The future of the global economy depends on rebalancing, we’re told.
Countries that had consumer booms have seen those turn to busts. Now they need to become more productive. And countries that have so far been driven by exports will need to encourage domestic consumption, as their overseas customers stop spending.
In Britain, our hopes hang on the manufacturing sector. And there are some signs that we are at least nudging the economy in that direction. Manufacturing has certainly been one of the healthiest sectors over the past year.
But there’s another rebalancing story in Europe that’s rather more convincing.
Keep an eye on the UK manufacturing sector
The Office for Budget Responsibility (OBR) is the latest independent body created by a new government to convince voters of its good intentions. And it’s a good thing that it carries that ‘independent’ label. Because it has just come out with a rather more upbeat outlook for Britain than many other economists.
Public sector cuts won’t hurt as much as feared, the OBR reckons. And the economy will grow more rapidly than first thought this year, although it cut its forecasts for the next two years.
The housing market is still a mess of course. The latest data on mortgage approvals shows that sales activity is still low by historical standards. And most indices show that sales prices are edging lower again. We certainly can’t expect another property boom for some time (here’s the latest news on what we believe are the most important housing market indicators).
With the weak housing market hanging over both consumers and the financial sector, we need another sector to pick up the slack. That would be manufacturing. It’s easy to forget, but we’re actually the sixth-biggest exporter in the world. So the idea that we can make exports a more significant proportion of our economy isn’t that far-fetched.
You might have read, for example, that pharma giant GlaxoSmithKline plans to create 1,000 jobs in Britain. That’s due to a planned cut in the rate of corporation tax chargeable on profits generated from UK-owned patents. And the experts at our latest Roundtable were quite optimistic about Britain’s chances of rebalancing. You can find out their take on the UK’s prospects, in the next issue of MoneyWeek, out on Friday. (If you’re not already a subscriber to MoneyWeek magazine, subscribe to MoneyWeek magazine.)
But we do have our problems. If Europe ends up in trouble, it will be hard to insulate ourselves, particularly if we’re trying to increase our sales to the region. And we are still massively in debt, as Tim Price pointed out to readers of his Price Report newsletter last week: Forget Spain – Britain’s debts look pretty painful too. Put it this way, if we were part of the eurozone, we would probably be the ‘too big to fail, but too big to save’ economy spooking markets, rather than Spain.
German consumers seem to be spending again
Is there a better bet? Well, there’s another major European economy that could benefit from rebalancing in the other direction – Germany. The country is already the world’s second-largest manufacturer, of course. What it could do with is a bit more activity on the consumer side.
The good news is that, according to Jamie Dannhauser at Lombard Street Research, that’s exactly what’s happening. Here’s the essence of Dannhauser’s argument: Germany had a brutal recession, from which it rebounded rapidly. That’s to be expected. As a major exporter, the collapse in world trade hit it extremely hard. But the subsequent rally meant it came back more quickly too.
“What has been puzzling, however, is the strong growth in employment.” Rather than laying off staff, German firms “hoarded labour on a massive scale during the recession.” As a result, you’d have thought that companies would have plenty of spare capacity to use up before they started hiring again. In other words, you’d have expected to see “a ‘jobless’ recovery in Germany.”
And yet, employment is growing more rapidly this year (at an annual rate of 0.8%) than it did on average, between 1997 and 2007. The unemployment rate – at 6.7% – has fallen to levels not seen since just after reunification. So what’s the explanation?
It’s quite simple – the new jobs are rising mainly in the service and construction sectors. In other words, it’s the sectors dependent on domestic demand that are finding they need to hire more people to keep up. As Dannhauser puts it, exports may have been the main driver of recovery, but “the increased economic activity (and incomes) that has resulted from this appears to be translating into faster growth in domestic spending.”
How to profit from German commercial property
If the German consumer is emerging from hibernation, that would be very good news for the economy. It means that even if external demand tails off in 2011, domestic demand may pick up the slack. And that could be good news for German commercial property, particularly property such as shopping centres. My colleague David Stevenson looked at one stock you could use to play the sector in a recent edition of MoneyWeek – it claims to be the only public company in Germany to invest solely in shopping centres in prime locations. You can read his piece here: Is commercial property making a comeback?
Do bear in mind that as it’s listed in euros, there is currency risk involved. But as long as you don’t have to pull your money out in the short-term, you should be able to wait out any euro-related havoc.
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