"Low Pressure from Rising Government Bond Yields... US Growth Rate This Year Approaches China"

Inventory Reaccumulation Cycle... Increase in Investment in Old Economy Sectors like Housing Expected
Financial Environment Also Stable... "Burden of Rising Government Bond Yields Less Than Expected"

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] An analysis has emerged suggesting that the U.S. economic growth rate this year is likely to match that of China. This is due to the strong fiscal and monetary policies being implemented, as well as an ongoing re-stocking cycle centered in the U.S. From the second quarter, inflation rates are expected to rise due to base effects, leading to mixed outcomes across industries and assets.

Re-stocking Cycle... Corporate Investment Also Expected to Increase

On the 14th, economist Gitae Ahn of NH Investment & Securities diagnosed that the current economic recovery and rising inflation rates strongly reflect an expansion of the inventory cycle based on increased U.S. income. He explained, "Currently, the U.S. has the highest ratio of excess savings (household savings increased compared to pre-COVID-19) relative to disposable income worldwide," adding, "During the 'driving season' vacation period in May and June this year, it is highly likely that U.S. excess savings will be released through travel and gasoline consumption." This analysis suggests that the surge in consumption following the temporary income boost from government support last year will be repeated in the second quarter of this year. Additionally, the steady increase in permanent income (earned income) supports this view.

In fact, since October last year, U.S. retailers have been gradually building up inventories, but inventory ratios still remain below historical averages. The inventory ratio for manufacturers has declined even further. Economist Ahn explained, "The shortage inflation occurring globally, centered on the U.S., indicates that supply shortages are not only due to supply disruptions but also based on increased demand."

Meanwhile, corporate investments are expected to increase this year. If the inventory cycle expansion continues, companies typically increase investments beyond just replenishing inventories. Given that investments in old economy sectors have been low and global capital goods orders (such as semiconductor equipment, excavators, machine tools) have already surpassed pre-COVID-19 levels, there is a high possibility of a rebound in facility investments in the second quarter of this year.

In particular, investments in U.S. housing and infrastructure facilities are expected to increase due to aging assets in these sectors. The 'housing inventory disposal period,' which refers to the time needed to sell remaining homes relative to the current sales pace, is at a historic low. The average age of houses is at its highest level in the past 70 years, and although housing starts are increasing, they still fall short of historical averages. Economist Ahn predicted, "U.S. housing investment, which has been sluggish for nearly 15 years since the mortgage crisis in 2006, could surprisingly become active," adding, "Unlike the 2000s when housing starts led economic expansion, China's housing starts are now slowing, so if an investment cycle emerges in the old economy sector, it is more likely to be in the U.S. than China."

Rise in Treasury Yields Tolerable... Financial Environment Stable

He also assessed that the recent rise in U.S. Treasury yields is not at a level that the economy cannot handle. Last year, the federal government's interest expenses relative to U.S. GDP were 2.7%. The highest level since World War II was 4.9%, which would occur if nominal GDP does not grow at all this year and the average annual Treasury yield rises to 1.65%. Therefore, the current yield level (1.54% as of the 11th) is not enough to significantly increase the U.S. government's interest burden.

The overall financial environment was also judged to be safe. When Treasury yields rise and bank stock prices fall, it can be seen as a phase where costs (inflation, interest rates) outpace economic recovery speed, but currently, yields and U.S. bank stocks are moving together. Economist Ahn stated, "The financial condition index, which includes stock prices and interest rate changes, is more stable not only during the COVID-19 period but also compared to early 2016 when concerns about a Chinese financial crisis arose," adding, "Although some growth stocks sharply declined due to rising U.S. Treasury yields, this reflects market anxiety in the stock market and does not represent the overall financial environment."

The current situation is viewed as a 'reflation' phase (a state moving away from deflation but not reaching severe inflation) with inflation gradually rising. Inflation rates are expected to surge in the second quarter due to base effects but will rise moderately over the long term. Quarterly, the second quarter is expected to see inflation rates exceeding 3%, indicating rising inflation; the third quarter will experience disinflation as rates decline from the peak; and the fourth quarter will see a moderate reflation phase again.

In this context, asset prices favorable to deflation are likely to decline. However, this is not expected to burden the overall economy. Economist Ahn explained, "The recent sharp decline in some U.S. growth stocks is not connected to banks, so it does not lead to broader financial instability," adding, "The core of financial instability lies more in the corporate bond market than in stocks."

Differentiation by Asset... U.S. Growth Rate May Catch Up with China

He also emphasized the need to pay attention to China's recent shift in monetary policy from accommodative to neutral. This is aimed at preventing increased volatility caused by large capital inflows. Although the Chinese government controls the capital market, the structure inevitably leads to openness. When companies earn U.S. dollars through exports, the People's Bank of China uses these to purchase U.S. Treasuries, placing Chinese interest rates under the influence of U.S. market rates. China's current account surplus in the fourth quarter of last year reached its highest level in 12 years, and net capital inflows surged. In the 2000s, large capital inflows followed by rapid outflows caused financial instability, so the current shift to neutral monetary policy is seen as a preemptive measure to block this.

Economist Ahn predicted, "Ultimately, China's monetary policy shift aims to prevent capital flight that could occur later if U.S.-led growth accelerates," adding, "If the focus remains on economic stability, it is highly likely that U.S. and Chinese growth rates will be similar this year."

This content was produced with the assistance of AI translation services.