Monday, July 30, 2012

U.S. Economic Growth Slows Down

Sources:
FT: U.S. Consumers Cautious on Spending
FT: U.S. Factory Orders Increase in May
FT: U.S. Factory Output at Three-Year Low
FT: U.S. Manufacturing Activity Drops Sharply
NPR: “This Is Not Good”: Factories Show Signs Of Slowing
WSJ: Factory Slump Reaches U.S.

In the beginning of July, the U.S. government released reports showing signs of economic growth slowing down in the country. First, U.S. manufacturing shrank in June for the first time in three years. The Institute for Supply Managements (ISM) said that its index of manufacturing activity fell from 53.5 in May to 49.7 in June. A reading below 50 is an indication of contraction—a decline—in the economy. Anything above 50 signifies an expansion of the economy, or an increase in the level of economic activity and of goods available in the marketplace. This is the lowest reading on the index since July 2009, a month after the recession officially ended. Manufacturing accounts for 12% of the U.S. economy and has been at the forefront of the country’s recovery.

There are many reasons for the contraction in U.S. manufacturing. Americans have cut back on spending which has led to lower demand of manufactured goods. In addition, Europe’s economy is in a recession, which has hurt U.S. exports, because Europeans are buying less goods in general and thus less American-made goods. A recession is a general slowdown in economic activity occurring when the country’s gross domestic product (GDP) declines for two or more consecutive quarters.. It also appears that U.S. manufacturing is likely to stay weak for the next few months as the ISM’s new order index plunged from 60.1 to 47.8. The new order index reflects the levels of new orders of goods and products from customers of manufactured goods. Although this measure is traditionally volatile, such a sharp decline could signal a downturn in the demand for U.S. products overseas. It is the first time this index number has fallen below 50 since April 2009, when the economy was in a recession.

The fewer amount of new orders in manufacturing has left many businesses concerned that U.S GDP growth will further decline. This fear stems from the recent decline to a 1.5% GDP growth rate in the April-June quarter from a 1.9% rate found back in the January-March quarter. U.S. businesses are also concerned about Europe’s financial crisis and the possibility that U.S. lawmakers will not extend a package of tax cuts at the end of the year. Thus, U.S. companies are cutting back on manufacturing and purchasing as well as not increasing their hiring to prepare for a downturn of orders from Europe and higher taxes. Another concern of U.S. businesses is that European manufacturing has remained at its weakest level in three years and continued to decline in the month of June. Meanwhile in other parts of the world, a recent survey shows that China’s industrial sector expanded at its slowest pace in seven months.

U.S. consumer confidence decreased to its lowest level of the year at 73.2% in June, which was another reason for the slowing in manufacturing. Consumer confidence is an economic indicator, which measures the degree of optimism that consumer’s feel about the overall state of the economy and their personal financial situation. In a recent survey given to 5,000 U.S. households, it showed that consumers are concerned about slowing job growth and increasing unemployment. The unemployment rate in June was at 8.2% up from 8.1% in April, with the U.S. economy adding only 69,000 jobs in the month of May and only 80,000 in June. The sharp drop in the ISM index will not help the situation, as it will trigger speculation that the U.S. economy may fall into recession.

In an effort to kick-start the economy, the Federal Reserve extended “Operation Twist,” in which the government sells short-term bonds while buying long-term bonds. The aim of the program is to lower long-term interest rates. By selling shorter-time bonds and using the money from the sale to purchase long-term bonds, the government will increase demand for the longer-term bonds, which in turn will drive up the price of those bonds, and lower the rate of return (yield) of such bonds. The relationship between bond price and yield is inverse, thus as bond prices increase, yield decreases.

Additional signs that America’s economy is feeling the impact of slower growth in China and continued unrest in Europe could cause the U.S. central bank to take more aggressive action , including purchasing financial assets (such as bonds and stocks) as a way to inject more money into the economy. Injecting more money into the economy means that banks will have more cash to lend to each other, to companies, and to any consumer making a large purchase like a car or house. The fall in manufacturing will be of concern to Barack Obama’s re-election campaign as well as his rival Mitt Romney.

