Tag Archives: Economics and demography

Human Capital And Trade Deficits

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Michael Mandel had an interesting take on the US trade deficit in Business Week earlier this month (btw: he also has a weblog).

His opinion is that the US trade deficit isn’t as big a deal as people often think. One of the reasons: that the ongoing import of human capital into the US (which of course isn’t measured in the trading accounts ledger) more than compensates for the deficit:

“But get with the 21st century, folks. The trade in goods and services represents only one part of America’s connection with the rest of the world. What’s equally important — and what the trade numbers miss completely — is the incredible flow of people into the country. Each year, the U.S. receives about 700,000 legal immigrants, as well as a host of temporary skilled workers and undocumented immigrants.

Now I wouldn’t go down the same road as Mandel with the deficit question per se, but he obviously raises an interesting point here – and one, of course, that immediately strikes a chord with me.
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European GDP Numbers

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Provisional GDP numbers for eurozone countries in the first quarter are out today. The German economy surprisingly bounces back, whilst Italy is now officially in recession after two quarters of contraction. Also worthy of note is that the Dutch economy contracted slightly in the first quarter, which may have some implications for the forthcoming constitution referendum there.
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Inflection Point?

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Earlier this month, when Edward wrote

The alarm shot was given by Dalls Federal Reserve President Robert McTeer when he declared in a speech in New York last week that whilst overseas investors now ?finance? the US current account gap, ?theoretically some day that process will come to an end, the flows will turn against us and there will be a crisis that will result in rapidly rising interest rates and a rapidly depreciating dollar.? This prospect, which currently seems remote, should not be taken lightly. It is real, and it is there.

I noted that this prospect had been around for a long time (close to ten years at least) and asked what would constitute a sign that this time might be different.
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Germany’s Jobs Woes Continue

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With unemplyment currently running at a five year high of 10.7%, yesterday’s news that GM/Opel and KarstadtQuelle are to reduce employment further (‘Germany Loses 15,000 Jobs in a Day’ was the Bloomberg headline) could hardly come at a worse time. There is plenty of evidence of the long promised restructuring, but little of jobs growth. ‘Jobs churn’ US style does require the two halves of the equation to at least balance.

The future does not look inviting. The FT puts it as follows: “KarstadtQuelle?s problems have been exacerbated by the extreme reluctance of Germans to increase consumer spending.” Actually I have been arguing that this ‘extreme reluctance’ isn’t simply shyness, and that there are clear structural reasons why this is the case.

At the same time continued downward revisions on the global growth outlook following the oil ‘spike’ mean that export driven economies like the German one can expect little relief on the global demand front (ECB president Jean-Claude Trichet is the latest to warn on this front, changing the banks emphasis earlier in the week to slow growth rather than inflation as the main concern).

Again – in a kind of ‘euro lament’ – Bloomberg sums up a rather bleak week week like this: “At least eight reports in the past week signaled slowing growth in the $9 trillion euro economy. The pace of expansion at manufacturers and service companies cooled, retail sales declined and industrial production in the region’s three biggest economies dropped more than economists forecast”.

To put all this in perspective, I think it is worth remembering that only six months ago most commentators were anticipating that we would now be entering the vigourous upswing of that long awaited recovery. As it is almost all the indicators seem to be pointing towards negative.

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.

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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Peek Data

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It’s sometimes interesting to give some thought to the things we believe, and don’t believe, about people. For some George W Bush is one of the most ruthless US Presidents we have seen in years, for others he is apparently the perfect gentleman, playing exactly by the rule book:

Financial markets may be all ears on Thursday night for hints about August job growth from President Bush, but they will be listening in vain since he plans to purposely avoid an early peek……………

“While the president typically sees the jobs data the evening prior to its release, he will not receive the jobs numbers tonight, nor will any of the people who are working closely on his speech,” said White House spokeswoman Claire Buchan.

Instead, Bush will wait with everyone else until Friday to see the hotly anticipated news.

The US Labor Department sends the data, due out at 8:30 a.m. today (Washington time), to the president’s economic advisers the night before. Normally there is not much importance attached to this, but this time clearly there might have been. I didn’t see the speech, but from the reports I’ve read, there was no special mention of the jobs state of play. Also, interestingly, there seems to have been no special reaction in the financial markets to this absence: they clearly see George as a gentleman. Whatever the numbers finally are (and we will still have to wait till later today to actually see them) I’m sure everyone will read the sub-text the way they want to, although clearly glowing numbers (which I personally am not anticipating) would give the most knee-jerk Bush critics a rather harder time.

Economic Consequences of Spain’s 11M

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Italian consumer confidence has remained near a 10-year low in March in the wake of the Madrid terrorist bombings. In fact the bombings may have hurt sentiment in Italy more than the Sept. 11 attacks on the U.S. according to a statement from the government-funded Isae institute. The confidence survey, which was carried out between March 1 and March 12, showed that consumers who had been growing more optimistic about the prospects for lower inflation and improvements in unemployment turned pessimistic in the two days after the bombings. In fact while the 22-year-old Italian consumer confidence index touched its all time record low of 93.7 in April 1993, March was the third month in a row that the index has been below 102, the last time it was that low being in February 1994.
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Korean Companies Outsourcing in Russia

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“Russia is our No.1 destination for technology outsourcing,” says Cha Dae Sung, who is in charge of “global technological cooperation” for Samsung.

And Samsung is not alone. LG Electronics, Daewoo Electronics, and hundreds of smaller companies rely heavily on Russian engineers, who labor either from Korean suboffices in Moscow or in the office towers of Seoul. “There’s an enormous pool of scientific and engineering talent we can tap into in Russia,” says Song Yong Won, Russia specialist at the state-run Korea Institute of Science & Technology.

Read the whole thing.