February 1, 2015 5:32 pm
The perils of a strong US dollar
Edward Luce
The bad news is the US recovery is based on the familiar model of rising consumption
.
©Matt Kenyon
First things first. We are not about to replay the 1930s. The world’s big economies are not deliberately indulging in “beggar thy neighbour” devaluations and protectionism is not poised for an ugly revival. As they say in the US : situation normal, all fouled up — or words to that effect.
Yet there are undertows we ignore at our risk. The US dollar is surging and export growth is slowing.
The same applies to the widely forecast stampede of reshoring to the country, which is not really happening. Most US competitors are cutting interest rates and watching their currencies fall against the dollar. If these trends persist, and they will, US politics will react. A rising dollar is not the picnic it is made out to be.
Yet it is hard to see what will stop it. The gap between North America’s growth, which is “solid”, in the words of Janet Yellen, US Fed chairman, and that of most other big economies is real. So, too, is the growing monetary divergence. US 10-year bond yields are historically low at just 1.7 per cent. But these are juicy compared to Germany (0.3 per cent), Japan (0.25 per cent) and even the UK (1.3 per cent). Investors will keep buying the dollar.
This will become more pronounced as the Fed moves towards its first rate rise in almost a decade. Most others are cutting theirs. In the past three weeks, Canada, India, and Singapore have all reduced their lending rates. Australia and Turkey are expected to follow suit. The European Central Bank and Denmark are moving into negative nominal territory. It is probably a matter of time before the euro reaches parity with the dollar.
The dangers are twofold. First, there is an increasingly strong effect on the corporate bottom line. Almost half of the revenues of US S&P 500 companies come from overseas, and an even higher share of net profits. The stronger the dollar, the weaker their earnings growth.
In the last quarter of 2014, many big companies reported declining profits. Caterpillar’s fell by 25 per cent. Procter & Gamble forecasts zero growth in 2015 because of the strong dollar. Even Apple and Google warned of “strong currency headwinds”. This helps explain why US equity markets dropped by 5 per cent in January, while the dollar rose.
Second, the political backlash is growing. Last week, Republicans and Democrats pressed Mike Froman, the US chief trade negotiator, to include a currency manipulation clause in the Transpacific Partnership trade deal — with Japan the focus. Though China is not part of the TPP, the renminbi was their real target. Mr Froman redirected their questions to Jack Lew, the Treasury secretary, who insists a strong dollar is in America’s interests.
Mr Lew’s mantra is formulaic, and arguably misleading. But as my colleague Alan Beattie has pointed out, currency shenanigans are in the eye of the beholder. One person’s devaluation is another’s monetary policy. Rules against it are impossible to enforce. Insisting on them would wreck chances of a Pacific trade deal.
Yet, as exports stall and manufacturing jobs fail to return to the US, the political debate is likely to grow louder. Last month, Lawrence Summers, the former US Treasury secretary, and Ed Balls, the UK shadow chancellor, came out with a report on inclusive prosperity at the Center for American Progress. It offers a clear set of policies to reverse the declining incomes of the western middle class.
These include broadening employee ownership, improving parental leave, raising the minimum wage and stepping up vocational training. Its findings are seen as a blueprint for Hillary Clinton’s presidential campaign. Astonishingly, given that Mr Summers has long opposed such clauses, it also recommends “new trade agreements should explicitly include enforceable disciplines against currency manipulation”. With such cover, it is little wonder both left and right are clamouring for their inclusion.
What, then, will become of the strong dollar? The upside is that Ms Yellen can afford to keep interest rates at zero for longer than expected. There is scant sign of wage growth and inflation is nowhere on the horizon. The stronger the dollar, the lower the cost of imports. Falling oil prices also help.
By Europe’s standards, the US is grappling with a high-class problem. The bad news is that its recovery is based on the familiar model of rising consumption. In the last quarter of 2014, growth of 2.6 per cent was driven by household spending, rather than investment. American companies are actually cutting domestic outlays.
Since rising US consumer spending is driven by cheap borrowing costs rather than growing middle class earnings, it is vulnerable to a turn in the interest rate cycle. Most Americans are still cautious about the strength of the recovery. With 30-year mortgages available at less than 3 per cent, it is striking how few are buying homes. It is hard to believe more will do so when Ms Yellen finally acts.
In one respect, Mr Lew is right. The strong dollar reflects America’s success. It may also be a case of being careful what you wish for.
0 comments:
Publicar un comentario