South African Dlamini-Zuma Chosen to Lead African Commission

Sources:

On July 15, 2012, the African Union’s (AU) 51 voting member-states chose Nkosazana Dlamini-Zuma, Home Affairs Minister of South Africa, to lead the African Commission for the next four years. The AU countries initially voted in January, but neither Dlamini-Zuma nor incumbent Jean Ping of Gabon were able to garner the 60% of the votes necessary to chair the Commission.

Member-states of the Southern African Development Community (SADC), including Botswana, Zimbabwe, and Tanzania, supported Dlamini-Zuma, while member states of the Economic Community of West African States (ECOWAS), including Ghana, Cote D’Ivoire, and Nigeria, supported Ping.

Dlamini-Zuma is the first woman elected to lead the AU Commission—a position exercising power over the executive and administrative branch of the AU. The Women’s League of African hailed Dlamini-Zuma’s election a victory for women across Africa, who have historically been victims of prejudice and oppression in many parts of Africa.

The election of South African Dlamini-Zuma is also noteworthy because such a position is typically held by a representative from a smaller African government. The reason that representatives from smaller governments have typically held the position is to ensure that African powerhouses—Egypt, South Africa, Nigeria, Libya, and Algeria—do not have too much influence over African politics. However, many leaders in Africa thought a change was necessary to give the AU more global influence; analysts and some Western diplomats have criticized the AU for allowing Western countries to take the lead in recent conflicts in Africa.

South African leaders, including President Jacob Zuma, Dlamini-Zuma’s former husband, have been lobbying for Dlamini-Zuma to chair the Commission for months. They believed that leadership of the AU would cement its status as an emerging global power. Last year, South Africa increased its global status by beginning a two-year term on the United Nations Security Council. A temporary seat on the Security Council gave South Africa authority to vote on Security Council resolutions. South Africa is now seeking to gain permanent-member status, which would give it veto power over Security Council resolutions. South Africa has also been active with Brazil, Russia, India, and China—together, the BRICS—to increase the influence of emerging economies. They have acted together in deciding whether to bailout Europe, and they have plans to set up a development bank for emerging countries, similar to the International Monetary Fund.

There are many ongoing conflicts in Africa: South Sudan’s dispute over oil rights, military coups in Mali and Guinea-Bissau, and a dispute between Rwanda and the Democratic Republic of the Congo. If Dlamini-Zuma wants to increase the AU’s and South Africa’s economic and political power, she must gain the support of the nations that supported Jean Ping and begin to solve these problems. For example, ECOWAS member-states, who predominantly supported Ping, are seeking Security Council support for a military intervention to unite a divided Mali, an intervention that SADC member-states, who supported Dlamini-Zuma, have shown scant support. If Dlamini-Zuma can use her influence to garner Security Council and SADC support for this intervention, countries that were opposed to her candidacy may view her more favorably, which will further increase the AU’s power.

A united Africa could show Western nations that the African Union is a serious player in global politics. For a continent in conflict and mired in indecision for the last six months, this would certainly be a welcome development.

Monday, July 16, 2012

China to Test Freer Yuan in Financial Zone

BI: China is Experimenting with a Truly International Currency
China Offshore: Central Bank Allows Chinese Businesses to Settle Trade Using the Rmb
FT: China to Create Special Currency Test Zone
Reuters: China to Experiment with Freer Yuan

On June 28, 2012, China announced plans to create a special financial test zone. The financial test zone is to be located in the city of Shenzhen on mainland China and will allow China to determine how easily Chinese currency can convert into gold and other foreign currencies. This new measure will allow Hong Kong banks to lend renminbi, the official currency of China, directly to companies on mainland China, particularly in the new economic zone of Shenzhen.

The currency experiment aims to increase the flow of the Yuan (the primary unit of the renminbi), between Hong Kong and mainland China. Prior to the announcement, Hong Kong banks could only lend to Chinese clients in Hong Kong, and if the Chinese clients wanted to bring that money into China, they needed approval from the foreign exchange regulator. The Chinese foreign exchange regulator limits the amount of renminbi that can leave and enter mainland China. The Chinese government also has regulations in place to ensure the renminbi cannot travel without restriction across the border for pure financial transactions, like loans. The currency experiment in Shenzhen allows renminbi held by bank lenders overseas to flow back to China because banks in Hong Kong can lend to Chinese clients in Hong Kong, but with the currency experiment, they can also lend to those on mainland China.

