Friday, April 16, 2010

A GDP Canary in the Inflation Coal Mine

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Singapore recently reported that its 2010 first quarter GDP increased by a whopping 32.1%. While a huge growth rate like this would be OK for an emerging market in its earliest stage of growth, Singapore is already an advanced economy. China, which is behind Singapore on the development curve, saw a GDP expansion of 11.9% in the beginning of this year and inflation is already starting to show up there.

While countries are always trying to increase their GDP growth rates, this is one of those areas where the proverbial 'too much of a good thing' can lead to trouble. There is a desirable band of GDP growth for every economy. Too little is not enough to keep the population employed and happy, too much creates more demand for resources than available supply and this causes inflation. The desirable level of economic growth for the U.S. is generally believed to be around 3% a year. It can be much higher for an emerging market.

Singapore is a trading economy and its current huge growth is an indication of how much Asian trade is picking up. It's first quarter GDP was a record increase. The central bank just began raising interest rates to tighten credit. Singapore also boosted its inflation forecast to the 2.5% to 3.5% level as a result of its GDP numbers. It will indeed be lucky if it can keep its inflation rate that low.

China's consumer prices were up 2.5% in March. China's economy grew by 8.7% in 2009, while the U.S. and EU economies stagnated. China is now arguably the second largest economy in the world and if it hasn't already moved ahead of Japan, it will do so very soon.  Almost half a trillion dollars in stimulus in a $4.9 trillion economy can be credited for maintaining China's spectacular growth rate. Stimulus creates inflation as well as growth though. The growth numbers were all very high for the first quarter. Retail sales were up 19.6%. Fixed asset investment was up 25.6%. Exports were up 29%. China, like most Asian economies has based its economic expansion model on export growth.

Not everyone in the world can be a net exporter however. Someone has to be buying those exported goods and that someone is the United States. The U.S. trade deficit widened by 7.4% in February (this subtracts from U.S. GDP and requires borrowing from foreign sources in order to fund it) and the deficit with China widened. The U.S. trade deficit is going up again because imports are rising faster than exports. The media reported that Wall Street economists were surprised. Apparently having a PhD in economics doesn't mean you can grasp the concept that increased exports from one country lead to increased imports in another. Many of these same economists also say there will be no inflation in the U.S. even though the government is engaged in substantial money printing.

Disclosure: Not relevant.

Daryl Montgomery
Organizer, New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

No comments: