January 2, 2004

Happy New Year everyone…may the new year bring an expanding real GDP in your corner of the world.

A German Swing and a Miss.  We were all hoping the German political power brokers would get together and come up with a long term plan to restructure (and thus stimulate) the German economy.  The much discussed Agenda 2010 was suppose to be a set of bold policy initiatives to stimulate the German economy and undertake some much need structural reforms in the German economy.  Specifically, many hoped for policies that would increase investment, lower extremely high tax rates, free up the overly regulated Germany labor markets, and breath life into the German domestic market.

A few weeks ago the Social Democrat-led government and the Christian Democratic opposition finally agreed on the structure of the new reforms.  Prime Minister Gerhard Schroeder had originally called for income tax cuts of 23 billion euros and significant losing of labor market controls.  But the agreement with the Christian Democrats (who control the upper house of the German parliament) calls for tax cuts of just 15 billion euros and limited labor market reforms. 

Recent opinion polls of the German population are less than encouraging.  A recent poll taken after the policy announcements were made, find that almost half of German polled think they will have LESS money to spend next year than this year.  German retail stocks have dropped significantly since the terms of the agreement were released.  So much for stimulating the German economy.

 

Israel and Arab countries expected to grow.  The Israeli economy looks to be showing signs of life after a three year recession.  Israel's Central Bureau of Statistics reports that their GDP increased by 1.2 percent in 2003 after dropping by 1.1 percent in 2002 and 0.9 percent in 2001.  The Israeli economy has suffered from the Palestinian intifada and the global economic slowdown over the last several years.  The unemployment among Israel’s is still a whopping 11%.  Hopefully a growing economy will result in much needed job creation in Israel.

Things are also looking up for Israel’s neighbors.  The Economist’s Intelligence Unit expects to see an average 3.4 percent rate of growth for the Arab countries.  Iraq, naturally, leads the list thanks to a lifting of economic sanctions and the increase in oil exports.  The EIU also reported that they anticipate Jordan and Lebanon to benefit from the U.S. rebuilding of Iraq.  Egypt is also expected to see some economic growth thanks to increased tourism to the country.

 

Jeez…I hope they are right.  The Kyodo News in Japan reported last week that a poll of Japanese business executives found that 70 percent of them believed the Japanese economy was improving.  Only a quarter of them thought the Japanese economy was “flat” compared to 85% who thought so during a similar poll this summer.  Seventy-five percent of the executives polled believed that the Japanese economy would expand moderately during 2004.  Here is hoping they are right!

Speaking of Japan…I hope Japan learns from its recent free trade talks with Mexico.  After the collapse of the WTO global trade talks in Cancun the Japanese (like the rest of the world) have changed their trade policy efforts toward bilateral free trade agreements.  Japan is currently in talks with Singapore and South Korea and is preparing for talks with Thailand, the Philippines and Malaysia.  Worries abound that these talks will collapse just as they did with Mexico in October.  According to the Japan Times one of the main problems was that Mexican Economy Secretary Fernando Canales found himself negotiating with three Japanese ministers at the same time: Foreign Minister Yoriko Kawaguchi, Trade Minister Shoichi Nakagawa and Agriculture Minister Yoshiyuki Kamei.  This made an agreement virtually impossible.

Prime Minister Junichiro Koizumi must correct this situation.  Some have suggested that Japan needs an American-style Office of the U.S. Trade Representative to work out trade agreements.  This is probably a wise suggestion, but it is politically feasible in Japan?

The U.S. economy continues to chug onward.  The Fed reported that U.S. factories, mines and utilities have been increasing output over the last few months.  Industrial production was up 0.9% in November which was about twice what most economic forecasts had anticipated.  Even with this increase in output industrial capacity utilization is well below its historical levels at only 75% in November.  Thus, inflationary pressures remain weak as we saw the Consumer Price Index fall by 0.2% in November.  A very good sign indeed.

The Institute for Supply Management reports that much maligned U.S. manufacturing sector continues to expand nicely.  The U.S. manufacturing sector expanded for the sixth straight month.  The ISM's purchasing-managers index, which is a gauge of overall activity in the sector, rose to 66.2 in December from 62.8 in November (a reading of above 50 indicates that the sector is expanding, while a reading of below 50 signals the sector is contracting). The December reading was the highest since December 1983.  The report also suggested that employment in manufacturing is also expected to increase.  This is a very good sign for the entire U.S. economy.

All the best,

MB