Author Archives: Edward Hugh

About Edward Hugh

Edward 'the bonobo' is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

Recession on the Horizon?

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Morgan Stanley (among many others) have been busy cutting their 2004 and 2005 growth outooks. With Oil prices continuosly hitting new highs this all has some sort of inevitability about it. Whilst it is probable that the slowdown in growth will bring oil back from its current peaks, MS estimate that “the new equilibrium for oil prices is now somewhere in the $30-40 range — well above the $20 average of the 1990s”.

Obviously the oil ‘spike’ is well short of the magnitude of the 1970′s shocks, it is, however, no mere trifle. All of which leads MS’s Eric Chaney to conclude:

If, as we think, the barrel of Brent remains above $40 until the end of this year, the maximum impact of the shock will occur in the first months of 2005, where we see only 0.25%Q GDP growth. Because uncertainties surrounding consumers? and companies? reactions to oil prices are high, we reckon that the odds for a technical recession, i.e., two consecutive declines in quarterly GDP, have become significant despite assurances given by policy-makers.
Source: Morgan Stanley Global Economic Forum

Take care, you have been warned!

Update: this impression is only confirmed by the latest reading on the German-based he ZEW Center for European Economic Research’s index of institutional and analyst sentiment: down to 31.83 from 38.4, and by the decline in French industrial production in August.

Gloomy, or Just More Realistic?

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One of the problems of being a ‘dissenting voice’ is that it is hard for others to get a grip on a yardstick for evaluating what you are saying. Normally I am considered ‘gloomy’. But if what I am arguing against is a concoction of all the ‘best case’ scenarios rolled meticulously into one, it might be fair for me to ask, aren’t those who point the finger really guilty of presenting an excessively rosy panorama.

Latest case in point are the consensus projections for life expectancy, as highlighted by the forthcoming UK pensions Commission interim report, details of which are ‘leaked’ in today’s FT:
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Hardly Breaking News

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That the US jobs report last Friday showed continuing weakness in the labour market is certainly by now far from breaking news. I wouldn’t however want to let it pass by without comment. I think it is now abundantly clear that there is a pattern in all this somewhere (what that pattern is precisely, and what is causing it may be another matter). The US is not creating the quantity of new employment it needs. This means that the output gap (the gap between potential and actual output) is unlikely to reduce, and that the Fed will in all probability be unable to raise interest rates as vigourously as it had anticipated. This is also likely produce downward pressure on the dollar (with a consequent upward pressure on the Euro) and all sorts of other weird and wonderful things which should preoccupy those given to thinking about these matters. I think the debate is effectively over though: this is more than just a ‘soft spot’.
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Arrivederci Lisbon?

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The Financial Times reports today that the team lead by Wim Kok, set up after the March economics summit, and charged with carrying out a review of the Lisbon process, is likely to find that we are badly behind schedule. This is hardly surprising since the Lisbon agenda was rather stronger on rhetorical nicety (including the now famous objective of turning Europe into the ?most competitive and dynamic knowledge-based economy in the world? by 2010) and rather weaker on concrete policies and objectives.

The intention is now to change this balance:
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Turkey and the Constitution

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Ohhhhhh, I can’t resist this. Anatole Kaletsky writing in the Times:

Turkey is likely to scupper the strongest argument in favour of ratifying the European constitution: the claim that voting rights among the EU member nations must be reformed to accommodate past and future enlargements. The fact is that, far from preparing the EU for the future, the constitution will have to be torn up if Turkey joins. Turkey?s rapidly growing population, which will overtake Germany?s by 2015, would give it more votes under the new constitution than any other nation. Since an EU with Turkey as the single most powerful member would make no sense to anyone, including even the Turks, enlargement would mean completely rewriting the constitution just five years after the new arrangements are supposed to come into force. While conspiracy theorists suspect that the constitution was drafted to block Turkey?s accession, it looks increasingly like Turkey will sabotage the new constitution.

We do seem to be creating something of a muddle here. Many thanks to Dave at North Sea Diaries for the link and extract.

This summary of yesterday’s Commission discussion on Turkish entry also makes interesting reading.

Google Book Search

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Whilst speculation abounds in the weblog world that Google is about to launch its own browser tchnology, more traditional media seem to be enthusing about the possibility of Google book search:

Google, beset by a growing number of competitors in the internet search business, will shortly unveil a number of new features to its own search engine, according to one of the company’s directors.

It has also started testing a service that lets users read book excerpts online, echoing the popular ?Search Inside the Book? service created by Amazon.com.

