars against yen at a foreign exchange brokerage on Wednesday, Jan. 15, 2014, in Tokyo.

The global recovery is set to accelerate further this year, with a sharp improvement among the world's richest economies, according to the World Bank. Global economic growth is expected to speed from a 2.4 percent rate in 2013 to 3.2 percent in 2014, according to a new report from the bank released late Tuesday.

In the richest countries, growth is expected to jump by nearly 70 percent, from 1.3 percent to 2.2 percent. Meanwhile, developing countries' GDP growth will accelerate from a 4.8 to a 5.3 percent growth rate.

The strength among wealthier countries such as the U.S., Japan and nations in the Euro Area, should act as a bolster to developing countries in places like sub-Saharan Africa and southeast Asia, said World Bank President Jim Yong Kim.

[READ: What's Wrong With GDP?]

"The performance of advanced economies is gaining momentum, and this should support stronger growth in developing countries in the months ahead," he said in a statement.

Accelerating growth among both advanced and developing nations reflects promising economic trends. In advanced economies, "the drag on growth from fiscal consolidation and policy uncertainty will ease" in 2014, the bank said in its forecast. Meanwhile, growth among developing countries, while slower than in the mid-2000s, nevertheless appears more sustainable than that "turbo-charged pre-crisis growth," the bank added.

[OPINION:Why the U.S. Should Oppose World Bank Lending to Argentina]

The World Bank predicts that U.S. growth will improve substantially, from 1.8 percent in 2013 to 2.8 percent in 2014. The Euro area is likewise set for a marked improvement, with growth shifting from -0.4 percent in 2013 to 1.1 percent in 2014.

Chinese growth, meanwhile, is expected to hold steady at a strong 7.7 percent, and India's growth will speed from a 4.8 to a 6.2 percent rate.

Though there are promising signs worldwide, the bank in its report warned that plenty of risks remain. For example, while Europe is recovering, per capita incomes in some EU countries are still declining, which could threaten further growth.

Likewise, the Federal Reserve's tapering of monthly asset purchases, known as quantitative easing, in the U.S. could threaten developing economies worldwide.

[READ: 5 Reasons 2014 Is Looking Good for the U.S. Economy]

"To date, the gradual withdrawal of quantitative easing has gone smoothly. However, if interest rates rise too rapidly, capital flows to developing countries could fall by 50 percent or more for several months – potentially provoking a crisis in some of the more vulnerable economies," said Andrew Burns, the report's lead author.

Despite some destabilizing prospects, the bank still maintains a positive outlook. Growth among developing countries, as well as the broader global economy, is likewise projected to continue a steady acceleration through 2016, the bank concludes, while in richer countries growth will flatten out at 2.4 percent in 2015 and 2016.

Ukraine warns efforts to solve crisis peacefully 'futile'

The Ukrainian interior minister on Saturday warned that efforts to solve the country's deadly crisis without using force were "futile" as protesters and police were locked in a tense standoff in Kyiv.

The European Union urged concrete steps to end the crisis, which according to activists has already left five dead and risks spiralling into another bloody confrontation if President Viktor Yanukovych chooses to use force to end the well fortified two-months protest camp in the capital.

Overnight, demonstrators had hurled Molotov cocktails at police who responded with stun grenades and rubber bullets, AFP correspondents said.

The exchanges on Grushevsky Street in Kyiv lacked the ferocious intensity of those earlier in the week but will raise concerns about the sustainability of the truce brokered by opposition leader and world champion Vitali Klitschko in place since early Thursday.

More from GlobalPost: In Kyiv, no mood for compromise

With tensions rising in Kyiv as hundreds poured into the protest zone Saturday morning, Interior Minister Vitaliy Zakharchenko bluntly warned that the use of force was possible.

"The events of the last days in the Ukrainian capital have shown that our attempts to solve the conflict peacefully, without recourse to a confrontation of force, remain futile," he said in a statement.

Accusing the mainstream opposition of failing to control radicals, Zakharchenko said the authorities now had information that the protesters were "hoarding firearms" at their headquarters.

