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". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. 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".

Is Spain Getting Left Behind?

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This not unreasonable question was asked today by Ralph Atkins on the FT’s Money Supply Blog:

The economic news from Spain has turned more worrisome. Eurozone purchasing managers’ indices for manufacturing showed the region’s recovery humming along nicely (December’s final index reading at 51.6, up from 51.2 in November, was in line with the preliminary estimate released last month).

But Spain is heading in the opposite direction. Activity in its manufacturing sector continued to fall, and the pace of contraction in the fourth quarter was faster than in the third quarter, according to Markit, which produces the survey. Spain’s manufacturers are also reporting far steeper job losses than in other large eurozone economies, according to Chris Williamson, Markit’s chief economist.

Ralph certainly has a point here. Spain’s December PMI results are shocking, it posted 45.2 in December, just below the 45.3 posted in November, indicating a still substantial rate of contraction. Even more to the point this is the third month running where Spain has turned in the worst reading of any of the 26 countries included in JPMorgan’s Global Manufacturing Survey. Continue reading →

Global Output Continues Its Rise As Asian Manufacturing Surges Ahead

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Global manufacturing industry ended 2009 on what seems to be a fairly positive footing, with the JPMorgan Global Manufacturing PMI posting a comfortable 55.0 in December, up from 53.7 in November, significantly above that critical 50 growth/contraction dividing line. December’s was the highest reading for 44 months, and the headline Global PMI has now remained in expansion territory for each of the past six months. So this is not a fluke, and growth is being sustained, even if it is not evenly distributed, and is far from being that much hoped for “V” recovery. But of course, what happens to all of this as the stimulus is gradually withdrawn?

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That “Staggering” Greek Deficit Continues To Stagger Onwards and Upwards

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Only a few short weeks ago the financial and economic world declared itself staggered to learn that the 2009 Greek fiscal deficit was going to come in at 12.7% (mind you, as the conservative Dutch newspaper NRC Handelsblad pointed out, there was plenty of evidence of what was coming available long before for those who really wanted to look into the matter). Well, now get ready to be staggered again, since according to a spate of articles that have started appearing in the Greek press, the number which only so very recently had us all reeling in shock may be on its way up again, if only by “a few tenths of a percentage point”. How many “tenths of a percentage point?” Well at this stage this isn’t exactly clear. On 28 December the web portal Capital.gr reported (in Greek, but try Google translator):

“Temporary (cash) data from the flow of government revenues have fallen quite substantially when compared to those of the last quarter of 2008,… not only data for October-November, but the first indications for December show that the delay in the flow of public tax income (mainly) is important. The Treasury has also begun to “mumble” about the possibility that the deficit in 2009 is going “to close a few decimals above the anticipated 12.7 %…”. How many decimals? This is unknown at present, although the General Accounting Office (YPOIK) displayed some optimism that the gap will not exceed 0.1% – 0.2% of GDP (ie the deficit will remain below 13%) even if some do not hesitate to speak of a deficit of over 13% of GDP.”

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Ten New Year Questions For Paul Krugman

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I have an interview with Paul Krugman in today’s edition of La Vanguardia (in Spanish). Below I reproduce the English original. As will be evident, there are many topics about which Paul and I are far from being in complete agreement. But on one topic we are in complete harmony: the diffficult situation which now faces Spain, the need for internal devaluation, and the threat which continuing inaction on the part of Spain’s current leaders represents for the future of the entire Eurozone.

One

Edward Hugh: In your NYT article “How Did Economists Get It All So Wrong”, you state what I imagine for many is the obvious, that few economists saw our current crisis coming. The Spanish economist Luis Garicano even made himself famous for a day because he was asked by the Queen of England the very question I would now like to put to you: could you briefly explain to a Spanish public why you think this was?

Paul Krugman: I think that what happened was a combination of two things. First, the academic side of economics fell too much in love with beautiful mathematical models, which created a bias toward assuming perfect markets. (Perfect markets lead to nice math; imperfect markets are a lot messier). Second, the same forces that lead to financial bubbles – prolonged good news tends to silence the skeptics – also applied to economists. Those who rationalized the way things were going gained credibility until the day things fell apart. Continue reading →

Hungary’s Economic Correction Still Fails To Convince

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“Hungary’s potential economic growth should be 2 percentage points over the corresponding EU figure in order to ensure convergence”.
Prime Minister Gordon Bajnai, speaking in London in October

Two contrasting pieces of news about Hungary’s economic plight have caught my eye over the last week. In the first place, and in an evident sign of the times, retail sales reportedly fell at their fastest annual rate in over ten years in October, whilst secondly, and more surprisingly, I learnt that Hungary’s economic-sentiment index rose to its highest level since October last year, when the gale force wind sent by the fall of Lehman Brothers engulfed the country. How can this be, I thought? These two pieces of information would, at least on the surface, seem to be pretty contractictory, with the former suggesting the deepest recession in living memory is getting even worse, while the latter seems to add backing to government claims that the worst is now behind them. Continue reading →

China’s Looming Demographic Problem Moves Steadily Up Over The Radar

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As Israeli blogger “Nobody” points out for us,the Economist has been giving increasing coverage to global demographic issues of late, and this week it is China’s problem that has caught their eye.

