World Bank cuts Global Growth Outlook

Excerpts.

"The World Bank cut its global growth forecast for this year after emerging markets from China to Brazil slowed more than projected, while budget cuts and slumping investor confidence deepened Europe’s contraction".

"The world economy will expand 2.2 percent, less than a January forecast for 2.4 percent growth and slower than last year’s 2.3 percent, the bank said in a report released today in Washington. It lowered its prediction for developing economies and sees the euro region’s gross domestic product shrinking 0.6 percent. In contrast, forecasts were raised for the U.S. and Japan, which was helped by fiscal and monetary stimulus".

"Debate among U.S. policy makers over when and how to dial back the Federal Reserve’s $85 billion-a-month program of asset purchases has shaken financial markets in developing nations. More than $2.5 trillion has been erased from the value of global equities since Fed Chairman Ben  Bernanke said May 22 that the Fed could scale back stimulus efforts if the employment outlook shows “sustainable improvement.”

''The withdrawal of accommodative policy may have consequences in the longer run as interest rates in developing countries rise more than in their industrial counterparts, slowing investment and growth, according to the report".

''Developing countries collectively were forecast by the World Bank to expand 5.1 percent, less than the 5.5 percent estimated in January.

China’s growth outlook was cut to 7.7 percent from 8.4 percent, according to the World Bank’s report. The 6.1 percent forecast for India was reduced to 5.7 percent and Brazil’s was lowered to 2.9 percent from 3.4 percent.

The effects could be neutralized if growth picks up in Europe or Japan, which the bank now sees expanding 1.4 percent this year from 0.8 percent in its January forecasts, he said".

Source: Bloomberg 

Meredith Whitney: Booming States in the U.S. 2013.

 Excerpts

"Whitney, the author of The Fate of the States, also downplayed the role of historic low interest rates in the more recent uptick in the U.S. housing market.

"I don't think the mortgage market is responding to low [interest] rates anymore," she says. "Very few first-time buyers [are] going out with a mortgage and buying [a] home. There's no correlation there that once was between mortgage rates and home purchasing [in the U.S.]"

If anything, she adds, "low interest rate are killing [U.S.] retirees; people living on a fixed income are really struggling."

''Interestingly, Whitney forecasts a bright and prosperous future for resource-rich states in the U.S. - North Dakota, Nebraska, Texas, Wyoming, among others - and the Canadian province of Alberta''.

These American states, which she refers to as the "new geography of American prosperity," hadn't experienced a housing crisis as severe as the rest of the country.

"Those states have agrarian roots [and] are used to major booms and busts and have managed themselves much more conservatively on a fiscal basis," she says. "And because of that they [entered] into the [recent] bust with a lot more dry powder."

"These states are rich in resources and businesses are making long-term investments," she says. "Businesses are building new facilities in these states and are making 30-year investments. It's not coincidental that [these states] have unemployment rates that are half that of Nevada and California."
This, adds Whitney, has ripple effect which draws greater inflows of skilled people, creates new jobs, prompts infrastructural developments, all of which ultimately provide a boost to housing markets''

Source: Howard Green Interview to Meredith Whitney in bnn.ca

Urbanization Plan under revision in China. Fiscal revamp and ''hukou'' reforms are an imperative duty

"Premier Li Keqiang has rejected an urbanization proposal drafted by theNational Development and Reform Commission (NDRC), seeking changes to put more emphasis on economic reform, according to the sources, who are familiar with the matter".

State-owned China Development Bank recently pledged to lend 150 billion yuan ($24.47 billion) to southeastern Fujian province to support its urbanization and channel 30 billion yuan into urban projects in central Anhui province, according to Chinese media.

“The urbanization plan could be delayed. Top leaders have seen potential risks if the program cannot be kept on the right path,” said an economist at a top think-tank which advises the cabinet.

China plans to spend some 40 trillion yuan ($6.5 trillion) to bring 400 million people to its cities over the next decade as leaders such as Li try to sustain economic growth that slowed to a 13-year low of 7.8 percent in 2012.

 ''China is still dealing with the side effects of its 4 trillion yuan stimulus package launched in 2008 to counter the global financial crisis, which left local governments with a 10.7 trillion dollar according to Government sources and sent real state prices speculatively higher''.

To fund the urbanization plan, local governments would issue long-term bonds. 

But a fiscal revamp is needed because local governments don’t have a steady flow of tax revenues to back the issuance of bonds. Under China’s tax structure, in place since 1994, the central government gets most receipts; while local governments do the spending,and their only source of revenues are land sales.

 ''Beijing needs to overhaul its land and tax codes as well as free up the rigid residency registration, or “hukou”, system to give migrant workers access to education, health and other services where they work, experts have said. Li wanted more detail on these sorts of reforms in the plan'', the sources said.

“The focus of the urbanization drive should be land and hukou reforms. It’s doomed if China continues to rely on local government spending to support urbanization,” said Yi Xianrong, senior economist at the Chinese Academy of Social Sciences (CASS), a leading government think-tank in Beijing.

''China’s housing inflation accelerated to its fastest pace in April in two years, despite stricter measures by Beijing to calm a frothy real estate market.

Li Yining, the premier’s former teacher at Peking University, recently said Chinese banks could be dragged into another spending binge that could spark a financial crisis.

But Premier Li is unlikely to backpedal on the urbanisation drive, with his interest in the issue seen as far back as the early 1990s when he wrote a doctoral thesis on the subject. One of his key arguments was to reform the hukou system''.

Source: Reuters May 2013

Central Bank Governor of Israel Stanley Fisher: Higher U.S Bond yields will stop higher currencies for emerging markets.

“I am happy to see these rises in Treasury yields because we’ve been dealing with capital inflows which are not particularly wanted.”
''The Bank of Israel last month cut interest rates twice by a cumulative 0.5 percentage point to 1.25 percent in a bid to moderate the strengthening of the shekel, and also announced the purchase of $2.1 billion in foreign currency by the year’s end. The shekel has jumped 7 percent in the past year''.
“If you have a current account which is fundamentally in balance, which ours is, then when our rates are significantly above foreign rates, we have to deal with foreign inflows,” Fischer said yesterday''
"As speculation the Federal Reserve may lower its bond-buying,  yields on 10-year Treasury bonds reached 2.29 percent on June 11, the highest since April 2012 and up from a record 1.38 percent in July. JPMorgan Chase & Co.’s Emerging Markets Currency Index has fallen 4 percent in the past month as investors pull money out of developing nation bond funds".

''Fischer earned a reputation as a trailblazer as the first central banker to cut rates in 2008 at the start of the global economic crisis, and the first to raise rates the following year in response to signs of financial recovery. He also bought up foreign currency in unprecedented amounts to drive down the value of the shekel and boost exports, more than doubling reserves''.