Challenges this year, but no apocalypse

 

Europe

In the past three months, correlation has increased between the euro and the baht – whenever the euro weakens against the dollar, so does the baht. This reflects the focus financial markets currently have on Europe, and the overriding impact this has on global risk appetite. 

This relationship will not hold for too long, but it may continue as long as investors remain unconvinced by European policies. 

Europe’s problems are complicated by an economic contraction. The impact on Thai trade may be muted, as Thai export destinations are well diversified. In 2011, the EU accounted for 10.6 per cent of Thai exports – of  which more than half are to the major countries least affected by recession: Germany, the Netherlands and the UK. 

Europe’s authorities have been gradually taking steps towards solving its financial woes. But the political challenges (some necessitating new laws across 27 countries) mean it is difficult to quickly implement aggressive measures. 

Going forward, some possible actions that would help investor sentiment are: 

_ The European Central Bank using its balance sheet to boost the debt market and the financial sector; 

_ Greater commitments towards central control of fiscal policies, including common bond issuance, and;

_ An increase in the size and capabilities of the rescue fund for indebted nations.

 

United States

During the third quarter of 2011, the US was beset by Congressional wrangling over its budget, a downgrade of its triple-A credit rating by Standard and Poor’s, and worries that the economy would fall into another recession. 

But the mood shifts quickly in global markets. The US proved its resilience again, as economic figures for the past several months have been better than expected. 

During this European crisis, the US dollar has benefited from inflows as investors seek liquidity and safe havens. Comparatively, the US financial sector appears to be in sound shape after the measures taken by the Federal Reserve during the Great Recession in 2008-09. 

There are caveats. The level of economic activity remains weak. The unemployment rate of 8.5 per cent is the best in nearly three years. But it will take many more years to get back to anywhere near pre-crisis levels (4.6 per cent during 2007). 

Political turbulence could also escalate again this year, particularly with presidential elections coming up. This could prevent a complete solution to long-term issues on debt levels. Current budget constraints will also prevent another major stimulus programme, which means that growth is likely to remain mediocre. 

The Federal Reserve appears ready and capable of supporting the economy if growth falters. With interest rates near zero, the main policy option would be another round of quantitative easing (speculated about for a while now). 

 

China

The recent weaknesses in the US and Europe have increased the importance of China as a driver of global growth. Preliminary figures show that China grew by 9.2 per cent in 2011 – its 10th straight year of 9+ per cent growth. 

Back in 2001, China accounted for 4.4 per cent of Thai exports – far behind Japan, the US and the EU. In 2011, China became Thailand’s largest single export destination, taking in 12 per cent of the total. 

However, China’s phenomenal growth record could be broken in 2012. In the last several months, there have been clear declines in growth of industrial production, fixed-asset investment and retail sales. Export trends also appear poor. 

Chinese authorities are quick to act, and they have already reversed course from previous monetary policy tightening. The Chinese central bank began cutting banks’ reserve requirements in November. Further easing measures are likely, to support new loans and investments. 

Worries about asset bubbles, particularly in urban property, persist, along with concern over local government loans. 

Nevertheless, Chinese fundamentals remain strong. The  government has low debt levels, which could allow tax cuts or increased infrastructure spending. HSBC Research expects a reasonable 8.6 per cent GDP growth for China in 2012, which would easily be the best of any major global economy. 

 

Parson Singha is chief markets strategist in the Global Markets Department of HSBC Thailand.