Category Archives: Economics

FDI in France and Germany

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John Snow obviously had had sight of the document ( and here pdf ) when he went round lecturing us that Europe may become a non-favoured environment for US FDI:

“Foreign investment in France and Germany fell sharply in 2004, reinforcing concerns that inflexible labour practices and weak domestic demand are driving investors elsewhere.

In France, inward investment almost halved from $43bn (?35.44bn) to $24bn, according to figures released yesterday by the Organisation for Economic Cooperation and Development, the group representing the world?s most industrialised countries“.

But as much as the facts, the reasons behind the facts are interesting.

“Mark Zandi, chief strategist at Economy.com, the consultants group, said the data showed US companies the main source of direct investment funds in 2004 were spending their cash piles mainly on Asian investments.

?US companies are attracted to Asia partly because the currencies remain competitive, but also as low cost bases for production destination and as growing markets in their own right,? he said.”

Actually there is little realistic way that the EU or the US can reasonably expect to compete with China for FDI on China’s own terms, we both have to find another way.

More Bad News From Italy

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Italy’s crisis rumbles on, and I don’t expect it to get much better any time soon. This week we learn that Italian retail sales fell sharply in April,

After adjustment for seasonal factors, retail sales in April were down 0.8 percent on the previous month ? the steepest month-on-month fall since May 2004. Compared with a year earlier, sales were 3.9 percent lower – the sharpest decline in the series? history.

and that consumer confidence in Italy fell in June to its lowest since last September:

The ISAE institute reported that its consumer sentiment index fell to 102.9 in June, from 104.3 in May. The index has now fallen in six of the past eight months.

ISAE noted that the index measuring expectations about the general economic situation declined to its lowest level for ten years, largely due to concerns about job security.

Also Italy posted a trade deficit with non-EU countries of 487 mln eur in May compared with a 109 mln surplus a year earlier:

Exports rose 10.3 pct year-on-year in May to 10.647 bln eur, while imports rose 16.6 pct to 11.134 bln.

In the five months to May, the trade deficit widened to 5.225 bln eur from 1.732 bln, as exports rose 7.6 pct and imports increased 15 pct.

Spanish Hotel Prices

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Hotel prices in Spain remained in May at 2004 levels according to a National Statistics Institute (INE) report today. This could be a significant reading if price inflation in fact is disappearing from the sector. As the report notes, most of the recent increase in business has come from Spanish nationals.

Spain is running a large trade deficit. Tourism is one of the key ‘exports’. The combination of a high euro, and continuing domestic inflation has been hitting this badly. The non-increase is obviously a measure of the pain reading. Hotel and tourism prices have been rising at an annual rate of 5% plus since the start of the century.

Now For Some Real Medicine

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Paul Krugman has on occassion suggested ironically that Bagdad was only for the boys, that the ‘real men’ would go to Teheran. Well here’s another of those ‘real men’ in the economics field: Paul Betts writing in the FT, with one of those delicious ‘wingnut’ arguments:

“A dose of sado-monetary policy from the European Central Bank could force long overdue structural reform in Europe. Rather than follow Sweden’s example by cutting interest rates, the ECB should consider pushing them higher.

Politicians, especially in Berlin and Paris, would hate it. Wolfgang Clement, Germany’s finance minister, applauded the Swedish decision as showing how a central bank could support general economic policy without upsetting its price stability strategy.”

Turkey Grows and Grows

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One of the few real IMF success stories, the Turkish economy continues with what Serhan Cevik calls its spectacular normality:

The Turkish economy is now in its fourth year of uninterrupted growth, with an average real GDP growth rate of 7.5% per annum. Indeed, the trend growth rate surged from 3.9% in the 1990s to 5.8% in the post-crisis period and to an impressive 7.8% last year. And we project 7.2% growth for Turkey in 2005 and 6.8% next year, compared with average OECD growth rates of 2.6% and 2.8%, respectively. Obviously, this is an unusual performance for a country that had long failed to keep the economy close to its potential on a sustainable basis. In fact, the growth rate of real per capita GDP decelerated from 2.3% per annum in the 1970s to 1.7% in the 1980s and then to 1.3% in the 1990s leading to the 2001 crisis. However, with prudent fiscal and monetary policies and structural reforms, real per capita income increased by 18.9% on a cumulative basis in the last three years, and should remain on an above-trend growth trajectory in the coming years.

