Thailand, Singapore and Australia show we are still heading for lower interest-rates

Today has opened with something that has become rather familiar in the credit crunch era. So familiar in fact it is the 736th version of this,as the Bank of Thailand joined the party.

The Committee voted unanimously to cut the policy rate by 0.25 percentage point from 1.25 to 1.00 percent effective immediately.

Actually they gave thrown something of what in baseball is called a curve ball at the end of last week when they released this.

In December2018, the Thai economy continued to expand from the previous month. Private
consumption indicators suggested expansion in all spending categories, albeit at a slower pace due partly
to the high base effect. Manufacturing production and private investment indicators suggested continued
expansion. The number of foreign tourists continued to increase. Nonetheless, the value of merchandise
exports and public spending contracted, particularly in capital expenditure.

We find central banks regularly doing this where rate cuts come with explanations that things are going well! As an aside there may be a hint in there that the Japanese manufacturers who relocated to Thailand may be doing okay. However this morning the Bank of Thailand gave a rather different picture and emphasis.

In deliberating their policy decision, the Committee assessed that the Thai economy would
expand at a much lower rate in 2020 than the previous forecast and much further below its
potential due to the coronavirus outbreak, the delayed enactment of the Annual Budget
Expenditure Act, and the drought.

If we pick our way through this we see that the Corona Virus is having an impact.

Tourist figures were expected to grow at a
much lower rate than the previous forecast.

This adds to the ongoing drought which added to the issues in the Pacific economy we have looked at before. Indeed this bit smacks of a bit of panic.

Financial stability became more vulnerable due to the prospect of economic slowdown. In this situation, there was an urgent need to coordinate monetary and fiscal measures.

It feels that inflation will now be below target both this year and next which is interesting if we note what the target is.

The MPC and the Minister of Finance have mutually reviewed the appropriate inflation target and hence agreed to propose headline inflation within the range of 1-3 percent as the new monetary policy target.

Let me give them some credit here because they have trimmed their target as they can see we are in a lower inflation world.

These changes include (1) technological advancements, which reduce costs of production and boost supply of goods and services; (2) an expansion of e-commerce, which foster greater price competition, thereby reducing entrepreneurs’ pricing power; and (3) the aging society, which will contribute to the decline in overall demand for goods and services going forward, since the elderly, which normally receive lower income after retirement, constitute a larger share of the entire population.

Other central banks could and in my opinion should follow this lead. The only caveat I would have is to point 3 where there will be an impact from health care inflation which tends to be higher than average.

Singapore

Here they decided on different tactics and the emphasis is mine.

Singapore, 5 February 2020… In response to media queries, the Monetary Authority of Singapore (MAS) said that its monetary policy stance remains unchanged. However, there is sufficient room within the policy band to accommodate an easing of the Singapore Dollar Nominal Effective Exchange Rate (S$NEER) in line with the weakening of economic conditions as a result of the outbreak of the 2019 novel coronavirus (2019-nCoV) in China and other countries, including Singapore.

As you can see they would like a lower exchange-rate although the catch with that is someone else’s has to rise hence the use of the phrase “beggar thy neighbour” to describe such policies.

Foreign Exchange Swaps

These were features of the credit crunch era as central banks made sure they could get their equivalent of cold hard cash if they needed it. Except in contrast to official statements we see that this emergency measure seems not to have faded away. From November.

Singapore, 29 November 2019…The Monetary Authority of Singapore (MAS) today announced the renewal of the Bilateral Local Currency Swap Arrangement with the Bank of Japan (BOJ) for another three years.

 

2     The agreement was established in November 2016 to enable the two central banks to exchange local currencies with each other of up to SGD 15 billion or JPY 1.1 trillion.

So the MAS has concerns about getting hold of Yen presumably fearing a situation where the Japanese repatriate their large foreign investments.

In the same month there was a renewal of the deal with Indonesia which started conventionally.

A local currency bilateral swap agreement that allows for the exchange of local currencies between the two central banks of up to SGD 9.5 billion or IDR 100 trillion (about USD 7 billion equivalent);

But had quite a chaser?

A bilateral repo agreement of USD 3 billion that allows for repurchase transactions between the two central banks to obtain USD cash using G3 Government Bonds [1] as collateral.

