Macro Weekly – The significance of washing machines and monkeys

by: Han de Jong

  • Trump administration takes first clear protectionist measures
  • ECB boss Draghi fails to talk down the euro
  • We have raised our eurozone growth forecasts
  • US Q4 growth not as weak as it looks
  • Chinese scientists have created two cloned monkeys through nuclear transfer
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Washing machines and solar panels

When presenting our views to clients soon after Donald Trump won the US presidency, protectionism always made it on to the list of risks that is part of such presentations. Somewhere along the way, I can’t remember when, but it must be months ago, I dropped protectionism from the list. It appeared that the president had campaigned on a protectionist platform but wasn’t actually following through. Until last week. The president approved import duties of up to 30% on solar panels and 50% on washing machines, as so called ‘safeguard tariffs’.

The merits of trade protection are hotly debated. Conventional wisdom among economists is that free trade encourages the international division of labour and therefore is positive for the standard of living. It is clear, however, that within one country, some individuals and companies will be hurt by being exposed to foreign competition. The traditional economic view is based on David Ricardo’s Law of comparative advantage. Ironically, Ricardo was a British economist and his ‘law’ was published in 1817 while the Corn Laws were introduced in 1815 in the UK to protect land owners against cheap imports. The very protectionist Corn Laws were repealed in 1846. Even the most hard-core free-traders will probably admit that protectionist measures are justified in the case of ‘dumping’. Whether the Chinese and others are dumping solar panels and washing machines or in some other way competing unfairly is a moot point. That producers in the US and in Europe find it difficult to compete with Chinese competitors is clear. But it is equally clear that slapping import tariffs on these goods makes them more expensive for US consumers.

The washing machine case is interesting. Whirlpool Corporation had lobbied for the duties to be imposed. In 2006 Whirlpool merged with Maytag and got the OK from the competition authorities by pointing to foreign competition. Much has perhaps changed in the white-goods industry, but it is ironic that Whirlpool now wants the foreign competition to be ‘dealt with’.

The significance of all this is not so much washing machines or solar panels. It is the fact that the US president is taking protectionist measures. Apparently, US presidents have used this particular tool of safeguard tariffs on 19 occasions, but the last time was in 2002. The big question is whether this is an incident or whether the measures are the start of something more, something big. In any event, I will put protectionism back on my list of risks. And I think I will put it near the top.

Eurozone growth forecasts raised

Recent days have seen another set of strong eurozone confidence indicators. The German Ifo index rose from 117.2 to 117.6 in January. The January reading is the highest on record (in my database the series goes back to 1991). Already strong momentum is, thus, simply gathering more speed. The range of market PMIs was also solid. While the manufacturing PMI for the eurozone eased from a record 60.6 to 59.6, the services sector PMI rose from 56.6 to 57.6. As a result, the composite index rose to a record 58.6 from 58.1.

Eurostat has revised some national accounts data recently. Together with the further strengthening of the confidence indices as well as solid hard data, this has led us to revise our growth forecasts for the eurozone in 2018 and 2019. We now expect GDP growth of 2.8% in 2018 and 2.3% in 2019, up from 2.5% and 2.2%, respectively.

The January ECB policy meeting did not lead to any surprise as far as action is concerned. But the focus wasn’t on action anyway; nobody expected a change in the actual policies. The focus was on the president, Mario Draghi. What was he going to say about the appreciation of the euro? We had expected him to try and talk the euro down. As it happened, he was either unsuccessful or he did not intend to try. The ECB does not have a target for the exchange rate. According to its communication it looks at the exchange rate mostly as a factor that may impact inflation. There can be little doubt that the appreciation from USD 1.04 late 2016 to USD 1.24 now will be a hindrance to seeing inflation move higher. On the other hand, the economy is doing well and, so far, handling the appreciation well. At the current level, the exchange rate is probably near the upper limit of where most calculations would put ‘fair value’. The recently published update of The Economist’s Big Mac index actually suggests that the euro is still marginally undervalued against the dollar. We continue to think that the euro has overshot.

US Q4 GDP growth not as weak as it looks

US GDP grew 2.6% qoq, annualised in Q4. This was lower than the expected 3.0% and lower than the previous quarter’s 3.2%. However, there were significant negative contributions from inventories (0.67% GDP) and net exports (1.13% GDP). So the overall number did not do justice to the strong increases in personal consumption (3.8%), non-residential fixed investment (6.9%), residential investment (11.6%) and government consumption (3.0%). All these strong spending items obviously contributed to strong import growth as demand ‘leaked away’ abroad. But big negative growth contributions from inventories and net exports do not last, they revert to the mean and are close to zero over time. As a result, I think the GDP data looked good.

We are expecting corporate investment to be a key driver of the global economy in 2018. US corporates are perhaps a little further in the cycle than corporates elsewhere. US durable goods order data for December was consistent with our view. They rose 2.9% mom, after an upwardly revised 1.7% in November. Capital goods shipments (non-defence, ex aircraft), which is an input for corporate investment in the national accounts, rose 0.6% mom, after 0.4% in November (originally reported as a drop of 0.1%)

Cloned monkeys in China

Chinese scientists managed to clone two monkeys using nuclear transfer technique. I do not know what that technique is, but apparently, it is quite an achievement. Cloned monkeys do not often feature in economic commentaries. So why am I mentioning them here? It seems to me that China is rapidly developing in the technology space and cloning monkeys in this apparently difficult way is simply another example of Chinese progress. I was in Germany on Thursday and I argued to German clients the same case, showing them several slides underscoring the notion that China is moving fast. I even said that China could become technologically superior to us in a few years’ time. I showed them a table with the market capitalisation of companies. The largest German company by market cap is SAP, worth some USD 140 bn. The largest US company is Apple, worth around USD 900bn. The largest Chinese company is Tencent, worth some USD 550 bn. Some clients came to me afterwards, expressing their unhappiness with what they thought I had suggested. By no means had I tried to talk down the achievements of German companies. I just wanted to argue that we need to be alert. One client argued that German companies are the best from a technological point of view and that their position is not under threat as ‘the rest of the world needs us’. I hope he is right.