Germans Cut Back On Credit

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This news to the effect that German consumers actually reduced their outstanding debt is deeply significant in my view. What it reflects is what needs to be analysed:

“German private households ignored the attractions of historically-low interest rates and for the first time paid back more money than they borrowed last year.

The net credit repayment reported by the Bundesbank, Germany’s central bank, on Monday reflected the high level of consumer insecurity in Europe’s largest economy. It contrasted with the strong credit growth in other European countries, which has boosted consumer spending.

?There is nowhere else where a country comes even close to such weak growth rates,? said Julian Callow, economist at Barclays Capital.“

Italy’s Deficit Also Balloons

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Italy posted a trade deficit with the rest of the world of 1.354 billion euros in April, widening sharply from a deficit of 155 million euros in the same month of 2004, national statistics office ISTAT said on Thursday. The deficit also increased from March, when it stood at 845 million euros.

Trade with European Union countries alone showed an April deficit of 368 million euros, compared with a 109 million euro deficit in April last year.

A 5.854 billion euro cumulative trade deficit with the rest of the world in the first four months of this year was the largest Jan-April deficit since at least 1991.

Italian imports from the rest of the world rose 6.5 percent year-on-year in April, far outstripping a 1.6 percent increase in exports. Imports from the EU in April were up 1.8 percent on the year, while exports were flat compared with the year before.
Source: Reuters via NTC Research

I don’t think I am being too alarmist if I say that something nasty is happening to the international competitiveness of Spain, Italy, Greece and Portugal.

That Other Turkey

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Far away from the hassle and turbulence of Turkey’s EU membership application is that other Turkey, the one that is growing and expanding, the economic Turkey. This time it’s cars:

“With a cluster of carmakers and part suppliers, the Turkish automotive sector has reached a critical mass and become an integral part of the global network of production bases. The country?s geographic location and demographics make it an ideal production (and distribution) centre for the mature European market as well as emerging markets in the Middle East and North Africa. Not surprisingly, the annual growth rate of automotive exports accelerated from 6.7% in the 1980s to 30.8% in the 1990s and to 42.6% in the last five years. Accordingly, Turkey now exports over US$10 billion worth of motor vehicles and parts to 170 countries, and there is no sign of a slowdown in the near future. The sector raised its international sales by 53.7% in 2004 and 43.9% in the first five months of this year, generating 20% of the country?s total export earnings. “

Spain’s Balance of Payment Deficit

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I don’t have time to go into this much further right now, but Spain’s Current Account Deficit is ballooning enormously. According to figures realesed by the Bank of Spain today, Spain?s trade deficit increased to 6.56 billion euros in March. The deficit was up from 4.0 billion euros in the same month a year earlier. The full report from the Bank of Spain shows that:

El d?ficit acumulado de la balanza comercial se elev? en los tres primeros
meses del a?o hasta 14.736,5 millones de euros, desde 9.734,8 millones en igual per?odo del a?o anterior. En el per?odo enero-marzo, las exportaciones de mercanc?as aumentaron un 1,7%, en tasa interanual, mientras que las importaciones crecieron a un ritmo sensiblemente mayor, un 12,3%.

ie that the accumulated deficit on the commercial balance in the first 3 months rose from 9,734.8 millon euros, to 14,736.5, (an increase of 51% y-o-y). Exports increased 1.7% whilst imports increased 12.3%. Last year Spain had a trade deficit of 5% GDP, at this rate we could be heading for the 7-8% range in 2005. This *is* unsustainable, but no-one has any idea what to do about it.