The American Economy: Comeback Kid

Almost the only thing on which Barack Obama and Mitt Romney, his Republican challenger, agree is that the economy is in a bad way. Unemployment is stuck above 8% and growth probably slipped below an annualised 2% in the first half of this year. Ahead lie the threats of a euro break-up, a slowdown in China and the “fiscal cliff”, a withering year-end combination of tax increases and spending cuts. Mr Obama and Mr Romney disagree only on what would make things worse: re-electing a left-wing president who has regulated to death a private sector he neither likes nor understands; or swapping him for a rapacious private-equity man bent on enriching the very people who caused the mess.

America’s economy is certainly in a tender state. But the pessimism of the presidential slanging-match misses something vital. Led by its inventive private sector, the economy is remaking itself. Old weaknesses are being remedied and new strengths discovered, with an agility that has much to teach stagnant Europe and dirigiste Asia.

Balance Your Imbalances
America’s sluggishness stems above all from pre-crisis excesses and the misshapen economy they created. Until 2008 growth relied too heavily on consumer spending and house-buying, both of them financed by foreign savings channelled through an undercapitalised financial system. Household debt, already nearly 100% of income in 2000, reached 133% in 2007. Recoveries from debt-driven busts always take years, as households and banks repair their balance-sheets.

Nonetheless, in the past three years that repair has proceeded fast. America’s houses are now among the world’s most undervalued: 19% below fair value, according to our house-price index. And because the Treasury and other regulators, unlike their euro-zone counterparts, chose to confront the rot in their financial system quickly, American banks have had to write off debts and raise equity faster than their peers. (Citigroup alone has flushed through some $143 billion of loan losses; no euro-zone bank has set aside more than $30 billion.) American capital ratios are among the world’s highest. And consumers have cut back, too: debts are now 114% of income.

New strengths have also been found. One is a more dynamic export sector. The weaker dollar helps explain why the trade deficit has shrunk from 6% of GDP in 2006 to about 4% today. But other, more permanent, shifts—especially the growth of a consuming class in emerging markets—augur well. On the campaign trail, both parties attack China as a currency-fiddling, rule-breaking supplier of cheap imports. But a richer China has become the third-largest market for America’s exports, up 53% since 2007.

And American exporters are changing. Some of the products—Boeing jets, Microsoft software and Hollywood films—are familiar. But there is a boom, too, in high-value services (architecture, engineering and finance) and a growing “app economy”, nurtured by Facebook, Apple and Google, which employs more than 300,000 people; its games, virtual merchandise and so on sell effortlessly across borders. Constrained by weakness at home and in Europe, even small companies are seeking a toehold in emerging markets. American manufacturers are recapturing some markets once lost to imports, and pioneering new processes such as 3D printing.

Meanwhile, what was once an Achilles heel is becoming a competitive advantage. America has paid dearly for its addiction to imported oil. Whenever West Texas Intermediate climbs above $100 per barrel (as it did in 2008, last year and again this year), growth suffers. But high prices have had an effect, restraining demand and stimulating supply. Net imports of oil this year are on track to be the lowest since 1995, and America should eventually become a net exporter of gas.

Many countries have shale gas, but, as it did with the internet revolution, America leads in exploiting it. Federal money helped finance development of the “fracking” technology that makes shale gas accessible, just as it paid for the internet’s precursors. However its use was commercialised by a Texas wildcatter called George Mitchell, the sort of risk-taker America has in abundance. In Europe shale gas has been locked in by green rules and limited property rights. In America shale has already lowered consumers’ energy bills and, by displacing coal, carbon emissions. In future, it will give a spur to the domestic manufacture of anything needing large amounts of energy.

America’s work-out is not finished. Even when the results are more visible, it will leave many problems unsolved. Because the companies leading the process are so productive, they pay high wages but do not employ many people. They may thus do little to reduce unemployment, while aggravating inequality. Yet this is still a more balanced and sustainable basis for growth than what America had before—and a far better platform for prosperity than unreformed, elderly Europe.

Of Cliffs, and Other Perils
What should the next president do to generate muscle in this new economy? First, do no harm. Not driving the economy over the fiscal cliff would be a start: instead, settle on a credible long-term deficit plan that includes both tax rises and cuts to entitlement programmes. There are other madnesses brewing. Some Democrats want to restrict exports of natural gas to hold down the price for domestic consumers—a brilliant strategy to discourage domestic investment and production. A braver Mr Obama would expedite approval of gas exports. For his part, Mr Romney should back off his promise to brand China a currency manipulator, an invitation to a trade war.

Second, the next president should fix America’s ramshackle public services. Even the most productive start-ups cannot help an economy held back by dilapidated roads, the world’s most expensive health system, underachieving union-dominated schools and a Byzantine immigration system that deprives companies of the world’s best talent. Focus on those things, Mr Obama and Mr Romney, and you will be surprised what America’s private sector can do for itself.

