Category Archives: Economics

UK Jobless Upward Trend Continues

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U.K. jobless claims rose for an eighth consecutive month in September, extending the longest period of increases in almost 13 years, “as growth in Europe’s second- biggest economy slows”. This adds just a little more evidence to the fact that all is not necessarily currently all for the best in the land of John Stuart Mill. However as NTC research point out, not all is totally bad either:

Meanwhile, annual average earnings growth held steady at 4.2 percent in the three months to August, signalling that higher inflation is still not feeding through to wages.

So earnings continue upwards at a healthy clip, but not above trend. No evidence of ‘secondary effects’ here then. Which makes you wonder why the normally reasonable Mervyn King is currently being so evidently unreasonable. You can find my explanation for this here (and in the comments).

Mervyn King on Tuesday night signalled he was not convinced of the case for lower interest rates and could see many reasons why the rise in oil prices might increase inflationary pressure.
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China: Eating our Lunch or Taking us to Dinner?

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That’s the dilemna posed by the latest paper from Laurence Kotlikoff Hans Fehr and Sabine Jokisch: Will China Eat Our Lunch or Take Us to Dinner. Simulating the transition paths of economies in the U.S., EU, Japan, and China the paper develops a dynamic, life-cycle, general equilibrium model to study their interdependent demographic, fiscal, growth and current account evolution.

Having taken a close look at the respective population dynamics they point out that as a consequence of relatively high fertility and net immigration rates, the U.S. population is projected to increase from 275 million in 2000 to 442 million in 2100. In Europe – as we all already know – population may well fall over the next century from 375 to 340 million, while in Japan, the population falls from 126 million to 85 million. However the projections show the Chinese population decreasing by even more – from 1.3 billion to 1.2 billion. Although China is in fact aging rapidly, its saving behavior, growth rate, and fiscal policies are currently very different from those of developed countries. Kotlikoff et al find that if successive cohorts of Chinese continue to save like the current cohorts, if the Chinese government can restrain growth in expenditures, and if Chinese technology and education levels ultimately catch up with those of the West and Japan, the developed world’s long run future looks much brighter. China eventually becomes the world’s saver and, thereby, the developed world’s savoir with respect to its long-run supply of capital and long-run general equilibrium prospects.

In a recent article on declining yield differentials William Pesek (Hat Tip Brad Setser) asks “What’s China got to do with all this?”. Perhaps the paper by Kotlikoff et al offers him part of the answer. (I have more on this paper here).

Feldstein: A Eurosceptic at the Fed?

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Bloomberg this morning has a review of the pros and cons of Marty Feldstein as Alan Greenspan’s successor. One thing they don’t touch on is what the implications might be of having someone at the head of the US Federal Reserve who is pretty much convinced the Euro can’t work.

“Marty has something of a tin ear for politics, and that would be a problem in the Fed chairman’s job,” says William Niskanen, who followed Feldstein as head of the President’s Council of Economic Advisers in 1984 and is now chairman of the Cato Institute, a free-market research group in Washington.

Feldstein finished second only to Ben Bernanke, chairman of the White House Council of Economic Advisers, when 104 financial professionals were asked last month to name Greenspan’s most likely successor. Bernanke got 38 percent of the vote and Feldstein 31 percent in the survey, which was conducted by Stone & McCarthy Research Associates, a Princeton, New Jersey, consulting company. No other candidate received more than 10 percent.
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Hanging In The Balance

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UK property prices have been hovering dangerously around the zero price growth mark for the last couple of months. Year on year growth is of course dropping substantially and we are now just below the 3% annual mark. Definitely one to keep watching.

UK house price inflation fell in August according to the Office of the Deputy Prime Minister, giving further indications of a slowdown in the property market. Annual inflation fell to just 2.8 per cent in August, down from 4 per cent in July and 13.6 per cent a year ago.

The ODPM reported that house price growth in London, which tends to lead overall trends in the market, slowed to 0.8 per cent from 0.9 per cent in July. The average house price in the UK barely changed in August, standing at �186,208 compared with �186,207 in July.

Some analysts have concluded that these numbers suggest that the market might be stabilising at current levels. …But there will be continued concern that as house price inflation on all the main indicators heads towards zero, the current stability in the market will not last. Nervousness is likely to increase as property investors realise they can no longer rely on the prospect of capital gains to offset the reality of low rental yields.

Older and Older

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I think this is no longer news, but the OECD held a press conference yesterday to inform us that we are all living longer, but we still aren’t working longer, and that somehow these two facts don’t fit with our existing pension arrangements. Well perhaps it isn’t exactly news, but it still needs to sink-in somewhere. So I guess this is why yesterday the OECD were drawing everyone’s attention to a new report they have prepared on the basis of 21 separate country reports compiled as part of a thematic review of policies to improve labour market prospects for older workers initiated in 2001. The whole thing will get icing and a cherry at what is being called a High-Level Policy Forum to be held next Tuesday (18 October) at Palais d’Egmont. More details on the reports and the accompanying older workers forum can be found here).

At present, many public policies and workplace practices discourage older people from carrying on working. On average in OECD countries, fewer than 60% of people aged between 50 and 64 have a job, compared with 75% of people in the 25-49 age group (see Chart 1).

Such policies and practices are relics of a bygone age and unsustainable at a time when population ageing is straining public finances and holding back higher living standards. If there is no change in work patterns, the ratio of older inactive persons per worker will almost double in the OECD area over the next decades, from around 38% in 2000 to just over 70% in 2050.

