Archive for January 24th, 2011
Slow recovery predicted for the US
(CNS): Journalist Clive Crook and keynote speaker at this year’s Cayman Business Outlook said that the United States would be in for slow growth this year because of a number of pressures bearing down on its economy. Whatever happens in the US was, according to Crook, of tremendous importance to the Cayman Islands because the island’s tourism was based upon US visitors and the Cayman Islands dollar was pegged against the US dollar. “We should not underestimate the US,” he said, however he noted that current politics in the US were currently at a “pivotal moment” as the world was about to find out about America’s capacity to govern itself, as President Obama comes to grips with a Republican majority in the House of Representatives.
“There is currently a clash between the chronic difficulties with the infrastructure of government in the US and a convergence of economic problems which have no roots in politics. These are clashing head on,” he said. The US, Crook said, was in for a very un-American long and slow recovery. “Past deep recessions have seen a sharp recovery but this recovery is more like a British recovery and will happen very slowly,” he said.
The recession has, according to Crook, “disturbed the whole pattern of economic life in US households” as they try and get their heads above water as a result of the housing crisis. “I believe the zeal to deleverage will abate eventually to just moderate anxiety but this is why the recovery will be so slow,” Crook explained. “There will be no rapid recovery. So long as households try and get on top of their personal finances and restore their savings, consumption will be slow and there will be sluggish growth.”
Another worrying event that Crook believes will slow down recovery will be the influx of regulation by the US government to attempt to better regulate the financial markets.
Crook said, “Too much regulation creates more of a problem than a solution. The US government has embarked on an incredibly ambitious regulatory reform plan but the implications of which are shrouded in mystery. They have produced 2,000 pages of instructions on the regulation – new rules to recast the financial regulatory landscape.” He said the concern in this regard was that these new rules may take the same form as the last set of US knee-jerk reaction regulations (known as the Sarbannes-Oxley Act of 2002 which followed the Enron collapse) which he called an “ill-considered response which created more problems than it solved.”
The threat of an increase in interest rates was also an issue of concern, according to Crook. He said he was not sure that China’s capital flows into the US would continue which would threaten to increase long term interest rates, at a time when America needed them to be kept low.
Measures taken by the Federal Reserve Bank including lowering interest rates and quantative easing (namely printing money) would only be short term solutions.
Crook did have praise for the Fed, when he said, “The Federal Reserve deserves full marks for the measures they took to ease the economy. At the time we were worrying that this could be the next great depression but all we have now is a disappointing recovery rather than a catastrophe.”
Nevertheless, he said that this was a dangerous recession and that the US could not afford to pussy-foot about as the main worry right now was acute political uncertainty.
More from CBO: Slowdown for China needs careful handling
Slowdown for China needs careful handling
(CNS): China’s current growth rate is set to slowdown in the near future, but this does not necessarily mean it will have a knock-on downturn effect on the global economy, according to Peking University’s Professor Michael Pettis, who was speaking at this year’s Cayman Business Outlook Conference, so long, he said, as it was properly managed. Previously, countries such as Brazil, Japan and the Soviet Union had all achieved rapid growth in a short space of time, only to be followed by rapid declines. “This is not a co-incidence” Pettis said. “Their growth was unsustainable.”
In these countries their growth was unbalanced because it was based on trade, he said, which meant an undervalued exchange rate causing the cost of imports to be high and exports to be low. The effect on household income was therefore similar to imposing an import tax causing a decline in household income.
“In recent years in China wages have grown much slower than productivity which means a huge subsidy to employers,” Pettis explained. “With a rebalancing they can increase the share of household income and decrease their dependence on investment and a trade surplus.” This would mean raising the value of the currency in China. This would have the effect of slowing down growth and increasing consumption as households would have a higher share of the country’s GDP.
However, Pettis warned that China would create a problem if it did this too quickly because the price of tradable goods would go up too quickly, bankrupting companies and causing unemployment to rise and household income to drop.
An increase in interest rates there would have to be implemented slowly because Pettis worried about how much money was in fact indebted to China’s Central Bank by state owned companies which were barely profitable and were only making money because interest rates were so low.
Beijing was beginning to start discussion in this area and a debate was taking place, according to Pettis. Nonetheless, there were impediments to the slow implementation of slowing the economy, not least of which is the fact that China’s trade surplus will continue to rise in the short term and the rest of the world would need to be able to absorb the trade surplus, at a time when the US and peripheral Europe had huge trade deficits.
“Here we have an arithmetic problem,” he said. “The difficult global trade environment means trade relations will only deteriorate.”
When China slows down the rest of the world does not have to suffer – China’s reduction in trade surplus can mean growth for the world, according to Pettis, so long as there is a real attemptat rebalancing household growth.
More from CBO: Slow recovery predicted for the US
French marines make unexpected stop in Cayman
(CNS): A French military plane made an emergency landing at the Owen Roberts International Airport around noon Sunday, 23 January, due to engine trouble. Cayman27 reported that there were French Marines on board. According to the local television report, there were about 40 people aboard who were all unhurt. The crew, who are based in Suriname, did not tell Cayman27 where they were coming from or where they were going. Emergency crews closed off the roads around the airport before it landed and it was met by fire officers, who escorted the aircraft to front of the Cayman Airways hanger. (Photos by Dennie Warren Jr.)
