Category Archives: Economics

Not So Fast!

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It is surely welcome news to find the German citizenry content with Angela Merkel, and that this new found contentment is feeding into more positive views about immediate economic prospects. But oughtn’t we to remember that there is a thing called the first hundred days, and a phenomenon known as the ‘honeymoon period’.

There is also – thank you Nietzsche – something called the ‘will to believe’.

I therefore think, along the lines of ‘one swallow doesn’t make a summer’ that it is a bit too early to be saying that the latest bounce in consumer confidence:

“is the latest indication that a broad-based recovery in Europe’s largest economy could finally be around the corner”.

I think we should wait for a broad-based and sustained recovery in confidence first. What we have is another indication that people are feeling rather better, and that is always good news. But lets just see how they feel when the first ‘reform’ package is unveiled, shall we.

The good news, however, was eclipsed by warnings from economists and politicians that Germany’s new government should not let rising opinion polls and improving economic prospects get in the way of much needed labour market and social security reforms.

“There is a lot more to be done,” Horst Köhler, Germany’s president, told the Stern weekly in an interview published on Wednesday. “I remain convinced the republic is facing a formidable task that will require decisive action and an enormous amount of staying power.”

When The Curves Invert

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Two bits of news this week appear to be unrelated. The interesting question is whether appearances are once more deceptive.

Firstly the US Treasury note situation:

At 6:23 am ET. the 10-year note yielded 4.393 percent while the two-year note yielded 4.396 percent.

Or as the FT puts it:

Yields on 10-year US Treasuries briefly fell below those on two-year notes on Tuesday for the first time in five years – a rare event that in the past has often heralded a recession.

Now there is – more or less – a consensus of opinion that this is not a harbinger of imminent recession this time round. So what then does it mean? Aha, would that we knew! There has however been another curve inversion was officially announced during the last week. According to this AFP report:

“

Japan’s population fell for the first time in 2005, the government said, calling it a “turning point” that will force the world’s second largest economy to adapt to a rapidly aging society….Deaths are likely to outnumber births by about 10,000 this year, the first decline since 1899 when Japan began compiling the data, health ministry figures showed

.”

The data suggest that Japan’s population may actually have been falling since October 2004.So where might the connection be? Well, back in April the soon-to-be Fed Chairman Ben Bernanke made his now notorious Global Savings Glut speech. In that speech he said the following:

one well-understood source of the saving glut is the strong saving motive of rich countries with aging populations, which must make provision for an impending sharp increase in the number of retirees relative to the number of workers. With slowly growing or declining workforces, as well as high capital-labor ratios, many advanced economies outside the United States also face an apparent dearth of domestic investment opportunities. As a consequence of high desired saving and the low prospective returns to domestic investment, the mature industrial economies as a group seek to run current account surpluses and thus to lend abroad

So he was arguing that ageing populations tend to increase the savings motive and produce an investment dearth. This flow of savings looking for investment tends to nudge down global interest rates. Perhaps the best discussion I have seen anywhere of the inversion phenomenon is this one from the Morgan Stanley GEF team. Clearly this is a complex problem, and they themselves have no consensus, but I did note this point from the Japan-based Robert Feldman:

“

In how many of the eight inversions over the last 40 years were international markets as closely intertwined as they are today? My point is that, as long as Bank of Japan still has huge quantitative easing in place and the yen carry trade is alive and well, part of the yield curve flattening in the US will be due to international factors and doesn’t necessarily signal a recession

.”

Here there are two points, the increasing efficiency and integration of global capital markets, and the special situation in countries like Japan. So to return to where I started, are the two inversions related. My answer would be a qualified yes. There is some relation. The hard part is to determine the nature and extent of the relation.

Battle Of The Standards

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An intereresting piece in the FT today about 3g standards and China. Basically there are three competing technologies: the European-backed WCDMA and US-supported CDMA-2000 standards, and the Chinese TD-SCDMA technology. There is a wikipedia entry on TD-SCDMA. Basically the Chinese system doesn’t imply the payment of license and patent fees (what a surprise) and it offers an asymmetrical data rate, i.e. it offers different speeds for downlink and uplink. The interesting isssue is, I suppose, after all the talk about China soon being the number one market in this, and the number one market in that, to ask the question just how much “upstream standards clout” will all this scale advantage eventually imply. Normally, third world economies would be expected to conform to first world standards eventually, but will the Chinese case be different?