As the Economist point out, the impact of so many years of one child per family policy is going to be significant, and while changing it now will be too late to avoid short term damage, in the longer term such a change is essential, if the country ever wants to return to some kind of structural stability.

SINCE the 1970s China’s birth rate has plummeted while the number of elderly people has risen only gradually. As a result its “dependency ratio”—the proportion of dependents to people at work—is low. This has helped to fuel China’s prodigious growth. But this “demographic dividend” will peak in 2010. China’s one-child policy will keep birth rates low, but as life expectancy continues to increase, so will the dependency ratio, reducing the country’s potential for growth. The government could yet salvage the situation by loosening its one-child policy. More children would increase the dependency ratio until they were old enough to join the workforce, but reduce labour shortages in the long term.

Again, no one really knows what the present Chinese TFR actually is. The US census bureau have just revised down their estimate to 1.5 from 1.8, but many internal studies put it at nearer 1.3, which, if accurate, is bound to produce a major structural distortion in the population pyramid. The economic consequences – for the whole planet – are also bound to be significant, as “Nobody” points out:

Meanwhile, given the general propensity of China to rapid economic growth and no less dramatic deceleration of its population growth (the workforce will stop growing pretty soon actually), the next superpower is about to transform itself into a huge vacuum machine sucking off labor surpluses from around the globe. Inside China labor shortages will develop and wages shoot up pushing labor intensive industries out of China and generating demand for these products from outside China. In short, after a decade or something, the global economy, and even more so the economies of the third world, may get a friendly push forward from the world’s next superpower, and a very massive one on that occasion.

What China’s demographic deficit has in store for all of us a decade or so from now is actually far from clear, but one thing is certain, it will be a roller coaster ride. Get ready to fasten your seatbelts.

Update

Quite coincidentally, a new blog was born yesterday – the anarchist banker – written by a young Portuguese economist who is a unabashed fan of Fernando Pessoa. His first post reviews a paper – The End of Chimerica – written by Niall Ferguson and Moritz Schularick.

For the better part of the past decade, the world economy has been dominated by a world economic order that combined Chinese export-led development with US overconsumption. The financial crisis of 2007-2009 likely marks the beginning of the end of the Chimerican relationship. In this paper we look at this era as economic historians, trying to set events in a longer-term perspective. In some ways China’s economic model in the decade 1998-2007 was similar to the one adopted by West Germany and Japan after World War II. Trade surpluses with the U.S. played a major role in propelling growth. But there were two key differences. First, the scale of Chinese currency intervention was without precedent, as were the resulting distortions of the world economy. Second, the Chinese have so far resisted the kind of currency appreciation to which West Germany and Japan consented. We conclude that Chimerica cannot persist for much longer in its present form. As in the 1970s, sizeable changes in exchange rates are needed to rebalance the world economy. A continuation of Chimerica at a time of dollar devaluation would give rise to new and dangerous distortions in the global economy.

I would just note in passing that the China-United States nexus was not the only export-lead/excess consumption duet we just left behind, there was the Sweden-Baltics/Ukraine one, the Germany-Southern Europe one, and the Japan-RoW one (rest of the world). As we wave bye-bye to one era, it is just worth noting than we don’t seem to have a very clear idea of what the one which lies ahead may look like.

Anyway, thanks to the anarchist banker blogger for drawing this all to our attention. As the author himself admits, posting may be infrequent (anarchic?), but they should always be worth the read.

