Paul Rochette, Senior Partner
Some new and persistent downside (and a few upside) international risks can affect our economy.
New risks are emerging. These include China’s housing bubble which, in terms of the number of units, makes ours look miniscule. China, to stimulate their economy, built entire cities only to find no one showed up. As a result, the Chinese economy, which has served as a global engine of growth, is slowing. While the latest figures show it not slowing as much as feared, the latest projection of growth in the 7.5% range is still a significant drop from the plus 10% range of the past decade.
In addition there is the potential for currency wars as the world attempts to stimulate their economies and support central government spending by devaluing their currencies – AKA printing money. The new Japanese Prime Minister Abe has stated that the Japanese are specifically trying to stop deflation by increasing the money supply, and that the slide of the yen is a result, not a reason, but few in Europe or the U.S. believe that. Coupled with aggressive money supply policy in the U.S. and continued challenges to the faith in the euro, a currency war may slowly emerge. The Chinese, while moving towards encouraging increased domestic consumption, are still heavily influenced by state owned enterprises (SOE’s) that wish to continue to export, and want the yuan to remain undervalued as well. All of the forces keeping other currencies weak will provide some further softening of U.S. prices, but at the cost of higher U.S. trade deficits, especially if the U.S. recovers sooner than others.
The European Union continues to be a cause for concern. After beating back the fears of a Greek default, the markets for Spanish, Italian and other southern tier debt stabilized, at least until this past week when Cyprus moved to center stage. For the first time in the euro crisis, depositors are being asked to contribute to the bailout. This is hitting depositors with more than 100,000 euro in Cyprus’s largest two banks, a large percentage of them Russians who have found Cyprus to be both a tax haven and a retirement center. The ramifications of depositors being hit means that now depositors in other southern European nations may no longer be so sanguine about the safety of their deposits, which both contributes to the growing southern European resentment towards Germany and also the growing sense that the crisis is not over. Perhaps depositors in Italy and Spain should be worried should the banking crisis not abate there. We will see if panic disintermediation hits this Thursday (3/28/13) when Cypriot banks reopen.
There are a few positive notes as well. The U.S. has entered trade talks with Japan and other Asian nations under the Trans Pacific Partnership, and is beginning talks with the EU over reducing trade barriers. Many economists agree that lowering trade barriers has net beneficial effects. With agricultural exports being one of the U.S.’s (and Colorado’s) strengths, continued global economic prosperity suggests more U.S. and Colorado exports of foodstuffs.
Canada, the EU and Mexico are Colorado’s three largest export destinations. While the EU is in the doldrums, Canada and Mexico are looking at respectable economic growth rates. Combined with China and Japan as our 4th and 5th largest export destinations, exports look to be a strong contributor to the U.S., the State and the region.