IMF Continues Debt Relief

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Today’s news is of course welcome news for everyone who cares about poverty in the third world, but going back to my Evo Morales post during the week, this policy will only really bring the benefits it could do if it is combined with a systematic drive to change the demographic profile of these countries, and this means, as well as writing-off debt, more expenditure on health and on education (and in particular on equality of opportunity female education). Really, what I think has been wrong with the IMF approach in the past has been a ‘one ring to fit them all’ policy. What we can see I think now is that this is inadequate: we need a two speed globalisation. One speed for the countries like Argentina, Chile, Turkey, Thailand etc, which are on the ramp and ready to take off, and another for those countries which need help with social spending (in order not to provoke an explosion in the political subsystem) while they get the demographic imbalances straighter. So we need a debt-pardoning-plus approach.

The International Monetary Fund’s board on Wednesday approved 100 per cent debt relief on $3.3bn owed to the fund by 19 of the world’s poorest countries.

In a statement issued after the board meeting, Rodrigo Rato, managing director, said: “This is an historic moment, which will allow these countries to increase spending in priority areas to reduce poverty, promote growth and to make progress towards achieving the millennium development goals.”

Youth Unemployment in the UK

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The FT today has an article about how long-term youth unemployment is now back at 1998 levels despite a 5 billion pound benefits-to-jobs programme . Now if you go to this url, and have a look at the population pyramids for the UK you might begin to see part of the explanation for why this is happening. The cohorts now entering the UK labour market are slightly thicker than the previous ones. Coincidentally I have just put up a post on Afoe which mentions Richard Easterlin’s disadvantaged cohort theory. What is happening in the UK at the present time would, IMHO, be a good example of the Easterlin effect at work.

Long-term youth unemployment has returned to about the level it was when the government’s flagship New Deal was introduced in 1998, casting doubt over the value of the £5bn benefits-to-jobs programme.

The sharp rise in long-term youth unemployment, which has increased by 60 per cent since its low point two and a half years ago, was revealed by figures from the Office for National Statistics yesterday.

German Inflation On the Way Down

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The latest inflation eport from the Federal Statistical Office in Germany says this:

The harmonised consumer price index for Germany, which is calculated for European purposes, rose by 2.3% in November 2005 compared with November 2004. Compared with the previous month, the index was down 0.5%. The estimate of 25 November 2005 was thus slightly corrected downwards.

Inflation threat, what inflation threat?

China: 20% Bigger Than We Thought?

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The Chinese economy could be 20% bigger than previously estimated. Since almost everything about Chinese data should have ‘best guess’ status, this probably hardly comes as a surprise, and indeed the estimate itself should be treated with the customary caution, but yes, that is the conclusion which is apparently being drawn from the latest national economic census conducted by the National Bureau of Statistics earlier this year.

A spokesman for the National Bureau of Statistics said on Tuesday it will announce the findings of the census and its impact on the calculation on gross domestic product at a press conference next week.

The NBS refused to say by how much it would revise the GDP figures, but it is expected that the new measure will show the economy is larger by about 20 per cent.

Also in the news, China has now become the world’s largest exporter of information and communication technology goods, according to an OECD reported out today

China overtook the United States in 2004 to become the world’s leading exporter of information and communications technology (ICT) goods such as mobile phones, laptop computers and digital cameras, according to OECD data.

China exported USD 180 billion worth of ICT goods in 2004, compared with U.S. exports in the same category valued at USD 149 billion. In 2003, the U.S. led with exports of ICT goods worth USD 137 billion, followed by China with USD 123 billion.

China’s share of total world trade in ICT goods, including both imports and exports, rose to USD 329 billion in 2004, up from USD 234 billion in 2003 and USD 35 billion in 1996. By comparison, the U.S. share of total world trade stood at USD 375 billion in 2004, USD 301 billion in 2003 and USD 230 billion in 1996..