Have we seen any examples of US Dollar shortages? But if we move from being tongue in cheek back to serious there is quite a definition of what I will call super prime collateral here so let me spell it out.

US Treasuries, Japanese Government Bonds and German Government Bonds.

Actually that begs loads of question but let me for now stay with today’s interest-rate theme by pointing out this is one of the reasons why so much of the German government bond market is at negative yields. The benchmark ten year is at -0.4% because foreign demand for high quality capital is added to what has been net negative supply with the ECB buying whilst Germany is running a surplus.

Australia

The Reserve Bank of Australia ( RBA ) did not act yesterday mostly due to this.

With interest rates having already been reduced to a very low level and recognising the long and variable lags in the transmission of monetary policy, the Board decided to hold the cash rate steady at this meeting.

Having cut to 0.75% last year it had made its move, or perhaps not all of it.

The Board will continue to monitor developments carefully, including in the labour market. It remains prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.

Comment

Perhaps the most revealing statement came from the RBA.

Due to both global and domestic factors, it is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target.

Let us look at the global factors.

The outlook for the global economy remains reasonable. There have been signs that the slowdown in global growth that started in 2018 is coming to an end. Global growth is expected to be a little stronger this year and next than it was last year

So not really that one but there is the domestic issue.

The central scenario is for the Australian economy to grow by around 2¾ per cent this year and 3 per cent next year, which would be a step up from the growth rates over the past two years.

So if they were the Beatles they would be singing this.

I have to admit it’s getting better (Better)
It’s getting better
Since you’ve been mine

Except that we apparently need low interest-rates for years ahead. So I think we can be pretty sure that the road ahead should they actually think things will slow down will involve even more interest-rate cuts. For all the talk of things like r* the reality is that we are still in a scenario where interest-rates are singing along with Alicia Keys.

Oh, baby
I, I, I, I’m fallin’
I, I, I, I’m fallin’
Fallin

 

 

 

 

There are major problems brewing in the Pacific for the world economy

It has been something of an economic tenet for a while now that the most dynamic part of the world economy is to be found in the Pacific region. However the credit crunch era has thrown up all sorts of challenges to what were established ideas and it is doing so again right now. The particular issue is what was supposed to be a strength which is trade and we saw another worrying sign on Wednesday.

The Monetary Policy Board of the Bank of Korea decided today to lower the Base Rate by 25 basis points, from 1.50% to 1.25%.

That is South Korea as we continue our journey past 750 interest-rate cuts in the credit crunch era. Here is their answer to Carly Simon’s famous question, why?

Economic growth in Korea has continued to slow. Private consumption has slowed somewhat, while investment has remained weak. Exports have sustained their sluggish trend as the export prices of semiconductors, petroleum products and chemicals have continued to fall amid the weakening of global trade.

So we see that the economy has been hit by trade issues and that unsurprisingly this has hit investment but also that it has fed through into domestic consumption. Next we got further confirmation that they are blaming trade as we wonder what is Korean for Johnny Foreigner?

Affected mainly by worsening global economic conditions, the growth of the Korean economy is expected to fall back below the July projection…….. The downside risks include a spread of  global trade disputes, a heightening of geopolitical risks and a deepening global
economic slowdown.

We also see that the Korean government has already acted.

Among the upside risks to the growth outlook are an improvement in domestic demand thanks to a strengthening of government policies to shore up the economy and progress in US-China trade negotiations.

 

Quarterly economic growth has been erratic so far this year but Xinhuanet gives us an idea of the trend.

From a year earlier, the real GDP grew 2 percent in the second quarter. It was lower than an increase of 2.8 percent for the same quarter of 2017 and a growth of 2.9 percent for the same quarter of 2018.

Singapore

On the one hand the outlook is supposed to be bright.

Singapore has knocked the United States out of the top spot in the World Economic Forum’s annual competitiveness report. The index, published on Wednesday, takes stock of an economy’s competitive landscape, measuring factors such as macroeconomic stability, infrastructure, the labor market and innovation capability. ( CNN )

The good cheer was not repeated in this from the Monetary Authority of Singapore on Monday.

