Updated August 11, 2013, 11:54 p.m. ET

Emerging World Loses Growth Lead

Global-Trade Decline Dulls Developing Markets as Outlook Brightens in More-Established Economies

By ALEX FRANGOS in Hong Kong, SUDEEP REDDYin Washington, and JOHN LYONSin São Paulo

China, India and Brazil are disappointing investors. Manufacturing and export growth have slowed in all three countries. Why are stocks from developing countries doing better than those from the major developing economies? WSJ's Jason Bellini has #TheShortAnswer. Image: Getty

Momentum in the global economy is shifting to the developed world, away from the emerging economies that had led growth since the financial crisis.
For the first time since mid-2007, the advanced economies, including Japan, the U.S. and Europe, together are contributing more to growth in the $74 trillion global economy than the emerging nations, including China, India and Brazil, according to an estimate by investment firm Bridgewater Associates LP.

The turnabout may reshape world capital flows and upend forecasts that corporations had built around ebullient hopes for emerging markets.
Among forces driving the shift: a resurgent Japan that for years was a weakling of the global economy. Japan's economy expanded 2.6% on an annualized basis last quarter, the government reported early Monday, slower than the revised 3.8% first-quarter pace but a meaningful change after years of stagnation.
The recovering U.S. economy has produced steady, albeit tepid, growth. And Europe's economy is estimated to have expanded slightly in the latest quarter after a long recession, new reports this week are expected to show.

This Time Emerging Economies Aren\\\
 To enlarge graph click here

At the same time, the emerging world's big guns—such as Brazil, Russia, India and China—are ailing or ratcheting back from their stellar performance of recent years. The International Monetary Fund forecasts the global economy to expand 3.3% this year, compared with 3.2% in 2012 and 4% in 2011.

The shift could create new challenges for companies with big global operations. Some are already feeling the pinch.
Conditions around the world "have slowed down to a much greater degree than we had anticipated," said Richard White, chief executive of Flexible Steel Lacing Co., Downers Grove, Ill.
The privately held seller of products for belt conveyors used in manufacturing and mining had planned on its annual sales growth to ease to about 12% this year from 20% in recent years. Instead, sales are flat, he said. As a result, the company's employment in the U.S., home to almost two-thirds of its 900 workers, is staying flat, he said.
"The root cause seems to be China," said Mr. White, whose firm operates in 10 nations and sells into more than 150. "The demand that they had going—the need for iron ore, copper and coal—was driving mining activity in Australia, South Africa and South America."
The latest rebalancing of global growth is nascent and could reverse, should emerging economies bounce back even a little.
Many emerging-market economies remain the world's fastest-growing, even if they aren't expanding as quickly as before. Beijing's official full-year growth target of 7.5% would make this year the slowest since 1990, still far surpassing the U.S. pace of about 2%, though some economists figure China will grow even slower than the government target. Economists expect many smaller emerging economies from Southeast Asia to South America to grow at relatively strong rates, though more slowly than in prior years.
One sign emerging economies aren't directly benefiting from the growth pickup in more mature markets: Emerging-market purchasing managers indexes, a proxy for GDP growth, hit their lowest level since early 2009, according to an aggregate gauge compiled by the economic consulting firm Capital Economics. The same measures for the U.S., Europe and Japan were expanding.
Europe's tentative recovery hasn't translated yet into increased trade that could help emerging economies. Japan's renaissance—it is the fastest-growing large developed economy—also hasn't trickled through to its neighbors. Japan's recovery has come with a sharply weaker yen, which makes imports more expensive and means Japanese are more apt to buy things made at home.
The Bridgewater measure, based in part on an estimate of current growth rates rather than official data, shows the U.S., Japan and other developed markets contributing about 60% of the roughly $2.4 trillion in additional economic activity economists expect in the world this year. Bridgewater, the world's largest hedge fund, is known for its global economic analysis and performed well during most of the financial crisis.
Some multinational companies say the slowdown isn't a deterrent. Emerging markets "continue to be a fantastic source of opportunity," Herbert Hainer, chief executive of Germany-based sportswear giant Adidas AG, told analysts last week.
But Adidas' results show a short-term impact. Russia's slowdown weighed on its results, Mr. Hainer said, and its China revenue grew 6% in the first half, compared with 19% growth in the first half last year and 38% growth in the first half of 2011.
There is no one reason emerging economies are suffering.