Evidently China is still on the up and up, and rather faster than we anticipated. As well as being the number one exporter of ICT equipment, China is also the world’s number one investor, as Stephen Roach reported a few days back:

Despite its relatively small share in the global economy — only about 5% of world GDP (at market exchange rates) — China now spends more on fixed investment than any country in the world. In dollar terms, China’s fixed asset investment was running at an annual rate of close to $1,100 billion in the first three quarters of 2005 (at market exchange rates) — in excess of annualized 2005 investment totals in the US ($987 billion), Japan ($733 billion), and the Euro-zone ($651 billion). If China’s investment boom remains unchecked and its currency continues to appreciate, its dominance in shaping the global investment cycle will only grow.

The Uncertainty Which Surrounds ‘Uncertainty’

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We live, as they say, in an uncertain world. But recently, if you have been noticing, in the economic sphere references to the high levels of uncertainty attached to any forecast have been coming fast and furious. And this warning needs to be taken seriously. The data is very ‘volatile’. Only today there is news that the Japanese recovery may well not be as strong as anticpated. And now we find that:

French industrial production fell by the most in more than six years in October as car sales slumped, suggesting a pickup in Europe’s third-largest economy may lose momentum.

Nothing especially surprising here, and nothing to read to much into, except that we should not be too confident that the eurozone has all the momentum it is claimed to have. Dave Altig at MacroBlog posted yesterday about how some ECB governing council members still think more interest rate rises are a good thing., and the FT states today that “fresh signs of eurozone economic activity picking up emerged on Thursday”. Well that was Thursday, and this is Friday, and it would be a brave man (which I am not) who said that there were fresh signs of economic activity slowing down today. But do remember this: oil is sticking around 60$ a barrell, interest rates are rising (slightly), and Germany’s economy is export and not domestic driven.

Nordi-Flexi-Curity

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New Economist has been indulging himself (actually, truth be known he wants us to indulge him) with three posts on the Nordic Model (here, here and here).

Two things strike me. Firstly the fact that the UK presidency has been an absolute non-event (except for getting the Turkey negotiations started) since we were promised an ambitious programme of debate about precisely the topic of the EU social and economic model.

Secondly, as the last paper cited by New Economist makes clear:

The analysis also provides strong support for so-called absolute β-convergence among the Nordic countries. Thus, initial differences between the countries, in terms of real output per employee, real output per hour, and real wage per employee, slowly fade away over time. This finding tells us that the Nordic countries are not that different when it comes to saving rates, levels of the technology, and government policies.

Which means, of course, that these countries would have been ideal candidates for forming a currency union. Oh well, things that might have been! (Also it is perhaps worth making a mental note to check out more about that Nordic recession in the early 90s and what happened next).

Not Good News On European R&D

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This is not very encouraging:

European spending on re-search and development is falling further behind target, widening the innovation gap between the EU and competitors such as the US and Japan, two studies show.

North American and Asian companies are outpacing European businesses in R&D investment and spending more in high-technology sectors, according to data to be released on Friday by the European Commission’s research directorate.

It is doubly not very encouraging due to a point made in a paper which Brad Setser points us to. The paper is the U.S. and Global Imbalances: Can Dark Matter Prevent a Big Bang? by Ricardo Hausmann and Fredrico Sturzenegger. Basically they argue that the net US financial position is not as dire as it seems due to the existance of ‘dark matter’ (or in more converntional terms, due to the part of the iceberg which isn’t visible and measured). US assets they argue are conventionally undervalued due to the presence of ‘hard to measure’ components. Central to their argument is this point:

We would say that EuroDisney in reality is not worth 100 million (what BEA would value it) but four times that (the capitalized value at our 5% rate of the 20 million per year that it earns). BEA is missing this and therefore grossly understates net assets. Why can EuroDisney earn such a return? Because the investment comes with a substantial amount of know-how, brand recognition, expertise, research and development and also with our good friends Mickey and Donald. This know-how is a source of dark matter. It explains why the US can earn more on its assets than it pays on its liabilities and why foreigners cannot do the same.

I would say the argument that ‘foreigners’ are unable to leverage “know-how, brand recognition, expertise, research and development” is a ridiculously simplistic one, and it almost stretches the bounds of credulity that someone might believe this, but that having been said, if here in Europe we continually fail to maintain our R&D pace it will not be such a silly argument at some stage in the foreseeable future.