Yes, but until this day comes (much later this year, IMTO), one need to stay in the game and play it. QCOM just went here at $58.85 for $.57. Also extricated myself from DRIV at $21.90 for just a dime. In edit and out of QLGC here at $43 flat for $.44. Followed by BRCM at $41.49, only $.11 on this trip. Q off the table... Second COO taken off here at $47.30 for $.43.
The latest Japanese GDP growth report — a 7% annualized surge in the final three months of 2003 — added insult to injury for those of us who remain skeptical of the global economy’s newfound vigor. It rounds out a rather stunning picture of accelerating growth in most major segments of the world economy. With the important exception of Europe, the global economy now seems to be firing on all cylinders. Is a full-blown synchronous recovery in a long-sluggish global economy now at hand?
On the surface, the numbers are quite extraordinary. In the second half of 2003, the US grew at a 6% annual rate, Japan surged by 4.75%, and the Chinese economy turned in a 9.7% annualized gain. Collectively, these countries — which account for 41% of world GDP on a purchasing-power-parity basis — grew at an estimated 6.9% annual rate in the second half of 2003. Folding in a sluggish European growth outcome of slightly less than 2% in the second half but making allowance for reasonably solid growth elsewhere in the world, a back-of-the envelope guesstimate puts global GDP growth in the 5.0% to 5.5% range in the second half of 2003. That’s a veritable doubling of the anemic global growth rate of 2.7% recorded over the 2001–02 interval and probably the fastest run rate for the world economy since 1984. It’s been a stunning acceleration by any standard.
That great luxury of hindsight tells me I should have seen it coming. The combination of a massive global policy stimulus plus a postwar sigh of relief gave the world economy a huge lift in the second half of 2003. As I see it, there were two main sparks to this global growth spurt — the American consumer and the Chinese producer. The rest of the world largely went along for the ride. On the heels of a 23% annualized surge in real durable goods consumption in the two middle quarters of 2003 — a 32-year record — the American consumer provided a powerful uplift to the demand side of the global economy. Halfway around the world in China, industrial output surged at about a 17% annual rate in the final six months of the year — an equally impressive boost to the supply side of the global economy. The rapid growth of the Chinese production base pushed imports up at nearly a 40% annual rate in the second half of 2003; that provided a major growth impetus to China’s trading partners — a key factor behind the impressive growth performance in Japan and an increasingly important driver of economic growth in Korea and Taiwan, as well.
As impressive as this burst of global growth has been, I maintain the rather lonely view that the jury is still out on the key question of sustainability. My reservations go back to the same two growth sparks — the American consumer and the Chinese producer. For a jobless and income-short recovery, the recent performance of the American consumer is even more astonishing. With the internal dynamics of the US business cycle failing to deliver fundamental support to household purchasing power, the consumer has instead drawn support from more “toxic” sources of growth — namely, open-ended government deficit spending, ever-rising debt, reduced saving, and the ongoing extraction of incremental purchasing power from overvalued assets such as homes. If job creation and income generation continue to lag — a distinct possibility, in my view — the sustainability of consumption will require increasing support from these same toxic sources of growth. And the outcome in that case will lead to ever-mounting imbalances — not just higher debt and lower saving but the ever-increasing twin deficits of the government and the balance of payments. This, in my view, is not a recipe for sustainable vigor in the US recovery.
At the same time, there is almost a natural corrective element to growth spurts driven by consumer durables. By definition, these are long-lasting items that are purchased at infrequent intervals. The extraordinary surge of such spending in the two middle quarters of 2003 was a classic overshoot; it was not driven by an unleashing of pent-up demand — a normal cyclical dynamic following a recession-induced weakness in discretionary buying. Lacking support from the pent-up demand dynamic, there is good reason to believe that there will be a payback as the stock of durable goods returns to its equilibrium level. The durables growth rate already slipped to just 0.9% in 4Q03, and historical experience, as well as standard “stock-adjustment” models, both point to an outright contraction in consumer durables in the months ahead.
The story in China is very different, but the verdict is quite comparable. Last year’s growth surge was excessive, even by Chinese standards. It was fueled importantly by an outsize surge in bank lending; in the 12 months ending November 2003, the outstanding volume of loans was up 21% — nearly double the 12% average annual growth pace over the 1997–2002 period. Fearing a new wave of nonperforming bank loans and increasingly concerned about a property bubble in the coastal regions of Shanghai and Beijing, the People’s Bank of China moved to tighten monetary policy late last September. The policy shift is working. The growth in bank lending slowed to RMB 98 billion, on average, in the final three months of 2003 — only about one-third the RMB 275 billion average pace in the first nine months of last year.
Reflecting this marked slowdown in Chinese bank lending, I think there is good reason to believe that there will be a concomitant cooling off of both property building activity and excessive infrastructure spending. In addition, the export dynamic is also set to slow, reflecting the reduction in the tax rebate to Chinese exporters that went into effect on January 1. Moreover, to the extent that China’s slowdown is also manifested in the form of reduced domestic demand and import growth — a highly likely possibility, in my view — there will undoubtedly be a good deal of collateral damage to countries such as Taiwan, Korea, and yes, even Japan.
Consequently, the two major sparks to global growth in the second half of 2003 — the American consumer and the Chinese producer — are likely to play a sharply diminished role in the global economy in 2004. But why can’t another source of growth come into play? Who is to say it couldn’t even be Japan — especially in the aftermath of the stunning 7% annualized gain in the final three months of 2003. Our Japan team has its doubts, citing a series of one-off factors that temporarily boosted growth last quarter — namely, home refurbishment outlays, a quirk in the capex deflator, and a China-driven surge in exports. These factors should work the other way in the months ahead. Moreover, the government itself continues to have great doubts about the sustainability of recovery in the Japanese economy; why else would it be continuing its massive yen intervention campaign?
All this leaves the global economy pretty much in the same place it was a year ago — overly dependent on the US growth engine and biased toward ever-widening disparities in external, or current-account, imbalances. The powerful global growth spurt that occurred in the second half of last year hasn’t altered the lay of the land, in my view. Nevertheless, as we’ve learned over the past few years, unbalanced growth can persist for a lot longer than you think. But the greater the imbalances, the tougher the eventual endgame. That continues to be the biggest risk of all for this unbalanced world. Far from firing on all cylinders, I continue to believe the global economy remains in very precarious shape.
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