Rising U.S. interest rates have squeezed credit in parts of the emerging world.
The nature of the U.S. recovery plays a part. Consumer demand drove the past two U.S. expansions but has been modest in recent years, meaning slower growth in demand for foreign goods.
The U.S. expansion has benefited from domestic energy production, which creates demand for U.S.-made equipment. Stagnant U.S. wages mean lower relative labor costs. This U.S. expansion's peculiarities are among indications that a long pattern, in which developed-world growth supported emerging-world exporters, could be breaking down in places like Asia.
"We can't ride on the coattails of the West," said Frederic Neumann, co-head of Asian economics for HSBC Holdings PLC. "Asia has become too big."
Chinese economic indicators in recent days show a bottoming out of its slowdown. But China's damped demand for commodities has affected Latin America and Southeast Asia.
Brazil, Latin America's biggest economy, has stagnated partly due to China's waning appetite for products like iron ore. Brazil's GDP grew about 1% last year after growing 7.5% in 2010.
Indonesia, Southeast Asia's largest economy, is taking a hit from China's slowdown, with exports of coal and palm oil suffering. Its GDP grew 5.9% year-over-year in the second quarter, the worst showing since 2010.
In India, economic mismanagement has led to a plunging currency and widening current-account deficits. Bankers there are holding back credit, making it hard for businesses to invest and for consumers to spend.
Some global companies still voice optimism. Profits at Brazil's Vale SA, a major iron-ore producer, have fallen for eight straight quarters. China, its biggest customer, will continue to need Brazilian ore, said Jose Carlos Martins, Vale's director of strategy.
"There are a lot of people losing sleep over China," he said, "but I don't lose sleep over China."
—Warangkana Chomchuen, Tom Orlik and Xiaoqing Pi contributed to this article.
Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved

August 10, 2013

The Housing Market Is Still Missing a Backbone


IN a speech in Phoenix last Tuesday, President Obama finally entered the debate over the future of United States housing policy. But his talking points offered few details about how to reduce the government’s giant footprint in the mortgage market.

Mr. Obama vowed to keep mortgage costs affordable for first-time home buyers and working families, pleasing those who think that the government should have a large role in this arena. His call for investment in rental housing was a welcome change from past mantras that focused solely on increasing homeownership across the country.

Playing to taxpayers who are angered by the government’s takeover of Fannie Mae and Freddie Mac in 2008, Mr. Obama said he wanted to wind these companies down. That’s an important goal.

But as if to prove how hard this will be, both companies later in the week announced enormous profits for the second quarter of this year, most of which go to the government in the form of dividends. Together, the companies reported $15 billion in profits; with Treasury on the receiving end of this lush income stream, it will be tempting to keep the mortgage finance giants in business.

Yet with the government backing or financing nine out of 10 residential mortgages today, it is crucial to lure back private capital, with no government guarantees, to the home loan market. Mr. Obama contended that “private lending should be the backbone” of the market, but he provided no specifics on how to make that happen.

This is a huge, complex problema.

In fact, there are many reasons for the reluctance of banks and private investors to fund residential mortgages without government backing.

For starters, banks have grown accustomed to earning fees for making mortgages that they sell to Fannie and Freddie. Generating fee income while placing the long-term credit or interest rate risk on the government’s balance sheet is a win-win for the banks.

A coming shift by the Federal Reserve in its quantitative easing program may also be curbing banks’ appetite for mortgage loans they keep on their own books. These institutions are hesitant to make 30-year, fixed-rate loans before the Fed shifts its stance and rates climb. For a bank, the value of such loans falls when rates rise. This process has already begun — rates on 30-year fixed-rate mortgages were 4.4 percent last week, up from 3.35 percent in early May. This is painful for banks that actually hold older, lower-rate mortgages.

