March 2013

March has been an interesting month. Having just returned from a trip to Singapore, Chiang Mai in Northern Thailand, Shanghai (with side trips to two regional towns), and a day in Hong Kong, one arrives back at a Third World airport called Terminal 5, London.

It is extraordinary that most Asian countries have discovered that it is a good idea to have two jetties to load and unload large aeroplanes, yet London’s sparkling new Terminal 5 only installed one (although two promised for the new A380). Not to mention that when you come up to the jetty there seems to be general surprise that an aeroplane has arrived and it takes nearly ten minutes to find the ground staff to move the jetty up to the aeroplane – all very embarrassing!

The real interest is Asia. A new Government in China is getting its feet under the desk and is starting to move the levers towards expansion again. China’s new leader, Xi Jinping, has set a tone of pragmatism by starting to ask members of the communist party committee “to be more tolerant of sharp criticism….” He has also been promoting the idea that there is a need to reform the bureaucracy and really stamp out mid and high level corruption. Orders have gone out to officials to reduce extravagance, and reject “formalism and bureaucracy”. He set an example himself by not requiring roads to be closed when he is travelling so causing minimum disruption to local residents, reducing Reception Committees to the most basic, and greatly reducing his entourage of officials that normally follow the Party Chairman around.

Another interesting line he is taking is to reduce the amount of propaganda which has no substance. Statements such as “empty talk is harmful to the Nation, while practical jobs could help it thrive” are an interesting and significant change to the way the government is presenting itself.

China’s current Five Year plan is to drive up wages and this is having an impact on industry. Much of talk in the companies I visited was about automation, reducing labour and increasing output per employee, a concept that has been missed in the British government’s last budget!

The building programme that the West criticises goes on apace. There is still, even in Shanghai, an enormous amount of sub-standard building with people living in appalling conditions. From the macro economy of China to the micro-state of Singapore, the story is the same. The Singapore government’s latest budget allows 400% capital allowances for manufacturing companies investing in high level automation and technology, something it

would seem that European governments, with the exception of Germany, don’t have on their agenda.

One can’t depart from the Asian scene without a sideways look at Japan, where for the first time in twenty years the deflationary circle is being broken. As in China, wages are being driven up, encouraging domestic consumption which seems in the last few months at least, to have created the beginning of real GDP growth. While interest rates remain artificially low, we should see growth beginning to take off.

The USA continues to defy the doom-mongers and just about every indicator of economic improvement has remained fairly steadily positive since the beginning of the year. Appalling weather has caused some disruption but nothing at least for the moment seems to be significant. As I mentioned in December, the popular fascination with the “Fiscal Cliff” and “Sequestration” has really turned out to be what I call a Y2K type phenomenon. However, the number of government employees continues to decline at both State and Federal levels. State government finances continue to improve as their revenue rises with property prices and general recovery. Federal Government is still, on the whole, dysfunctional but in spite of this revenues are rising, although expenditure is not declining as fast as it could or should.

The wild card in the US continues to be exceptionally low energy prices which are the main feeder for reindustrialisation. The corporate sector still has not really increased its capital expenditure. Here the short termism of the markets and private equity sector are encouraging dividends and pay-back of stock rather than investment. Nevertheless the trend is firmly in the right direction.

Latin America as well is improving, led by Brazil, and for the moment political grandstanding has died down.

Two-thirds of the world is in good shape, leaving Europe and Africa mired in an economic quagmire. Leaving the African continent aside as a place where government as a concept doesn’t really function, we are faced with a frightening situation around the Mediterranean. It is quite impossible to predict where the anarchy and chaos in Syria, and to a lesser extent in Iran, will take us. All the states along the southern coast of the Mediterranean and around the Red Sea are potentially explosive.

The North Coast of the Mediterranean is the most bizarre sight. The Club Med economies unable to devalue are turning into an economic desert as their unreformed banking systems gradually disintegrate, industrial capacity grinds to a halt and unemployment is increasing towards half the population.

As north and south Europe does not have a Federal Government or a centrally controlled banking system, interstate transfers are done on an ad-hoc basis and are highly politically charged, going under the name of “bail-outs”. Germany providing the funding for the respective government bail-outs is vilified while its own population becomes more and

more nervous of the burden they are assuming. That old adage, “no good turn goes unpunished”, couldn’t be more apt!

Depressingly, it is very difficult to see how economic recovery will start before the system of democratic government completely ceases to function. The question of the day, after Cyprus, a micro-state experiment in bankruptcy, is what will the Italian, Spanish, Greek etc. populations do. Will they try and withdraw their savings in cash and keep it under the bed or open accounts with Northern European and Swiss banks? I suspect a Spaniard trying to open an account with Deutschebank will find it a slow and difficult process!

One can’t leave a look around the world without a comment on the UK – still one of the world’s major economies, although shrinking fast! A Budget of stunning banality was presented to Parliament last week. It seems that the current government came into power without any plan or idea of what to do and still hasn’t really formulated a coherent policy on anything. Plans are announced without having been thought through. Grandiose and somewhat vacuous statements are made without the philosophical and economic groundwork being properly worked out. Something the Chinese premier points to as dangerous and demotivating.

The main plank of economic policy was the announcement of loans to people at entry level on the housing market. The immediate effect will be increasing prices to the detriment of the very people that are supposed to be needing the help, with little impact even in the medium term on the supply of housing.

The reduction of Corporation Tax, while marvellous for banks and supermarkets, does nothing to rebalance the economy away from this already over-supplied area towards industrial regeneration.

It’s possible Mr Osborne only associates industry with his singing of the great hymn, Jerusalem, and its dark satanic mills!

Depressingly, the UK has become a country where the increasing cost and shortage of energy is impacting industry and the population. The lack of rail and road infrastructure massively puts up the costs for the general economy and the bizarre idea that you can be part of the modern world without having a world-class airport is hugely disheartening.

Damon de Laszlo 28th March 2013