This, in turn, would lead to higher taxes and/or lower benefits, coupled with slower economic growth. On the basis of unchanged patterns, OECD analysis shows, GDP growth per capita in the OECD area could shrink to around 1.7 % per year over the next three decades, about 30% below the average annual rates witnessed between 1970 and 2000.

Incidentally, I think this figure for sustained *per capita* growth of 1.7% across the OECD over the next decades is extraordinarily optimistic. If you strip out some of the large economies where the ageing problems are considerably more moderate – US, UK, France – I juts can’t see how the rest are going to sustain any per capita increase at all. What they will be into is damage containment. Unfortunately, as we can see, they seem to be in no special hurry to get on with even this.

Delphi – Consulting The Oracle

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The filing for Chapter 11 bankruptcy last Saturday by Delphi, the No. 1 U.S. car-parts supplier, is making waves, both in the stockmarkets and in the news columns. Stephen Roach had a whole GEF post devoted to the issue yesterday. This morning it is the turn of the FT, which has a (subscription only) piece that cites Delphi CEO Steve Miller to the effect that the pension liability conflicts which lie behind the bankruptcy are only a foretaste of ‘the intergenerational warfare’ that is to come:

“The bankruptcy of Delphi, a car parts maker employing 180,000 people worldwide, marked a “flash point” between the interests of current and former workers, its chief executive said on Monday.

Warning of “hard choices ahead”, Steve Miller, who previously managed US steel and airline bankruptcies, said the conflict offered a foretaste of an “inter-generational warfare” facing much of the industrialised world.“

German Exports Continue To Rise

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German exports, long the mainstay of the national economy, rose for a third month in four in August according to data released today from the Federal Statistical Office. The year on year increase of 13.4% is partly a reflection of the way the recent drop in the value of the euro has helped boost demand.

“According to provisional data of the Federal Statistical Office, Germany exported commodities to the value of EUR 63.4 billion and imported commodities to the value of EUR 51.9 billion in August 2005. German exports of August 2005 thus were 13.4% and imports 15.3% above the respective August 2004 levels. Upon calendar and seasonal adjustment, exports increased by 3.5% and imports by 6.0% compared with July 2005.

The foreign trade balance showed a surplus of EUR 11.6 billion in August 2005. In August 2004, the foreign trade balance showed a surplus of EUR 11.0 billion. Upon calendar and seasonal adjustment, the foreign trade balance showed a surplus of EUR 12.7 billion in August 2005.”

While exports power ahead the continuing weaknesses in domestic consumer demand and investment are to be seen in the fact that German industrial production fell 1.6 percent in August while factory orders fell 3.7 percent.

Alcohol Consumption Pro-Cyclical?

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Thanks mainly to indirect encouragement from commenter Teme, I am continuing to plough the Finland furrow. Today I found this very interesting piece of research:

ARE SLUMPS REALLY DRY SEASONS?

This paper explores the connection between alcohol mortality, drinking behaviour and macroeconomic fluctuations in Finland by using both aggregate and micro-level data during the past few decades. The results from the aggregate data reveal that an improvement in regional economic conditions measured by the employment-to-population rate produces a decrease in alcohol mortality. However, the great slump of the early 1990s is an exception to this pattern. During that particular episode, alcohol mortality did indeed decline, as there was an unprecedented collapse in economic activity.
The results from the micro-data show that an increase in the employment-to-population rate and expansion in regional GDP produces an increase in alcohol consumption while having no effect on the probability of being a drinker. All in all, the Finnish evidence presented does not overwhelmingly support the conclusions reported for the USA, according to which temporary economic slowdowns are good for health. In contrast, at least alcohol mortality seems to increase in those bad times that are not exceptional economic crises like the one experienced in the early 1990s. However, there is evidence that alcohol consumption is strongly procyclical by its nature. This suggests that alcohol consumption and mortality may be delinked in the short-run business cycle context.

KEY WORDS: alcohol mortality, drinking, business cycles

German Confidence Indexes

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The sharp eyed will have noticed that I have copiously refrained from commenting on the unexpectedly high reading obtained in yesterday’s German Ifo Institute Business Climate index. The index registered a slight unexpected increase, but as Ifo President Hans-Werner Sinn notes: “An evaluation of responses submitted before and after the federal election showed a tendency to more unfavourable expectations after than before the election, so the reading may in fact say a lot more about sentiment before rather than after the election.

More informative in many ways may be the Gfk consumer climate survey out today (follow link and click on button). The survey, which attempts to forecast the climate going forward, saw an increase in the number expressing scepticism about private income expectations and the propensity to buy:

“While in August this year the consumer mood was still relatively unaffected by the hike in oil prices and yet fired by the prospects of the elections, both the tax reform and the trend in oil prices seem to have been felt in September. Indicators covering private income and private consumption are particularly affected. Consequently, the consumer climate was also slightly down. In contrast, economic prospects have become more optimistic. The findings of the September survey given below do not reflect the outcome of the recent elections, since the survey was completed just before the date when the elections were held.”

At the present time it is very hard to assess what the impact of Germany’s election stalemate will be on the economic climate moving forward.

More Things Finnish

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Just a couple of background papers on Finland. Firstly this working paper from Jaakko Kiander “The Evolution of the Finnish Model in the 1990s: From Depression to High Tech Boom“, and a paper from Francesco Daveri and Mika Maliranta: Aging, Technology and Productivity (which you can find in this working papers list).

You can find the abstract below the fold.
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