21 February 2019
Falling imports reflect weakening consumer demand in the United States. Photo: Bloomberg
Falling imports reflect weakening consumer demand in the United States. Photo: Bloomberg

US can’t afford sharp rise in interest rates

As I mentioned in my previous article, we can’t expect much economic growth in the United States in the medium term.

Recent data shows the country’s trade fell short of expectations.

For the first time in a decade, imports through the three busiest US ports reported consecutive declines, in September and October.

Projections are for the value of imports to fall 10 percent during August to October from the same period a year ago. That is unexpected, as this should be a peak period for imports.

Import data reflects consumer and manufacturing activity.

If the data turns worse, we may assume the US economy is facing downward pressure.

Meanwhile, some large cargo companies reported worse than expected profits, owing to weak demand.

In addition, destocking efforts are not yet completed.

In September, the inventory-to-sales ratio in the US was 1.3 percent, the highest level since 2001.

As US companies are still clearing stocks they held from last year, demand for overseas products will fall.

Investment expenditures in developed markets have been declining for 10 years.

The downtrend is likely to continue. There are several reasons:

First, the commodity supercycle is over.

In the past decade, investment expenses were tightly linked with the energy industry.

Will this model continue to support economic growth? I doubt it.

Second, with more advanced technology, the economy is shifting rapidly toward a capital-light model.

Think about star companies like Uber and Airbnb.

The sharing economy they have adopted encourages people to make full use of, and make profit from, existing resources, for example their cars and homes.

In the new world of the sharing economy, demand for physical items, like bricks or factories, will decrease while human resources become more important.

It used to be that you had to own something to realize your life and dreams, but the sharing economy tells people we can share, or borrow, something to achieve our goals.

The change in consumption model will change the economy.

With the rise of new economic models, industrial activities face challenges.

Demand from emerging markets is weak, and inventory levels in many countries are high.

This means the global industrial cycle may be at a beginning of a downtrend.

At the same time, commodity prices are going lower and lower.

The low prices of copper and crude oil reflect trouble in the global economy.

All in all, I believe the US will not raise interest rates quickly and steeply, because it cannot afford to do so.

This article appeared in the Hong Kong Economic Journal on Nov. 30.

Translation by Myssie You

[Chinese version中文版]

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Chief Investment Officer at Allianz Global Investors, Asia Pacific

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