Private investors, like mutual funds and pension managers, aren’t hurrying back to the residential mortgage market, either. Deep flaws remain in the mortgage securitization machine, and it needs to be retooled before investors will begin buying these securities again.

Perhaps the largest problem for investors who might otherwise be willing to return to the mortgage market is the lack of transparency in privately issued securities. Investors interested in mortgage instruments are not allowed to analyze the loans going into these pools before they buy them.

The banks putting together the deals typically provide some data, like borrowers’ incomes and credit scores, as well as whether the loans backed primary residences or second homes. But investors don’t get access to actual loan files that can tell them what they need to know about the quality and types of the mortgages packed inside the deals.

A CIVIL case filed by the Justice Department last week against Bank of America highlights the downside of nondisclosure. In that matter, prosecutors accused the bank of misleading investors when it sold them a mortgage security in early 2008. Although the bank contended in marketing materials that the security contained prime loans that met its underwriting standards, more than 40 percent of those loans did not comply with those standards, prosecutors said.

Lawrence Grayson, a Bank of America spokesman, said the bank was fighting the case.

“These were prime mortgages sold to sophisticated investors who had ample access to the underlying data and we will demonstrate that,” he said in a statement last week.

But the Justice Department contends that the bank failed to disclose important facts to investors about the quality of the mortgages in the $850 million pool, which wound up performing badly. As of June 2013, prosecutors said, 15.4 percent of those mortgages had defaulted, indicating that they were of a far lower quality than advertised. The Justice Department estimates that investors will lose more than $100 million on the deal.

Then there’s another issue. Investors are also unlikely to take an interest in mortgage securities because serious conflicts of interest are still embedded in the process.

For example, in the aftermath of the crisis, investors learned that they could not rely on the trustee banks charged with overseeing these loan pools to do their jobs. The trustees are supposed to make sure that firms administering the loans treat investors fairly. These duties include taking in and distributing payments as well as foreclosing on borrowers.

Even though the trustees are supposed to work for investors, these watchdogs are actually hired by the big banks that not only package the mortgage securities but also provide administrative services for them. So it was perhaps not surprising that the trustees failed to make the big banks buy back loans that didn’t meet the quality standards set out when the securities were originally sold. Such buybacks could have prevented billions in losses for investors, and the trustees’ inaction indicated where their allegiances lay.

Yet another reason for investors around the country to steer clear of mortgage securities is the recent action by Richmond, Calif., to seize underwater home loans and reduce the amount of debt outstanding on the properties. Many of the loans that the city officials want to restructure are held by mutual funds and pensions.

Pimco and BlackRock, two huge mortgage investors, are among those represented in a lawsuit filed last week against Richmond, contending that such a plan would violate the contracts that investors agreed to when they purchased the loans. And the Federal Housing Finance Agency, the overseer of Fannie and Freddie, has concluded that Richmond’s action could threaten the safety and soundness of the companies’ operations, harming taxpayers.

Mr. Obama’s views on the path forward for housing finance are welcome. But much work needs to be done before private capital will come back to this market. Eliminating conflicts of interest and increasing transparency in the securitization process will go a long way to achieving that end.