Marching Separately But Striking Together Over At the ECB

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Well first of all, a very Happy Xmas to any of you foolish enough to be reading tiresome posts like this one on such a special day as this – a tiresome post which simply starts by going into some nitpicking follow-up detail to my earlier post on ECB liquidity and monetary policy separation – That Which The ECB Hath Separated, Let No Man Join Together Again! – but then starts to explore the rather more torrid topic of what exactly Latvia’s Regional development minister Edgars Zalāns might have had in mind when he told the Delfi news portal that the Latvian agreement with the IMF and other lenders could “easily be amended given its shaky legal grounds” (there, that made you hiccup-back-up some of your xmas-pud, now didn’t it?) or what Prime Minister Valdis Dombrovskis might have been getting at when he warned that “We will just go bankrupt if we observe all legal norms.” Continue reading →

Latvia Is Back In The News, And Expect More To Come

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The Latvian government is getting nervous about the level of lending coming from Swedish banks. According to the Financial Times, “Latvia’s prime minister has warned Swedish banks they risk choking off recovery in the Baltic state’s crisis-hit economy unless they resume lending”. The Latvian authorities are complaining, it seems, that banks such as Swedbank and SEB, which dominate the Latvian market, have reined in credit as they struggle to contain rising bad loans amid the deepest recession in the European Union.

“The . . . abrupt stopping of credit is a very problematic issue,” said Valdis Dombrovskis, the prime minister. “We expect Swedish banks to start [lending] again. “Of course you can say that Latvians were borrowing irresponsibly but to borrow irresponsibly you need someone to lend irresponsibly,” he said. “We had very easy credit in a very overheated economy. Now we have almost no credit in a very deep recession.”

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Why The Ratings Agencies Are Right And George Papaconstantinou Is Wrong

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The Greek government is having a hard time of it at the moment. Only today the Finance Ministry issued a statement that it was ready to “intensify its efforts to restore the viability of fiscal and economic trends in Greece” in response to the Moody’s decision to downgrade the country’s credit rating, while just one week ago the Finance Minister was accusing Standard & Poor’s of failing to “assess correctly” new moves by Athens to tackle its swollen budget deficit – echoing a similar response from Spanish Prime Minister José Luis Rodriguez Zapatero. George Papaconstantinou’s critical outburst followed the earlier downgrade decision by the rating agency of the nation’s long-term sovereign debt. Today, the Greek Government got the answer they should have expected, since Moody’s effectively followed the path of the other two main agencies (Fitch already have the Hellenic Republic on BBB+) and downgraded Greece to A2 from A1. The move means Greek debt is one step closer to being cut off from eligibility as ECB collateral, since Moody’s have put the rating on negative outlook, which means they consider a further downgrade more likely than an upgrade over the next twelve to eighteen months, while the ECB are scheduled to revert to the pre-crisis criteria of only accepting Sovereign Bonds which retain at least one A- from one of the main ratings agencies as collateral for lending. Certainly Lucas Papademos, ECB vice president, said last week that the ECB would not change plans to tighten its collateral rules in December 2010 simply to accommodate Greece. Continue reading →

Podcast On The Present State Of The Spanish Economy

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Caveat emptor, Spanish based blogger Mathew Bennett and I have started doing podcasts, and you can find the first one here. At this point in time we are concentrating on Spain. Among the points we cover are:

– How does what’s happened in Dubai affect the economic situation in Greece, Spain and the EU?

– Are left- or right-wing political parties causing or solving more problems during the recess…ion?

– Will the Germans, the French or the EU be able to bailout several European countries at the same time if there are several sovereign defaults?

– Are the ECB and the EU trying to pre-empt the IMF in Greece and Spain?

– What are the underlying structural problems with the eurozone funding plan?

– Why is the ECB channelling funds through monetary and financial institutions to buy up government debt in the eurozone?

– How the ECB is trying to use a carrot and stick approach with eurozone governments to control national government deficits and public policy?

– Is IMF intervention now inevitable in Greece?

– Will the ECB will try to play politics and pressure Zapatero in the run up to the 2012 general elections in Spain?

– Is the situation in Spain similar to the situation in Greece?

– Why don’t Zapatero and the Spanish government seem to be reacting?

– Why is there no coherent plan to get Spain back on its feet?

– What is going on with Spanish banks?

– Will unemployment in Spain reach 25% by the end of 2010?

– Which is more important in Spanish economics: image or hard data?

– Will it be possible for the Spanish government to reduce the deficit from over 10% of GDP to less than 3% by 2012 or 2013?

– What state will the Spanish economy be in by the end of 2010?

– What will happen to Spain when the ECB raises eurozone interest rates?

– Might Spain soon be in a worse economic position than Greece?

– What are the ratings agencies trying to achieve with their warnings on Spain?

– Why won’t the Spanish government tell the Spanish people the truth about what’s going on with the Spanish economy?

РIs Jos̩ Luis Zapatero really the biggest problem for the Spanish economy right now?

Obviously many of these points run parallel to those raised in my recent post “Why Standard and Poor’s Are Right To Worry About Spanish Finances“, but maybe, if you have 40 minutes or so to spare, you might enjoy listening to them being made in Podcast format.