According to the Advance Estimates released by the Ministry of Trade and Industry today, the Singapore economy grew by 0.1% year-on-year in Q3 2019, similar to the preceding quarter. In the last six months, the drag on GDP growth exerted by the manufacturing sector has intensified, reflecting the ongoing downturn in the global electronics cycle as well as the pullback in investment spending, caused in part by the uncertainty in US-China relations.

They are very sharp with the GDP number perhaps helped by being a City state. The future does not look too bright either if we look through the rhetoric.

On the whole, Singapore’s GDP growth is projected to come in at around the mid-point of the 0–1% forecast range in 2019 and improve modestly in 2020.

The Straits Times has fone a heroic job trying to make the data below look positive.

Non-oil domestic exports (Nodx) fell by 8.1 per cent in September, a somewhat better showing than the 9 percent fall in August, according to data released by Enterprise Singapore on Thursday (Oct 17).

This was the third month in a row where shipments improved, and the August figure – revised downwards from the 8.9 per cent fall previously reported – also marked a return to single-digit territory after five consecutive months of double-digit declines.

But many eyes will have turned to this bit.

Electronics products weighed down Nodx, shrinking 24.8 per cent year-on-year in September, following a 25.9 per cent contraction in August.

China

This morning has brought the news we were pretty much expecting.

China’s economic growth slowed in the third quarter amid weak demand at home and as the trade war with the U.S. drags on exports.

Gross domestic product rose 6% in the July-September period from a year ago, the slowest pace since the early 1990s and weaker than the consensus forecast of 6.1%. Factory output rose 5.8% in September, retail sales expanded 7.8%, while investment gained 5.4% in the first nine months of the year. ( Bloomberg ).

Back on the 21st of January I pointed out this.

The M1 money supply statistics show us that growth was a mere 1.5% over 2018 which is a lot lower than the other economic numbers coming out of China and meaning that we can expect more slowing in the early part of 2019. No wonder we have seen some policy easing and I would not be surprised if there was more of it.

The numbers have been slipping away ever since although Bloomberg tries to put a brave face on it. After all you fo not want to upset the Chinese as you might find yourself like the NBA.

Even with the slowdown, year to date growth of 6.2% suggests the government can hit its 6% and 6.5% for 2019.

Actually M1 money supply growth picked up after January to as high as 4.4% but has now fallen back to 3.4%. So the easing has helped and we are not looking at an “end of the world as we know it” scenario in domestic terms but rather caution.

Before I move on let me point out the consequences of the African swine fever outbreak in the pig industry.

Of which, livestock meat price up by 46.9 percent, affecting nearly 2.03 percentage points increase in the CPI (price of pork was up by 69.3 percent, affecting nearly 1.65 percentage points increase in the CPI), poultry meat up by 14.7 percent, affecting nearly 0.18 percentage point increase in the CPI. ( China Bureau of Statistics )

Japan

Overnight the Cabinet Office has informed us that the Bank of Japan is getting ever further away from its inflation target.

  The consumer price index for Japan in September 2019 was 101.9 (2015=100), up 0.2% over the year before seasonal adjustment, and the same level as  the previous month on a seasonally adjusted basis.

They will of course torture the numbers to find any flicker so if you here about furniture and household utensils ( up 2.7%) that will be why.

Next month the issue will be solved by the Consumption Tax rise but of course that takes money out of workers and consumers pockets at a time of economic trouble. What could go wrong?

Comment

As you can see there are plenty of signs of economic trouble in the Pacific region. Many of these countries are used to much higher rates of economic growth than us in the west. According to Bloomberg Indonesia is worried too.

Indonesia‘s central bank has room to cut interest rates further, perhaps as soon as next week, says its deputy governor

Then of course there is the Reserve Bank of Australia which is cutting interest-rates at a rapid rate. In fact Deputy Governor Debelle gave a speech in Sydney updating us on his priority.

The housing market has a pervasive impact on the Australian economy. It is the popular topic of any number of conversations around barbeques and dinner tables. It generates reams of newspaper stories and reality TV shows. You could be forgiven for thinking that the housing market is the Australian economy.[1] That clearly is not the case. But at the same time, developments in the housing market, both the established market and housing construction, have a broader impact than the simple numbers would suggest.