The export boom in the United States and the mining investment boom in Australia are simply stunning.
This morning’s revision of US second quarter GDP to 3.3% annual growth is an extraordinary testament to the resilience of American capitalism – despite an almost complete shutdown of its credit markets, the US economy is now the fastest growing of the G7.
What an irony that the countries most affected by America’s lending excesses are the more prudent Europe and Japan, both of which look like going into recession (the UK is also being hit hard, but it wasn’t prudent).
What we have learned in the past 24 hours is that although the world’s banking system is in disarray because the excess and incompetence of those in charge produced a credit bubble, real business and trade is so far surviving the downfall of the bankers.
Global banks have now written off $US504 billion in losses and raised just $US353 billion of new capital, most of it from Asian and Middle East sovereign wealth funds.
That means the global banking capital base has been reduced by $US150 billion. Assuming a 12 times gearing based on Basel capital rules, that implies a $US1.8 trillion reduction in aggregate lending capacity, which is equal to about 3% of world GDP.
To a large extent the resilience of the US economy in the face of this can be put down to Ben Bernanke. The student of the central banking mistakes of the Great Depression first cut the official rate by 0.5% in September last year and in six months reduced it from 5.25 to 2% – one of the most dramatic monetary policy moves in history.
It may be that the second quarter growth number for the US, revised overnight from 1.9% to 3.3%, is the high water market for the American economy, but at the very least the recession has been postponed.
As with Australia, the US economy now has a split personality – weak domestic demand because of the combination of consumer deleveraging, falling house prices and high gasoline prices, and a booming export sector because of the weak US dollar.
As the currency stabilises and Europe, UK and Japan slip into recession, that growth will moderate.
The big risk to US growth remains the unravelling financial sector. The Federal Deposit Insurance Corporation (FDIC) has increased its list of troubled banks to 117, and while that’s only 1.5% of the 8,000 or so banks that the FDIC regulates, the trend of bank failures is up, not down.
As more banks collapse, there must be a strong chance of another major liquidity shortage in the months ahead, requiring Treasury credit lines to be tapped and leading to more volatility on financial markets.
As for Australia, in one way the continuing capital investment boom simply adds another chapter to a six-year story of a central bank tapping the brakes but failing to slow the lorry down.
The last monetary policy statement from the RBA suggests that Governor Glenn Stevens and his colleagues believe they have finally done it, and that rates will be cut in September – but have they? Most economists this morning still reckon there will be a rate cut on Tuesday – 0.25%, not 0.5% – but as with the US, the Australian recession has been adjourned, perhaps sine die.