China’s currency experiment could prove important to the eventual undoing of capital controls in the country as well as increase the Yuan’s presence overseas. Capital controls are mechanisms the Chinese government uses to regulate the flow of Yuan in and out of the country. For instance, the Chinese government limits the amount of Yuan companies can take out of mainland China for trading and lending as well as the amount they can bring back in. The experiment follows a series of other steps taken by the Chinese government to make the renminbi a more globalized currency that could eventually compete with the U.S. dollar in global markets. A global currency refers to a currency in which the vast majority of international transactions like sales and trades take place, (e.g., the U.S. dollar and the Euro). China’s drive for financial reform includes the goal of making the Yuan convertible to foreign currencies as early as 2015.

Over the past two years, large amounts of Chinese currency have moved abroad for the first time because Chinese companies could settle their international trade in renminbi, rather than first exchanging renminbi to dollars prior to doing business with foreign companies. The allowance of settling international trade in renminbi meant the Chinese Central Bank allowed all businesses that trade with China to use the renminbi in their trade exchanges and in business transactions, such as sales, with each other. Thus, a Chinese company can now pay a European company in renminbi, allowing the outflow of Chinese currency to foreign hands. The Chinese government has also allowed foreign investing institutions a limited but growing selection of investment options for their renminbi holdings, which includes Hong Kong’s dim sum bond market. Hong Kong’s dim sum bond market is a market that sells bonds denominated, or valued, in Chinese Yuan.

Shenzhen, designated as the country’s first special economic zone in 1980, helped to bring foreign investment and free trade to China. This economic zone was the first city that experimented with China’s broader economic reforms that were later rolled out across the country and helped China on its way to becoming the world’s second-largest economy. If the Chinese government follows through with its announced plans in globalizing the Yuan, Chinese currency could be more easily convertible to foreign currencies very soon.

Tuesday, July 10, 2012

The Canadian Territory Nunavut Approves Uranium Mining for the First Time

Sources:
Nunavut Government: Nunavut Facts

On June 6, the government of the Nunavut Territory, Canada approved the creation of the first uranium mine within the territory. The Nunavut Government sees the mine as an opportunity for job and economic growth through the construction and operation of the mine and the taxes it would produce for the government. In giving its approval, the Nunavut government provided specific guiding principles that must govern any uranium mining, as explained below. While community groups express concern about the formulation of the policy and the environmental impact, local leaders continue to be open minded about the mine’s potential economic benefits.

Nunavut is a federal territory in northeastern Canada created in 1999. Its land covers 20% of Canada, and has a population of 33,330 as of 2011. While it currently does not have control over its natural resources, Nunavut is in negotiations with the Canadian federal government to obtain this control and to ensure any mining of natural resources would directly benefit Nunavut. In fact, the Nunavut government stated that its approval of uranium mining is specifically contingent on ensuring that Nunavut is the main beneficiary of government revenue from mining activities within the territory.
 
The Nunavut government created its uranium mining policy after a mining company named Areva Resources Canada expressed interest in creating a uranium mine within the territory. In its policy, the Nunavut government approves uranium mining, provided the five stated guiding principles are met. The five guiding principles came from consultations the Nunavut government held with local communities, particularly those close to the proposed mine. The guiding principles articulated by the Nunavut government include: 1) that the mined uranium only be used for peaceful purposes, such as producing energy, and not for nuclear weapons; 2) residents of Nunavut must be the primary beneficiaries of the mining revenue; 3) uranium mining must meet national health and safety standards of the Canadian Nuclear Safety Commission (CNSC); 4) high environmental standards must be met, as approved by the Nunavut Impact Review Board (NIRB); and 5) Nunavut residents must approve the uranium mining. These principles are simply the first basic articulation of the Nunavut government policies, and any uranium mining operations require further approval from the NIRB and the CNSC.
 