August 11, 2013 7:10 pm

Germany is strong, but not nearly strong enough
The country’s success is the ultimate guarantee of the eurozone’s health, writes Tony Barber
Indepth: Germany elections
If Germany were to collect one euro for every piece of advice it receives on how it should act in the European economic crisis, its current account surplus would be even bigger than it is. From far and wide, the recommendations flow towards Berlin: float eurozone bonds, forgive Greek debt, devise a Marshall Plan for the Mediterranean, set up a banking union, let domestic wages rise, launch a fiscal stimulus instead of droning on about balanced budgets. Some of these suggestions are on the right lines, and some are wrong. But all overlook the point that one of Germany’s most useful contributions would be to reform and modernise its own economy.
Germany is conventionally depicted as Europe’s economic giant and Berlin as the go-to capital for Americans and Asians anxious to see decisive action to overcome the crisis. Nonetheless Europeans and non-Europeans alike view Germany as a reticent giant, a nation whose reluctance to lead reflects the burden of historical crimes as well as the deep-seated provincialism of its political culture. What is less well understood is that Germany, despite being the eurozone’s anchor, faces a cluster of long-term challenges which, if not addressed, will sap its ability to set any kind of course for Europe.
In “Looking to 2060”, a report on the world’s growth prospects, the OECD forecast last year that Germany would achieve average annual growth of 1.1 per cent from 2011 to 2060. This put Germany, next to Luxembourg, at the bottom of the OECD’s 42-nation survey. The International Monetary Fund estimates that Germany’s potential growth rate is 1.25 per cent.

Nations such as Greece, whose economy has shrunk by a calamitous 25 per cent during the crisis, or Italy, whose economy has contracted for eight consecutive quarters, would happily swap their slumps for Germany’s meagre growth. But to eke out 50 years of almost invisible economic expansion will not give Germany strength and confidence to lead Europe from the front.

A related problem is population decline, or what in German is termed Schrumpfnation Deutschland – “shrinking Germany”. With more than 81m people, Germany is the largest of the European Union’s 28 member states. According to EU demographers, however, the German population will drop by 2060 to about 71m. There will be more people both in the UKassuming Scotland does not secede – and in France.

The causes of the decline include a very low birth rate and modest levels of net immigration. At 1.36 births per woman, Germany has one of the lowest rates in Europe. More important is that, for the past 30 years, fertility rates have been below the level of 2.1 children per woman needed to maintain a population’s size. For many years to come, there will be fewer potential German mothers.

The government is taking steps to encourage parenthood, such as a recent law that guarantees a place at a day care facility for every child over 12 months old. But state-sponsored pronatalism is a delicate matter in a country with unpleasant memories of Nazi schemes to promote motherhood.

That leaves immigration. It emerged from the UK government archives this month that Helmut Kohl, the former German chancellor, had told Margaret Thatcher, the late premier, in 1982 that he planned to halve Germany’s then 1.5m-strong population of Turkish immigrants within four years because they did not integrate well. The plan never materialised, and German political debate, citizenship laws and social attitudes have all moved on a long way since those days. Net immigration went up to 369,000 last year. But Germany’s immigration system remains too restrictive: non-EU residents tend to be kept out unless they are skilled applicants for well-paid jobs. It is a woefully inadequate way of tackling Germany’s chronic shortages of engineers, information technology specialists, pharmacists, social workers and other professionals.

Germany’s demographic pressures make it essential for Angela Merkel, or whoever is chancellor after next month’s parliamentary elections, to introduce reforms across a broad front. Although domestic demand has gone up in recent years, thanks largely to low unemployment, the economy is famously reliant on exports of manufactured goods to generate growth. Exporting success needs to be complemented by more open product markets and a more competitive services sector, parts of whichsuch as the retail industry – are conspicuously inefficient by the standards of advanced economies.
Three other areas crying out for improvement are infrastructure, education and research and development. Germany spends less than any large EU country on upgrading roads, railways and waterways. Ageing infrastructure, like that of the rust belt of north-western Germany, drags down economic performance. As a percentage of economic output, Germany spends less on education and R&D than Austria, Belgium, Finland, France and the Netherlands.

Growth-enhancing reforms are essential because German economic success is the ultimate guarantee that the eurozone will survive and flourish. Germany is Europe’s most powerful economy. But it is not powerful enough.

Copyright The Financial Times Limited 2013.

Op-Ed Columnist

Madam President


Published: August 10, 2013 

WASHINGTONPRESIDENT OBAMA proved himself a great segue artist Friday, as he smoothly glided from his previously unassailable position on the matter of surveillance to his new unassailable position on the matter of surveillance.       

