It was only just over two weeks ago (two weeks, which following the logic of a historical time which seems far from uniform, now seem like half a lifetime) that guest poster P. O’Neill, said this:
For understandable reasons — the addition of 10, and soon to be 12, new member countries, and the constitutional crisis, the European Union has been preoccupied with foundational questions in recent years. But an older concern is working its way back onto the agenda: how to handle an economic crisis in a member country……However, the risk of the latter type of crisis in a member country is now quite high.
The warning lights are flashing again â€“ this time in eastern Europe, and especially in the recent or imminent member countries of Hungary, Romania, and Bulgaria. Poland is also a source of concern. Some combination of profligate governments, political uncertainty, EU spending booms, and capital inflows have created precarious economic positions for these countries.
Well, well, well, scarcely three weeks later, and here it is, all on the table. Sometimes, in the field of interest of what is sometimes erroneously termed the dismal science, things do indeed move quickly.
Now before going any farther I do want to make plain, the headline in the linked article – Hungarian economy takes a dive amid worst unrest since end of communism – is sensationalist, and this is *not* the begining of the end for Hungary. It is however quite a serious situation, the stock market’s main BUX index fell 6.6% in one week – losing 1,500 points – and the forint once more fell against the euro, to 277 from 272 one week ago (this is not a hge fall, but remember that the forint was already weak after the early summer drop, and, of course, there may be more to come). In addition the credit-rating agencies have been active: Fitch changed the outlook on Hungary’s credit to negative from stable, while Moody’s placed the country on review for a possible credit downgrade, and both of them cite fears that economic reforms could be diluted.
So Gyurcsany is now in a double bind, and everyone knows this. If he goes through with a hard set of reforms the Hungarian economy will shrink (yes shrink, just like Portugal did at the end of the 90s, by shrink here I mean have an important recession) and his government will tremble, while if he doesn’t reform as stated (and he will do so even more now, since the situation is worse) then the economy will crash anyway, since there will be capital flight.
And now the situation is complicated, quite simply because there is contagion risk, and top of the list I would say are Poland, Bulgaria and the Baltic States. As Vlastimil Tlusty – the Czech Republic’s finance minister – is quoted as saying:
“In today’s situation, where from a foreign viewpoint due to the situation in Hungary we are perceived as an unstable region, a similar critical state of public finances can have far reaching results”
I would go further, the issue isn’t just one of political stability (this can be addressed) it is the state of the underlying demographics: the day the global markets wake up to this, “que dios nos salva!”.
All of this also needs contextualising a little. The US economy is undoubtedly slowing (2007 is going to be a difficult year all round). This is producing a steady outflow of funds across the ‘emerging markets‘:
Asian currencies weakened, paced by Indonesia’s rupiah and the Philippine peso, on speculation investors will sell emerging-market assets as U.S. growth slows.
A report on Sept. 21 on Philadelphia manufacturing provided further evidence a two-year cycle of interest-rate increases is cooling the U.S. economy. Asian exports may suffer on a decline in consumer demand in the U.S., one of the region’s biggest overseas markets. The rupiah posted the worst week in a month, while the peso snapped a three-week rally.
“A lot of money has gone into Asian and Latin American markets and now people may be unwinding their holdings, pushing down the currencies,” said Nizam Idris, a currency strategist at UBS AG in Singapore. “Investors are more averse to risk following yesterday’s poor U.S. numbers.”
The rupiah lost 0.7 percent this week to 9,188, the worst- performing of 15 Asia-Pacific currencies tracked by Bloomberg. The peso, the poorest performer yesterday, declined 0.2 percent to 50.35 for the week, according to the Bankers Association of the Philippines
So first we go up (win-win) and then we come down (lose-lose), the dismal science is just like this.
In conclusion, and just to show that ageing populations are not simply a European problem, my friend the Singapore economist Eddie Lee (Eddie is, naturally, a specialist on the ‘Asian tigers’ and on China) wrote me this morning about Taiwan:
Domestic consumption dip a problem:
Taiwan’s economy is faced with “booming exports and a cooling domestic market, ” a problem caused by such structural factors as falling birth rates and the exodus of entrepreneurs and complicated by the credit card storm, economists said yesterday.
Liang Kuo-yuan, director of the Polaris Research Institute, said Taiwan’s birth rate began to fall in 2000, while at the same time businessmen accelerated their moves to foreign countries. “Smaller population and the absence of a fair portion of rich consumers certainly cooled off domestic consumption,” Liang said.
The government in August adjusted its economic forecast for 2006 from 4.31 percent to 4.28 percent, in part to reflect the annual domestic consumption growth of 1.71 percent — the lowest in three years.
In August, Taiwan’s surplus in international trade was NT$1.21 billion, a 10.5 percent growth from the same month of last year, and the total surplus for the first eight months of this year accumulated to NT$10.77 billion, a whopping growth of 71.7 percent from last year, indicating booming exports.
Pointing out that the domestic market is cooling to a “severe” extent, Liang cited figures that he said gave him no reason for optimism, such as the average growth rate of 6 percent in domestic consumption between 1991 to 2000, a figure that has fallen to 2 percent since from 2001 to 2006.
He attributed the decline to structural factors that were compounded by the credit card and cash card storm that appeared in the last quarter of 2005, forcing the banks to cut consumer loans, leading to NT$40 billion in “restrained” consumer spending.
Over the long term, he said, the cooling domestic consumer market will be “heavy, bad” news.
And as Eddie points out to me in his mail “this seems to be getting some media attention in the tiger countries …. “.
Also some more from Eddie’s mail (please remember these are ‘off the cuff’ comments, but very relevant nonetheless, Eddie used to be economics editor for the Straits Times):
It seems to me also that, following rostow’s stages of development, the peaking of the mass consumption stage coincides with a final over-extended flourish in the property market (japan circa 1990s, tigers circa 2000s)
that makes me somewhat concerned about the US, though obviously they have the ability to renew their populatino thru migrants. so it’s a question of how well that is managed.
Yes. 2007 will be interesting. I’d agree that the US & the rest of the developed economies, plus the tigers who clearly will become even more export-dependent, must look forward to the newly emerging economies to drive growth.
Both US & China could fall badly in 2007, but I would guess that China has the ability to pick itself up quickly, that’s what the demo dividend is about. That would be the key.
but whether it’s china/india, or migrants in US/UK … it’s the emerging countries that’s increasingly driving growth.
So here we go everyone, and plenty of food for thought.