The book excerpt service, called Google Print, aims to give users links to relevant books among the other search results they receive. Clicking on the link will then lead to the book excerpt, where users can read two pages forward or back from the relevant page and also click on another link to an online store to buy the book.
Source: Financial Times

Obviously the internet war is hotting up. Meantime I’m having fun playing round with Amazon’s A9.

What You Look For Is What You Get?

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Ok, I’m feeling in a wicked mood today, so how about something really controversial (just for a change). It’s now as near to official as we’re going to get it that Sadam Hussein wasn’t making any serious advance towards the development of WMDs.

So, this being the case, what exactly is going on in Iraq?
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Bulgaria and Romania to Enter in 2007?

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Amidst all the fanfare about negotiations opening on Turkey’s membership, we shouldn’t lose sight of other things that are in the pipeline. EU enlargement commissioner G?nter Verhuegen has just given Bulgaria and Romania the green light for a January 2007 target date.

?For the year 2007 we feel that accession may be appropriate and these two countries will be ready by then,? Verhuegen said.

?Negotiations with Bulgaria are technically speaking closed. We wish to conclude negotiations with Romania by the end of the year, we are aware that this will be difficult.?

Now I wouldn’t want to be misunderstood here. I am perfectly happy with Bulgaria and Romania as EU members, under the right conditions, just as I am happy with Turkish membership. But I do think that Turkey’s point about the same standards being applied is a valid one. I personally – and based among other things on extensive converstaions with migrants from these countries – have plenty of reservations about just how ‘ready’ these societies are if we are using the yardstick currently (correctly) being applied to Turkey. Corruption and lawlessness would be among the issues that immediately spring to mind. So, if there is a time to ‘turn the screw’, it is now.

Mid-term I am still convinced that Turkey will have much more to offer economically. Both Rumania and Bulgaria already suffer from many of the major problems facing existing EU member states – low fertility, rapid ageing, serious problems in paying pensions moving forward – and they have the added problem of the meaningful functioning of their democratic processes. Turkey is already making important steps forward, it would be nice to feel re-assured that the other two were.

Addendum: North Sea Diaries has a spoof text of a speech Erdogan might have made to the Turkish parliament explaining how the EU meets Turkey’s criteria as a suitable place to be. As our diarist wryly puts it “he made it clear the EU would be allowed to join Turkey”. You can find a summary of the speech he actually made in Strasbourg here.

Housing Review

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My out-of-consensus speculation that the Bank of England’s round of interest rate rises may be pretty much done looks sounder by the day. There may be one more rate increase, but it wouldn’t surprise me at all if they were pretty much over with it, and even if the next move (the end of this year?) wasn’t downwards. The reason? Growing evidence that the UK housing boom is bottoming out, and with this, UK consumption starting to take a hit.

U.K. mortgage lending growth probably slowed in August and consumer confidence may have weakened in September, suggesting economic growth peaked in the second quarter amid rising interest rates, surveys of economists showed……

House prices fell 0.6 percent in August from July, the first drop since August 2002, according to Edinburgh-based HBOS Plc, the U.K.’s largest mortgage lender. It was the biggest decline since December 2000.

Bank of England Governor Mervyn King and his rate-setting committee said they may have underestimated the effect of any decline in home values on consumer spending, according to minutes of the Bank of England’s Sept. 8-9 meeting.

“We’ve just come through a very slow holiday period and there is a general agreement that September is no improvement,” said Richard Hair, president of the National Association of Estate Agents. “We’re getting geared up for what may be a difficult market in the autumn.”
Source: Bloomberg

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‘Volatilty’ is Back

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After a series of posts on the rise of the euro earlier in the year, I’ve been relatively quiet on this front of late. This doesn’t mean that the problem has gone away. The growing feeling that the US economy was taking off certainly eased the pressure, and the euro has hovered around the low 1.20s. Now it seems that with growing awareness that growth may be slowing large scale ‘currency trading’ is coming back on the agenda.

Trading on the world’s foreign exchange markets has leapt to a record $1,900bn a day, driven by renewed interest in currencies as an asset class and the return of hedge funds specialising in currency bets.

Turnover in currency and interest rate derivatives sold by banks also soared to new record levels, according to a three-yearly survey by the Bank for International Settlements……

After slumping amid the introduction of the euro, which eliminated the currencies of some of the world’s biggest economies, trade in foreign exchange bounced back between 2001 and 2004.
Source: Financial Times

There is once more a lot of talk around about the need to float the Chinese renmimbi (which is a move which should come in gradually, but which won’t have sufficient impact to resolve the problem IMHO).

Trying to see into the future is a pretty fruitless endeavour, but we should all be aware that any sustained weakening in the yen and the US dollar would almost kneejerk style bring the issue of a rising euro straight back on the agenda. Definitely one to watch.