Akhmetov warns against force

But in a sign of a possible split within the ruling Regions Party over how to deal with the crisis, Ukraine's richest man Rinat Akhmetov said that talks could be the only solution.

"There can be only one solution to the political crisis — a peaceful one. Any use of force is unacceptable," said Akhmetov, an ally of Yanukovych and bankroller of his party. "The only way out is to move from street confrontation to negotiations," he added in a statement released by his SCM holding company.

Kyiv has been buzzing with rumors that Yanukovych plans a state of emergency to put down the protests once and for all, even though the president has assured the EU he has no plan to do so.

Further ratcheting up the tensions, the interior ministry called on protesters to free two policemen who it said had been captured and held in the Kyiv city hall which has been occupied by protesters for the last weeks.

The opposition has denied the claim.

More from GlobalPost: Watch this 360-degree video from the epicenter of the clashes in Kyiv

But in a clear threat to storm the building if they are not released, the interior ministry said it demanded the officers' immediate liberation.

"If this is not fulfilled then the police will have to carry out measures to free those captured," it said in a statement.

In another conspicuously-timed move, President Viktor Yanukovych appointed a new head of the Kyiv city administration, sacking previous incumbent Olexander Popov who had been blamed over violence against protesters last year.

The epicentre of the crisis — Ukraine's worst since 1991 independence — was relatively calm early Saturday but hundreds of protesters were still at the scene with the security forces on the other side of their lines.

The clashes had killed five activists earlier in the week, according to protesters. The authorities have confirmed two shooting deaths but insisted police were not involved.

Opposition slams 'absurd' arrests

The opposition further fumed at a court decision to arrest over a dozen activists detained in bloody clashes earlier this week for two months, saying the authorities were going back on the promise to grant protesters amnesty.

Klitschko's UDAR party said that 15 protesters were jailed, including a 72-year-old man accused of attacking a riot police officer.

"All of the case testimonies and court decisions are copies of each other," the former boxing star said, calling it "absurd".

In a conciliatory move, Yanukovych had said Friday that the extraordinary parliament session on Tuesday will "take a decision about reshuffling the government."

He also said that parliament would discuss changes to tough anti-protest laws passed last week, which reinvigorated the protest movement, and that those detained in rallies who are "not guilty of heavy crimes" will be amnestied.

But the protesters packing Independence Square in Kyiv every night have regarded the concessions with derision, wanting instead that Yanukovych simply resign.

EU urges concrete steps

World leaders have condemned the violence and urged the president to hold talks. But so far Western pressure has had little impact on the standoff.

EU Enlargement Commissioner, Stefan Fuele, who held talks with Yanukovych in Kyiv Friday, urged Ukrainian government to take concrete steps to halt "a spiral of violence and intimidation" and restore peace in the country.

"I have discussed a series of steps to this end, that could lead to confidence building and to a political process aimed at ending this crisis," he added.

EU foreign policy chief Catherine Ashton is due in Kyiv next week while the crisis is also expected to dominate the upcoming EU-Russia summit.

China's $500 million shadow bank rescue

When is default a good thing?

That's the question being asked in China, where the murky rescue of a high-yield fund appears to have prevented a default that would have cost investors millions and undermined faith in the country's financial system.

But the 11th hour bailout by a mysterious third party has raised questions about China's readiness to let investors pay the price for failed investments and mounting risk in the country's shadow banking system.

Three years ago, a group of wealthy Chinese investors put 3 billion yuan ($500 million) into an investment trust -- the cheerfully named Credit Equals Gold #1 Collective Trust Product.

The product was marketed by Industrial and Commercial Bank of China, a state-owned enterprise that is one of the largest and most profitable banks in the world.

But the fund was designed and issued by China Credit Trust, one of the many shadow banks in China that offer loans to companies or individuals that may have trouble securing traditional bank financing.

In this case, the product was underpinned by a loan to a troubled mining operation in northern China that would later collapse as the price of coal plummeted. Investors were promised a juicy 10% annual return over three years, but were told earlier this month not to expect payment.

Related: Chinese experts play down shadow banking risk
Will the iPhone succeed in China? 
Will the iPhone succeed in China?

Some of the investors, who reportedly put as much as $500,000 each into the fund, said ICBC should reimburse them since it had marketed the product.