© The Economist Newspaper Limited, London (July 14, 2012)


Stocks cannot advance in unstable macro-economy

Analyzing the stock market and the current influential factors, Trinh Hoai Giang, deputy general director of the HCMC Securities Corp. (HSC), said stocks could hardly soar from now to the year’s end as long as the macro-economy remained unstable. In a recent meeting with the Daily, the expert mentions factors that hinder the equity market from fast recovery. Excerpts:

The Saigon Times Daily: There have been favorable macro-economic conditions like low inflation in May and June and deposit rates down five percentage points, yet the stock market was stagnant in the last two months. What is the reason for this in your opinion?

Trinh Hoai Giang: I think the macro-economic signs are not as positive as seen on the surface.

Specifically, it was forecast that this year’s inflation would not be high. Inflation will rise by 6-7% this year. This currently shows that prices are stable, but the chance of prices picking up again is unknown. Falling inflation is attributed to objective factors such as dwindling global fuel prices and the global economy facing a risk of downturn. As for the Vietnam economy, the six-month growth is only 4.3%, which while keeping prices stable paints a gloomy picture with poor production and unemployment being major troubles.

As such, even though inflation went down, aggregate demand and purchasing power of the economy did not prosper. Given that credit did not grow, business performances would get worse in the third and the fourth quarters. These show that there is no support for stock indices to increase until the end of the last quarter because when businesses are struggling, investors are not cheerful to buy stocks.

In addition, foreign investors are mainly selling stocks instead of buying like what they did last year. This affects the psychology of local investors. They consider a market without foreign capital an unattractive market.

Therefore, it is not strange when the stock market did not pick up in the last two months.

As deposit rates dip, many banks said individual savings are on the downtrend. Then, will cash flow into the stock channel?

– Cash rotation is slipping, from two times in the previous years to 0.8-0.9 time at present, choking off the cash flow into the economy. Indirectly, the stock market is impacted. But it is unknown which channel the cash flow would switch to. In my opinion, investors now have many options. They have gold to mortgage to get money for investment, or use their saving books as security for loans for investment in real estate… This means cash flow can swiftly swap their destinations and it is difficult to identify where cash is flowing into. Investors only care which channels are profitable. For example, if the stock market is potential, investors can mortgage their saving books and pour the borrowed money into stocks. The reason why cash is not flowing into the stock market is because they have no confidence in the market’s rally.

Foreign investors are very concerned about forex rates, which are less volatile over the past time, but it seems that there is no new foreign capital running into the stock market of Vietnam, except for some big M&A deals. Could you explain this situation?

– Forex rates are temporarily stable as the central bank has raised forex reserves, and I think forex rates will remain stable until the first quarter of next year. Gold prices are also less volatile, ranging around US$1,600 per ounce. In Vietnam, gold will be strictly controlled under Decree 24 on gold production and trading management. This will help stabilize forex rates. Trade deficit could hardly surge this year, and thus forex rates would only inch up 1-1.2% this year.

As for foreign investors, they do not look at the six-month performance, but longer term, and with Vietnam’s economic structure, they do not have confidence in sustainability, so the possibility of high inflation returning is real. Therefore, stable forex rates only make foreign investors “less worried”, but it is not enough to make them feel assured about disbursing more capital. At HSC, no new foreign investor has opened account and no old investor deposit more money into their accounts.

Would the supporting policies from the Government, like bailout package or preferential lending rates, be able to improve the performances of listed firms in the coming time? To what extent will these results affect the stock market?

– I expect the aforesaid supporting measures will help stimulate the aggregate demand and remove the difficulties for enterprises, but this is a scenario of early next year, not this year. The Q2 business results would be lackluster as enterprises have been suffering high lending rates and huge inventories.

In my opinion, from now to the year’s end, business performances would not rosy. Bad debts will prevent credits from coming to enterprises. So far, this issue has not been settled. And the real estate market will not see any significant change in the next six months. I think GDP growth would only reach 4.5-5% this year, so the chance for the stock market to pick up strongly is slim. Moreover, if the European market continued to face problems, foreign capital inflows to Vietnam would remain low, bond capital would also in troubles as interest rates will drop further by year-end. There is no ground to say stocks would go up 20-30% like many experts have forecast. The biggest concern of investors now is improving liquidity. If this was well done, the market liquidity would receive better support. In addition, it is necessary to strictly handle false and late information disclosure.

Reported by Thanh Thuong

Techcombank, WU launch online money transfer service

HCMC – Techcombank and Western Union Money Transfer Company have joined hands to kick off an online money transfer service that allows customers to take delivery of money via their accounts, instead of coming to banks.

To use the service, customers have to open a bank account and sign up for F@st i-bank, an Internet banking product of Techcombank. Money will be transferred directly into customers’ accounts anywhere with Internet access.

Techcombank is one of the two first banks Western Union has chosen to introduce the service. The service allows customers to take Vietnam dong or U.S. dollars.

Techcombank each year invests an average US$15 million in technology to improve its products and services. It has nearly 300 branches and transaction offices and 11,000 ATMs connected to the Banknetvn, Smartlink and VNBC network.

The bank now serves over two million individual and 60,000 corporate customers.