Daily Archives: January 6, 2012

With US non-farm payrolls posting an unexpectedly strong 200,000 gain in December and German industrial orders now shrinking, are we about to see a great transatlantic decoupling?

Germany was always vulnerable to the chill winds blowing in from southern Europe.  A greater proportion of German exports goes in aggregate to Italy and Spain (9.8 per cent in 2010) than to either the US (6.9 per cent) or China (4.9 per cent). While German companies are usefully exposed to demand for capital goods from the emerging world, the European Union remains by far Germany’s biggest export market. Demanding austerity from fiscal sinners is all very well but German exporters are now being presented with the bill: export orders are clearly in retreat – and not only to destinations within the eurozone.

At first sight, the December payrolls gain, alongside a further welcome drop in the unemployment rate, suggests the US has some degree of economic immunity from the eurozone crisis. Decoupling may be a dirty word but it does, occasionally, happen.  After all, the US decoupled from Asia following the 1997 Thai baht crisis.

At the time, economic and financial Armageddon seemingly beckoned. Asian economies were in a state of meltdown, the western world was heavily exposed to trade with Asia and it seemed obvious that the US economy would be brought to its knees. Business surveys at the time supported this view.

Instead, the US went from strength to strength. Within the space of two years – helped along by rapidly rising equity markets – the Asian crisis was largely forgotten. In its place came the productivity miracle otherwise known as the “new economy”.

Other than the good fortune that comes from unexpected moments of technological advance and the willingness of Americans quickly to embrace these new technologies, the resilience of the US economy stemmed from a reversal of capital flows. Money that had been routinely flowing into Asia in the mid-1990s headed elsewhere and, in particular, to the welcoming arms of Uncle Sam. Bolstered capital inflows allowed the US to run a bigger current account deficit alongside a stronger dollar (which kept inflation in check) and lower interest rates (which boosted domestic growth). Seen this way, the new economy was born out of an external crisis.

Could the same thing happen again? At the beginning of 2012, there’s certainly a more optimistic attitude towards “brand USA”.  Notably, the dollar is up, helped along by continued eurozone unease.

Compared with the late-1990s, however, there are also some big differences. Back then, payrolls gains were running at 300,000 or more a month, growth was ticking along at 4 per cent, the housing market was a picture of health, the word “subprime” had not yet been invented and the financial system worked (often a little too well).

Today, the US is vulnerable to the eurozone crisis both via trade and through its myriad financial connections. Bond yields can’t fall much further. The housing market is in the doldrums. There is no room for a “Greenspan put”, at least not of the conventional kind. And the US, even more so than the eurozone, has a terrible fiscal outlook.

Significant decoupling can happen, but only if the domestic conditions are right.  For the US in 2012, sadly they are not.

Stephen King is group chief economist at HSBC

Lest we needed another reminder, Thursday’s announcement that the Italian automaker Fiat had achieved the final performance target in its alliance with Chrysler underscored once more the remarkable success of the rescue of the American automobile industry.

No capitalist (and I consider myself to be a full-throated one) likes the notion of government intervening in the private sector. But we must recognise the rare moments when deviations from this principle are not only to be tolerated, but welcomed.

As the events of the past three years demonstrate, General Motors and Chrysler were such an undeniable exception. At the end of 2008, the entire auto sector was on the brink of total collapse, a near casualty of the financial crisis, oscillating oil prices, uneconomic labour agreements and poor management. General Motors alone lost $30bn in that single year.

Due to courageous decisions by both former President George W. Bush and President Barack Obama, the industry is now thriving. US sales of autos and light trucks rose last year by 10.3 per cent to 12.8m, compared to 10.4m in 2009.

More remarkably, when the books close on 2011, General Motors will have recorded its largest annual profit since 1999, even though vehicle sales remain well below pre-recession levels.

Chrysler’s turnaround is at least equally stunning, thanks to the extraordinary management skills of Sergio Marchionne, Fiat’s chief executive. Its tired fleet refreshed under Mr Marchionne’s lash, Chrysler’s sales rose by 26 per cent last year, yielding the biggest increase in US market share of any automaker.

Of equal importance to job-hungry America, employment in the auto sector rose by 129,000 over the past two years.

Had the US government not stepped in, the outcome would have been the diametric opposite. By the end of 2008, the two giant automakers would have run out of cash, shut down and liquidated. Likewise, their many suppliers. The lack of available parts would have forced Ford into at least a temporary closure. By any measure, well more than a million jobs would have been lost, at least temporarily.

Those who steadfastly oppose bail-outs – including Mitt Romney and the other Republican presidential hopefuls – insist that somehow this potential disaster could have been averted without government assistance.

That is, quite simply, ridiculous. In late 2008 and early 2009, not a penny of private capital was available to finance companies in this sector, with or without bankruptcy. I know this because we looked assiduously and vainly for it.

I recognise that opening the door to government intervention can be a slippery slope; particularly outside of America, examples of inefficient companies propped up on life support by transfusions of public money are plentiful.

To that extent, the ardour of defenders of free market capitalism can serve the useful purpose of making such interventions very much the exception. But at the same time, let’s not forget that not all government is bad, and markets are not always utterly efficient.

The writer is a former counsellor to the secretary of the Treasury and contributor of a monthly column to the FT. www.stevenrattner.com

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