There is no moral high ground that he does not seek to occupy. As with drones and gay marriage, he seems peeved that we were insufficiently patient with his own private study of the matter. Why won’t the country agree to entrust itself to his fine mind?
Yet while Barry is in the thick of it, the air is thick with Hillary. From the sidelines, she is soaking up a disproportionate amount of attention and energy, as though she were already Madam President.
She is supposed to be resting and off making $200,000 speeches, but instead she’s around every political corner.
The cicadas never showed up. But we can’t hear ourselves think here this summer over the roar of the Clinton machine — and the buzzing back to life of old Clinton enemies. Meanwhile, Obama’s vaunted campaign machine, which has morphed into a political group called Organizing for Action, has sputtered in its attempt to tear down Republican obstacles and push through his agenda.
While President Obama seems drained and disgusted at the idea of punching through the Republican blockade that awaits him on his return from Martha’s Vineyard, he told Jay Leno that Hillaryhad that post-administration glow” when they met for lunch recently.
As the president was getting ready for his news conference, his former secretary of state was dominating the news with an event she didn’t even attend. Emily’s List held what was, in essence, Hillary’s first Iowa campaign event, titled “Madam President” and featuring Claire McCaskill, the Missouri senator who famously broke away from Clinton Inc. to join the Obama revolution in 2008.
Now McCaskill, who once said she wouldn’t trust Bill Clinton near her daughter, is presciently back in the fold, on board with Ready for Hillary, the super PAC supporting Clinton for 2016.
As ABC News’s Michael Falcone reported from Iowa, the state that allowed Obama to vault over Hillary, McCaskill said she’s dreaming of “that moment in 2017 when we can sayMadam President to Hillary Rodham Clinton.’ ”
In a funny echo of Hillary’s defense of Bill during the Gennifer Flowers scandal, when she said she wasn’t home baking cookies and having teas, McCaskill told the forum it’s hard for women to run for office because it’s “not sitting down to tea and crumpets.”
For one thing, McCaskill said, it’s awful to go to a department store to buy Spanx and get recognized as a senator.
It’s being called Hillary’sshadow campaign.” But the shadow campaign actually began when she was secretary of state. Obama granted his former rival special privileges and allowed her to move Hillaryland, with all her loyal image-buffers and political aides, into the State Department intact.
Because he doesn’t traffic in the unseemly nitty-gritty of politics that is mother’s milk to the Clintons, Obama has been somewhat naïve in how he has handled the imagery of their relationship.
West Wing strategists did not totally trust Hillary after the bitter 2008 battle. They thought by pulling the former secretary of state close, Obama could ensure that Hillary was not out there recreating events and decisions or taking more credit than she deserved — as she sometimes did during her 2008 campaign.
So Obama did not seem fully aware, with their cozy joint60 Minutesinterview and their laughing al fresco lunch at the White House recently, that instead of co-opting Hillary, he looked like he was handing her the White House silver on a silver platter. The Clintons can present those images as Obama passing the torch and bypassing Joe Biden, just as Bill once took a simple handshake from J.F.K. during a Boys Nation visit to the White House and turned it into an Arthurian moment.

Many Democrats are hungry to make history again, and they see the first woman president as the natural successor to the first black president.
But in other ways, Hillary is not such a natural successor. The Clintons are ends-justify-the-means types with flexible boundaries about right and wrong, while the Obama mystique is the opposite. His White House runs on the idea that if you are virtuous and true and honorable, people will ultimately come to you. (An ethos that sometimes collides with political success.)
It’s odd that Obama, who once talked about being a transformational president, did not want to ensure that his allies and his aims were imprinted on the capital. Instead, he has teed up the ball for Hillary. Some of the excitement about Barack Obama was the prospect of making a clean start, after years of getting dragged into the Clintons’ dubious ethics and personal messes. Yet Obama ushered in the return of Clinton Inc. and gave it his blessing.
What he doesn’t seem to realize yet is that Hillary’s first term will be seen, not as a continuation of Obama, but as Bill Clinton’s third term.