Reasons to be cheerful?

Jim O’Neill, Chairman of Goldman Sachs Asset Management GSAM, gives his inimitable assessment of last Friday’s economic news which delivered a number of negatives.

Firstly, O'Neill beileves Japan’s post-tsunami recovery appears to be firmly on track.  “The quarterly BOJ Tankan survey released last week was suggestive of a V-shaped recovery, consistent with almost all recent data. This week, the BOJ will probably raise their assessment of the cyclical economic outlook. Whether any of this will translate into anything more substantial beyond this autumn remains highly uncertain. There remains quite a debate between two groups of observers.  The majority continue to see a poor future for Japan given its major structural challenges. The minority (adjusting for Japan’s weak demographics) see a country that can sustain, and perhaps even grow, high living standards and that may offer some lessons to guide the US and parts of Europe.”

Moving on to the US and what O’Neill calls its “very irritating monthly payrolls” he asks, “Is the US stuck with a very weak 1-2% recovery for some time, or is the payroll data inaccurate once again? Or, is the US stuck with a strong profit-growth, but weak job-growth, recovery? I had been pretty strongly in the camp that the US recovery had only temporarily stalled during the past couple of months, and that higher food and energy prices, along with the disruption of the Japanese supply chain, were responsible for the softer data. But if Japan is witnessing a bounce back, it should be seen elsewhere too. I can’t see why the US can’t create jobs if the economy is improving.”

Following Friday’s data, O’Neill says analysts must watch weekly job claims even more closely than usual and wait until the August release of the July report to see whether the apparent grim employment situation is realistic or not.

Latest consumer and producer price inflation readings from China are at the high end of expectations, with CPI coming in at 6.4%. High food prices appear to be responsible for this figure. According to Yu Song, the GS Beijing-based economist, there are signs of moderation in the non-food elements. The debate will now focus on whether the June reading is the peak or not, and O’Neill believes it will be fascinating to hear the local policy makers’ tone this coming week. The PBOC Governor Zhou highlighted base effects as responsible for such a high CPI figure. The coming reversal of such forces is why so many expect CPI to ease in the coming months towards 4.5%.

O’Neill stresses that the near-term trend of Chinese CPI is extremely important for the second half of the year. “It will determine the stance of PBOC policy makers as to whether they can stop tightening. Given that the challenges facing the US, Europe and others will likely impact Chinese exports, lessening inflation would allow domestic demand to help the Chinese economy adjust to the post-crisis world.  At the same time, it would help the rest of us through increased Chinese imports.”
All of which means, warns O’Neill, the June trade data is not a great reading for the optimists, unless analysts are taking the view that the soft import data is temporary.

“The monthly trade surplus bounced back to $22.3bn in June, a surplus I think higher than the rest of the year to date. Both exports and imports were softer than expected, with imports especially disappointing. The release will muddy the waters also in terms of politics, as it will prove convenient to those who like to blame China for all their problems.  According to the Reuters data report, the rolling 12-month surplus is $173.4bn, which is less than 3% of GDP. This figure is still supportive of those of us who believe the trade balance has entered a new, lower era. It will be the headline that garners the attention though. In coming days there will be further important China data releases including the latest monetary data.”

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