The Nunavut government’s approval of uranium mining has been met by opposition and concerns from local community groups. An environmentalist group called Nunavummiut Makitagunarningit claims that the process for creating the territorial government’s policy was biased because the government hired a consultation company whose primary clients are in the mining industry and stand to directly benefit from governmental approval. Meanwhile, a local community group of hunters and trappers expressed concern about the uranium mine’s potential negative impact on the migration patterns of local caribou populations, a major source of food and income for communities around the proposed mine. The community worries that if the mine is built, the caribou would change their migration pattern to avoid the mine, and thus no longer come near the village.
 
In spite of these concerns, however, local leaders have expressed support for the mine as a source for increased employment and economic development. The Areva mine would provide 700 jobs during its construction and 600 jobs during its projected 14-year operation. In addition, the mine would bring an increase in infrastructure necessary for the mine—such as roads and telecommunications—which would also benefit local communities by providing greater access to economic activities.
 
Seeking to broaden opportunities for economic growth, the Nunavut government approved uranium mining within the territory. In doing so, it provided specific guiding principles for any uranium mining. Although local communities have environmental concerns, many residents of Nunavut are interested in the economic development a uranium mine could provide for the territory.

Sunday, July 08, 2012

Paraguay’s Suspension Clears Way to Mercosur for Venezuela

Sources:

On June 29, Argentina, Brazil, and Uruguay suspended Paraguay from Mercosur, a trading bloc that consisted of those four countries as voting members. Shortly after, Argentina, Brazil, and Uruguay also voted to make Venezuela a full member of the trading group.

The shakeup of Mercosur followed the Paraguayan Senate’s decision to remove leftist President Fernando Lugo. The Senate, which Paraguay’s right-wing opposition party controls, believed President Lugo did not appropriately handle a forced land eviction that killed nine farmers and seven police officers on June 15 of this year. Leaders of countries throughout South America condemned this impeachment. Argentina, Brazil, and Uruguay withdrew their ambassadors and claimed the impeachment violated due process (the legal procedures required to make a decision valid) because the Senate provided President Lugo less than 24 hours to present his defense at trial.

The decision by Argentina, Brazil, and Uruguay to suspend Paraguay from Mercosur opened the door for Venezuela, whose full-member status in Mercosur had been blocked for six years by the Paraguayan legislature (but favored by former President Lugo), to join Mercosur. Paraguay’s right-wing legislature had questioned whether Venezuela’s President Hugo Ch├ívez was operating a democratic regime. However, with Paraguay no longer eligible to vote in Mercosur meetings due to the suspension, the three remaining countries quickly agreed to grant Venezuela its long-awaited full-member status.

Venezuela will officially become a voting member of Mercosur on July 31, and its addition will increase the trading bloc’s global influence. Although Mercosur is already a major global grain provider, Venezuela will bring in the world’s biggest crude oil reserves into the trading bloc. Potentially, the addition of Venezuela’s crude oil could give Mercosur leverage in long-discussed free-trade negotiations with China as it will now have energy supplies on its side of the bargain.

Although Argentina, Brazil, and Uruguay decided to suspend Paraguay until it votes for a democratically elected president in April 2013 (the interim President, Federico Franco, had served as Lugo’s vice president and had been critical of former President Lugo), the countries did not decide to impose economic sanctions on Paraguay. The land-locked country of 6 million is already one of the poorest in South America, and economic sanction by Mercosur, such as imposing tariffs (a type of tax) on Paraguayan goods, could have devastating effects because half of its trade is with other Mercosur countries. Moreover, the country has already suffered economically this year because a drought destroyed its soy exports and farmers have slaughtered hundreds of cattle due to the outbreak of foot-and-mouth disease. According to Argentina President Christina Fernandez, who has called the removal of President Lugo a “coup,” economic sanctions would not be productive because “they never hurt governments. They always hurt the people.”

The right-wing members of Paraguay’s Senate did not expect a suspension from Mercosur after impeaching and removing President Lugo. Despite their expectations, Paraguay’s suspension is Venezuela’s gain, and the legislators’ six-year efforts to prevent Venezuela from gaining full-member status have finally been thwarted. However, it is too soon to determine what these developments mean for South America’s economic and political landscape.