China Manufacturing Growing... Yet the GDP Slows

After writing quite a bit over the past few weeks about US manufacturing and the current boost of growth, I figured to see how our great rival of the eastern hemisphere was fairing in the same industry.  Bloomberg reported last week that China had received an increase in manufacturing for the third straight month.  This comes at the same exact time as US manufacturing has taken a sharp rise over the same time.

However, there is a problem that seems to be following both China and the US.  Both countries saw a decrease in growth in GDP this past quarter.  This could be a sign that the economy, at least for the US, is not quite at the level we have been expecting since quarter 3's promising numbers.  China is still growing at an 8.9% rate, far above the United States, but economists believe that the market is likely to slow down even further.  Economists predict the first quarter growth rate should be around 8.6% in China.

I predict that China is going to continue to grow throughout 2011, however, at a far slower rate than expected. With the rising wages in China, companies are always looking to find ways to save on wages and move to places with the technology capable of doing business at the lowest cost.  With these wages comes more growth in human capital, which China has needed to transcend past the agricultural and more rural development that harbored much of the GDP in the past.

What should be interesting is seeing  how China reacts to the lowered growth in GDP.  Like the United States, I don't believe that the manufacturing is going to play a huge role in the growth of the Chinese economy.  But they do send some shocks through the markets and offer consumers faith to invest in the market.  I don't believe that China and many of the eastern Asian countries have experienced the intense recession that the rest of the world has dealt with.  This may become a problem, as the closely woven global economy seems to leave no prisoners as nations begin to fall.

References:

1. "China Manufacturing Improves for 3rd Month". Bloomberg News.

Bond Ratings Continue to Plummet in Greece

Even with the cooling of the flames in the EU and the agreement to establish austerity in Greece, the bond rating indices don’t seem to fully compromise with the plan.  News last Friday reports the drop in the Moody rating, going from “C” to “Ca”.  This comes only a week after S&P dropped Greece’s rating to what they call “selective default”.  Both of these rating companies agree that they believe there will be further problems to pursue Greece, even with approximately 70% of the bonds due to be forgone.  

Through this whole debacle, the question that everyone seems to want to know is when the EU is willing to let go and let Greece default.  As we have discussed in my economic forecasting course, the avoidance of Greece’s default may just be a way to avoid a total collapse of the European and global economy.  By holding off and making sure investors see what is going to happen, there will be more control in the spending within the individual countries surrounding Greece.  

Another article brought to the attention of BBC News is the thought of leaving the EU and being able to control their currency.  The first point that is made is the devaluation of the currency itself.  The biggest problem with Greece has been its inability to control the value of its currency.  When the currency is pinned to the standard in all of the Eurozone, whenever problems occur in the country, the easiest way besides devaluation would involve cutting wages, part of austerity.  Unfortunately, people aren’t too keen on that idea.  At this point in Greece’s economy, there is truly no other choice but cutting wages and government spending.

The article continues to explain the process of creating a new currency.  When announced, there would be a grace period in which the currency would have to be produced and put into the system in an orderly fashion.  The process may end up catastrophic.  I believe by what we have seen already, with riots over austerity, the citizens of Greece won’t be pleased by having new currency that will likely be worth less and less the minute they get their hands on the currency.   However, what other choice will Greece have?  The enormous amount of pressure that has built up over the past few years could very well be nearing an end, and unfortunately, I can’t imagine the situation ending well.

References:

1. Bowlby, Chris. “What if Greece had to Get a New Currency?”. BBC News. http://www.bbc.co.uk/news/business-16981897 
2. “Credit Ratings: How Fitch, Moody’s and S&P Rate Each Country”. The Guardian. http://www.guardian.co.uk/news/datablog/2010/apr/30/credit-ratings-country-fitch-moodys-standard 
3. “Moody’s Warns of Greece Default Despite Debt Deal”. BBC News. http://www.bbc.co.uk/news/business-17238523

Unemployment Rates in Spain Rises to End 2011

While the United States has seen relative growth as of recently, there are many countries, especially in the European Union, that are getting destroyed by the Euro crisis.  Spain is one of the countries topping the list of struggling economies.

BBC UK reports the final quarter of 2011 marked 5.3 million unemployed Spaniards, a growth from 4.9 million in quarter 3 of 2011.  This number is especially scary, as 5.3 million accounts for a 22.8% unemployment rate, more than double the average unemployment rate in the eurozone.  With such a high unemployment rate, the Spanish government is desperately trying to find ways to cut the budget and raise taxes in the upcoming year, but will expect a 1.5% shrink in the economy.

  

The Spanish Unemployment Rate Dating Back to Around 2005.  Since the housing bubble in 2008, Spain has struggled with job growth.

With the unstable European economy as it stands, something has to be initiated to regain investor trust into eurozone countries.  The European Union (and the global economy) will find it near impossible to bail out Spain, and a default would be extremely damaging to the global economy.

If we were to see a 22.8% unemployment rate in the United States, there would likely be riots through every city across the country.  The citizens who are taking the hardest hit in the Spanish economy are the youth.  BBC reports that there is a 48.6% unemployment rate for the ages 18-24.  This is extremely troublesome, as the best hope to build the economy is going to be with new blood and different economic thought to promote growth.

With Spain’s unemployment rate, I wonder what effect on emigration within the EU will happen over the next year.  What I could imagine occurring would be many of the young adults moving to countries with more attractive positions available.  This is not an uncommon notion, especially with the ability to travel between EU countries relatively easy.  

                                                                                                 

Over the last year or two, there have been articles discussing the emigration of Irish after the bail out.  Ireland has experienced two waves within the last 20 years of young adults becoming educated in Ireland, then finding positions in other countries around Europe.  Once the economy begins to pick up in Ireland, many attempts to move back, and as the trend has shown, are able to find jobs and send the economy into a spurt of growth.  

Perhaps Spain will experience a similar movement.  While Spain has a much larger population than Ireland, the incentive to find work remains the same.  I have never been to Spain, and while I wouldn’t necessarily know the social norms to leaving the country, citizens or the Spanish government need to make an effort to save the economy.    

References:     

1. “Spain’s Unemployment Total Passes Five Million”. BBC UK. http://www.bbc.co.uk/news/world-16754600

Romney Gains Support from Cisco's CEO

A large corporation has spoken out about the opinion towards the 2012 presidential election.  CEO John Chambers of Cisco Systems has openly supported presidential candidate Mitt Romney because of his plans to lower the current 33% corporate tax (as stated in the most recent debates, Romney hopes for 15%).  Chambers explains how much cheaper running a business in other countries, including China, Russia, UK, and Canada.

The belief that cutting corporate tax will bring jobs and corporations back to the United States is bold, and seems highly unlikely even with lowered rates.  Countries including China and Russia hold far lower wage levels that even if the corporate tax were to be cut in half, there would be so much uncertainty surrounding whether there would be a financial benefit to bringing companies back.  The United States would surely benefit from job creation, but the bigger question would remain to what would happen to funding of the government in the long run.

As stated in the last post, the percentage of money being put into the education system in America is at a low.  The best way to build on our human capital is giving Americans the best opportunity to succeed and innovate.  This is where economists need to push the realization that the costs of cutting tax money will ultimately harm the economy and the citizens of the US.  This election could effect greatly the outcome of the United States over the long run.  

Again, we fall back to the dispersion of wealth in the United States.  We need to recognize that the rich are getting  richer, while the lower and middle class are being left in the dust.  If these levels of income inequality continue to occur, there will be major problems for the country as a whole.  I truly understand where people believe that having corporations return to the United States could benefit our country, but if only 1% are reaping the benefits of the economic growth, will there be sustainability in the US economy?

Reference:

1. Smith, Aaron. "Cisco's Chambers Backs Romney for President". CNN Money. http://money.cnn.com/2012/01/26/news/economy/davos_chambers_romney/index.htm?iid=SF_E_River