The Economist UK - 16.11.2019

68 Finance & economics The EconomistNovember 16th 2019

2

Buttonwood Chinese whispers

The saving glut’s shadow

Source: Bureau of Economic Analysis

United States, net international investment position

% of GDP

-50

-40

-30

-20

-10

0

1995 2000 05 10 15 18

N

obody wantsto be called an un-

thinking optimist. Prospects for the

riskier sort of investments are cloudy.

The global economy faces numerous

threats. Being even mildly bullish can

seem a bit unreflective.

So whisper it, don’t shout it, but the

mood has changed recently for the bet-

ter. Since the start of October, global

equity prices are up by around 7%. Bond

yields have risen. There has been a move

away from the safe or defensive assets

that hold up in bad economic times,

towards those that do well in an upswing

(see box on next page). Hopes for a pre-

liminary trade deal between America and

China pushed the yuan briefly below

seven to the dollar last week.

At times like these, thoughts naturally

turn to the outlook for the dollar more

generally. A weaker dollar would be both

a signal and a driver of a broader im-

provement in risk appetite. The dollar’s

fortunes have not yet shifted decisively.

But the conditions for it to weaken are

starting to fall into place.

To understand why, consider the

forces behind the dollar’s ascendancy

since 2014. America’s economy, though

sluggish by historical standards, has

benefited from an ever-reliable engine:

the American consumer. The euro-zone,

by contrast, responded to its sovereign-

debt crisis by saving more. Its surplus

savings, together with those generated in

Asia, must find a home. America’s high-

yielding bonds and modish technology

stocks have made it the go-to place for

global savers. Capital inflows drove up

the price of dollar assets. America’s net

investment position—the foreign assets

its residents own abroad minus what

they owe to foreigners—went deeper into

the red (see chart).

As industry slumped and trade fal-

tered this year, America still looked the

best of a bad lot. But the scales are tilting

against the dollar. Global manufacturing

may have bottomed out. The purchasing

managers’ index for industry compiled by

the global economics team at JPMorgan

Chase rose for a third month in October.

Growth in output is barely positive, but an

improving trend in new orders alongside

falling stocks is a sign of a turn in the

manufacturing cycle. The improvement is

halting. Jobs-rich service industries are

still slowing, so it is too early to expect

better gdp growth. But hopes are growing

of a pickup in 2020, driven by economies

beyond America’s shores.

This matters for the dollar. Synchro-

nised global gdp growth opens the door for

investors to move capital out of America’s

expensive dollar assets to where assets are

cheaper, says Hans Redeker, a currency

strategist at Morgan Stanley. Moreover,

interest-rate cuts this year by the Federal

Reserve mean that the dollar is now receiv-

ing less support from elevated bond yields.

Central bankers in other places are disin-

clined to relax policy further. The Euro-

pean Central Bank’s governing council,

for instance, was divided on the decision

in September to cut interest rates and

restart quantitative easing.

A shift in global capital away from

America would be a particular boon to

emerging markets. A fall in the dollar

would make it easier to service their

foreign-currency debts. It would also

ease local credit conditions, thus helping

gdp growth. For investors, emerging

markets are where the value is. Equity

markets are cheaper. Bond yields are

higher. Currencies have scope to make

up the ground they lost earlier this year

and in the slump of 2013-16.

Apart from such trouble spots as

Argentina, Chile and Turkey, emerging-

market currencies have started to rally

against the dollar. Still, the euro is the

gauge by which many people judge the

dollar’s vigour, or lack of it. And it has

been stubbornly weak. Sentiment is

coloured by the travails of Germany, the

currency zone’s largest economy, which

only narrowly avoided a technical reces-

sion (two quarters of declining gdp) in

the six months to the end of September.

But the euro at least seems to have found

a floor. And if the world economy gathers

strength the euro will eventually rally.

That is still a big if. Another break-

down in trade talks between America and

China could lead to a renewed slump in

global manufacturing and business

spending, and kill off any incipient

dollar weakness. Other political risks—

the protests in Hong Kong; the Demo-

cratic primaries in America—are loom-

ing larger. And after a longish expansion,

the world economy is lacking vigour. But

the dollar’s stint at the top of the curren-

cy pile is looking tired, too. People are

already whispering. The noises may soon

get a lot louder.

Why the dollar is looking peaky

The delay is in part because reforging

supply chains is a slow and costly affair.

Plants and production lines are planned

years in advance. Finding new suppliers re-

quires lengthy certification processes.

But politicians also bear some of the

blame. Congressional haggling over the

usmcameans that there is still uncertainty

about whether and when it will come into

force. And until legislation is passed, the

details will remain unclear. One parts-

maker grouses about “inconsistency in the

application and interpretation of the

rules”, having received a variety of requests

for information from different manufac-

turers, each seeking to find out whether a

product would be compliant. Such vague-

ness makes planning even harder.

Then there are Mr Trump’s other trade-

related threats: to put further tariffs on im-

ported components from China, and to

slap duties on imported cars and parts

from the eu. Executives have faced up to

the fact that tensions with China could be

long-lasting, but are struggling to work out

how high tariffs could end up. Threatened

duties on imported car parts, ostensibly to

protect America’s national security, have

come under such intense criticism that

company bosses hope they will never be

applied. But Mr Trump’s obsession with

cars is too great for them to bet on it.

The president’s critics will complain

that his meddling in car companies’ supply

chains comes with costs, and that he is

both bringing higher prices for consumers

and sapping the competitiveness of Ameri-

ca as an export base. All true. But if his chief

desire is that more auto production is done

in America than would have been without

his measures, it is too soon to declare that

he has failed. 7