When is good news bad news?
Answer: When the business cycle is turning up.
Last week global financial markets were again hit hard by good economic news from the US, leading investors to expect an interest rate hike by the US Federal Reserve soon. Unstellar corporate earnings numbers and a policy-induced economic slowdown in the works in China also hurt global sentiment.
In the backdrop of this continued financial market uncertainty, the one positive news to come out was the expansion of the European Union to 25 members, by the addition of 10 new members. In its first estimate of economic growth this year, the US reported that its GDP grew at a 4.2 percent annual rate in the 1st quarter of 2004.
Although less than expected (vs. 5 percent consensus estimate), this followed 4.1 percent growth in the fourth quarter and a sizzling 8.2 percent in the third quarter. Overall, in the nine months ending in March 2004, the US economy grew at a 5.5 percent annual rate, the strongest in 20 years.
Also, the weekly jobless rate fell sharply last week, and US home sales surged in March (existing home sales grew 5.7 percent, the second highest pace on record, while new home sales jumped an even higher 8.9 percent). A key gauge of inflation, the personal consumption expenditure index (PCE), followed closely by Alan Greenspan, also surged by 2 percent.
Together, these good indicators further fueled investor fears of an interest rate hike in the near future.
As a result stocks in the US and abroad fell and Treasury yields rose while the dollar fell against most currencies. Continued growth in US consumer spending and housing sales backed by retail credit through the thick-and-thin of a business cycle provides a powerful lesson for lenders in less-leveraged countries around the world, namely, that credit is profitable not only for the lenders but also good for the economy (of course, when managed properly).
Europe also had a lesson for people in other countries. As we see more and more conflicts and demand for separation in various parts of the world, Europe is showing how a whole continent can move away from its past legacy of division and conflict and reunite itself through peaceful means.
On May 1, the addition of 10 mostly ex-communist Central European countries (Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia) has created the world’s largest trading bloc. In one stroke it has also become the world’s largest economy (by GDP) with a population of 451 million and per capita income of $23,160 (behind the US, and Japan).
The enlargement is seen as positive by not only the political world, but also global businesses. The existing EU members, in the long run, will benefit from home-grown low cost labor (unlike the US which is sending its jobs abroad to India and China), while the new members will benefit from investment from the older, richer members.
The world will benefit from a new economic engine and from the increased competition in a tripolar global economy (North America-Europe-East/South Asia).
(Khan H. Zahid is chief economist and vice president at Riyad Bank. He is based in Riyadh)