ICBC insisted that it had never guaranteed the product, and had no legal responsibility to pay investors. The bank's chairman even went so far as to describe the episode as a learning opportunity for investors, shadow banks and ICBC.

State media reports suggest that opportunity has been missed, thanks to a bailout by an unnamed third party that ensures investors will recover their initial investment. Interest will not be paid.

Related story: China's richest man prefers U.K. deals over U.S.

A default could have prompted investors to pull their money from other trust products and stop providing the deposits needed to supply credit and fuel economic growth.

"A default would likely lead to a loss of confidence in China's trust and other shadow credit markets and a shrinkage of liquidity in those markets, and hence, a credit crunch," said UBS economist Tao Wang.

The bailout seems to have eliminated that risk. But some analysts argue that a default is needed to demonstrate Beijing's commitment to allow market forces to play a larger role in the economy, and to send a message to investors that high-yield investments carry significant risk.

"These bailouts further perpetuate the implicit government guarantee that investors have come to expect when they purchase financial products in China," wrote analysts at Bernstein Research.
Will the iPhone succeed in China?

Unless losses are allowed, investors will continue to pour money into unproductive projects, they added.

Related story: What's going on with China's latest credit crunch?

The rapid expansion of shadow banking has sparked worries in Beijing about the efficiency of the overall credit system, and some fear the $6.5 trillion sector has reached a scale where it could sap growth. Beijing has promised reforms, but some observers think the government is dodging the hard choices.

"[This] is just another example of China kicking the can down the road," the Bernstein analysts said. To top of page

The 'Homeless Billionaire' Settles Down

The New York Times published a fine piece yesterday by Rachel Donadio about the adventures of Nicolas Berggruen, the man known as the “homeless billionaire,” at the World Economic Forum at Davos. It was full of keenly observed detail about the wealthy think tank proprietor. She described Berggruen as a slightly impish 52-year-old with blue eyes and a cool charm. She captured him hobnobbing with the likes of Wikipedia co-founder Jimmy Wales and Boris Johnson, mayor of London.

Did the Times bury the lead? In the final paragraph, Donadio dropped a bombshell:

    “Back at the party at the Swiss chalet, as Daft Punk’s Get Lucky played, Mr. Berggruen talked about his fascination with which governments work and which don’t, about his interest in East and West. He said that he hated the ‘homeless billionaire’ moniker, and that anyway it would soon no longer apply. He had recently bought houses in New York and Los Angeles, which are under renovation. ‘I haven’t moved in yet,’ he said.”

In other words, the homeless billionaire is no longer homeless. That’s worth pondering. Berggruen may not like his former nickname. Still, he did rather well by it. He attracted a considerable amount of attention because of his unorthodox lifestyle. Fourteen years ago, Berggruen made a life-changing decision: He disposed of his apartment on the 31st floor of Manhattan’s Pierre Hotel and his Art Deco home on a private island near Miami, choosing to rough it instead at four-star hotels around the world.
Video: Billionaire Eric Schmidt's Rules for Success

This undoubtedly helped attract a group of high-net-worth individuals and political leaders to his think tank. There are plenty of rich people with think tanks. Berggruen has done better than most of them because he is more colorful and beguiling, enlisting the likes of former U.S. Secretary of State Condoleezza Rice and Google (GOOG) Executive Chairman Eric Schmidt.

Now that he’s drawing crowds at Davos, Berggruen may not feel the need to cultivate a mystique. The question is, will he still throw his annual Oscar party at the Chateau Marmont, which attracts such celebrities as Paris Hilton, Woody Harrelson, and Leonardo DiCaprio. It’s one thing for Berggruen to settle down. But if he becomes too domesticated, he may find himself a little lonelier the next time he goes to Davos.
Video: Where Bullish Billionaires Are Putting Their Money

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Local Port :
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HTTP Query :
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Tri Access Point :
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Local Host :
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Local Port :
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HTTP Query :
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(bugs sesuai operator)
- Inject Method : HEAD
- Inject Newline : \r\n
- Inject Splitline : Default
HTTP Header :
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Server Config :
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