Tag Archives: Economics

The French Consumer Is Alive And Well

Posted on by

Some good news on the economic front to counter all that bad news on the social one. The French economy grew at an annualised rate of 2.8% in the third quarter of 2005 (or by 0.7% over the prebious quarter). Driving this growth: strong spending by French consumers. At this rate the French economy will be growing at a faster rate than the UK one in 2005.

France’s economy expanded at the fastest pace in more than a year in the third quarter, suggesting European growth is accelerating and providing central bankers leeway to raise interest rates. Gross domestic product increased 0.7 percent from the second quarter, when it rose 0.1 percent, the government said today in Paris.

In the euro region, where France accounts for about one- fifth of the economy, growth probably accelerated to about 0.4 percent in the third quarter from 0.3 percent the previous three months, the European Commission said Oct. 13. This quarter, the economy may expand 0.6 percent, it said. French consumers stepped up spending as oil prices retreated from a record and government-subsidized hiring pushed down unemployment from a 5 1/2 year high.

Getting Old Before Getting Rich

Posted on by

This is definitely about to become the new ‘meme’ about China. Actually it is reasonably valid. China’s ‘demographic shocks’ which come principally from the great famine produced at the time of the cultural revolution, and then from the subsequent one-child policy, are undoubtedly going to have significant consequences. Today UK Tory front bench spokesman on Trade and Industry David Willetts has a piece on the topic in the FT (subscription only unfortunately):

One reason for China’s stellar growth is that it is at a demographic sweet-spot. The massive reduction in infant mortality achieved by China’s barefoot doctors in the 1960s and 1970s is now yielding a surge of young workers – an extra 10m working-age adults per year. China’s challenge now is just to absorb them into the labour force. Add to that the massive population flow from the countryside and you can see why wages are low and growth is so fast. There are few pensioners and there are not many children either. The rabbit is indeed in the middle of the python.

If you are frustrated by your inability to read more, and are willing to hack it through a more academic paper on the same theme, then can I recommend “Demographic Dividend and prospects for economic development in China” by Wang Feng, of the University of California Irvine and Andrew Mason, of the University of Hawaii. The paper was presented at the recent (August 2005) UN experts meeting on ageing.

Update: New Economist has a fuller version of the Willets piece online.

Currency Volatility and Hungary

Posted on by

As I noted last week, Hungary now seems to have lost the ‘anchor’ of a 2010 eurozone entry expectation. (see also this, and this ). As I am also indicating currency markets may well be driven at the moment by a combination of interest rate yield variations and expectations of future movements, and this may lead to increasing volatility.

Now, if we assume that between the relatively calm waters of ‘eurozone closing’ and the choppy waters of swimming alone in the open sea there must be a break point somewhere, it might not be unreasonable to ask whether Hungary may not be presently in danger of crossing that imaginary thin red line? With Hungarian interest rates currently at 6% clearly growth-needs indicate a measured pace of reductions (particularly with core inflation around 1.5%) , but CA deficits and government funding deficits in the 6% to 7% range anything substantial in the way of rate reductions looks problematic. This is why ‘slipping anchor’ on the euro-docking objective could turn out to be especially problematic in Hungary’s case, in particular given the high levels of non-forint-denominated borrowing, and the potential for secondary ‘balance sheet’ effects.

More On Exchange Rates and Policy Rate Differentials

Posted on by

Morgan Stanley’s Stephen Len is obviously on the same page as I am about how the rising interest rate differential between Europe and the US is likely to drive short term currency movements:

Policy rate differentials are especially important now for the currency markets, and it pays to focus on central banks these days.

Reason 1. Global monetary paths are diverging, not converging. Among the major economies, only the US has an output gap small enough to support tightening. I doubt either the ECB or BOE will be in a position to tighten rates this year. Many now understand quantitative easing must be terminated by early next year, but no one has proposed actually raising interest rates from zero. Therefore, monetary paths are diverging, with the rest of the world having trouble keeping up with the Fed. This makes the Fed much more important for the USD than in ‘normal’ times.

Reason 2. Global equity portfolios are likely to be out of balance. Since 2003, there have been massive equity flows into Euroland and Japan. Since much of these flows occurred when the USD was still in structural decline, and some of the outflows reflected fears of a USD crash, it makes sense to suspect hedge ratios are quite low on these equity outflows. With the rise in the FFR and resilient dollar, the cost of running these currency exposures is increasingly unjustifiable. The equity market cap-weighted short-term interest rate differential between the US and the major markets is now around 180 bp, and still rising. If the Fed takes the FFR to 5.0% by end-2006, the differential will reach levels last seen in 2000.

Issing Gives Inflation Warning

Posted on by

More evidence today of how the Central Bankers and their economic advisers are doing their best to sound the inflation alarm. This time it is ECB Chief Economist Otmar Issing:

European Central Bank Chief Economist Otmar Issing said a surge in oil prices may lead to higher-than- expected inflation in 2006, as the bank edges closer to raising interest rates for the first time in five years.

“Rising oil prices are not only affecting current inflation rates but they’re also overshadowing next year,” Issing said in an interview on Oct. 14 at a banking event in Frankfurt. “It can’t be ruled out that risks for price developments will deteriorate that much over the medium term that we might have to expect the annual inflation rate to slightly exceed 2 percent.”

The comments were the second in three days suggesting the bank may raise its inflation estimate of 1.9 percent for 2006. The bank projects the level this year at about 2.2 percent. ECB President Jean-Claude Trichet said at a briefing after the annual meeting of the Group of 20 industrial and developing near Beijing yesterday that he can’t exclude inflation being “over and above” the bank’s 2 percent ceiling.

My view: this very much depends on the evolution of oil prices. There is little evidence of any strong impact on ‘core prices’ at this point, there is plenty of evidence of growth weakness. There is thus little justification from a purely eurozone perspective for any short term increase in interest rates, and certainly no justification whatsoever in the case of Germany.

Growth and Inflation in the UK

Posted on by

Following-up on my post earlier this week on interest rate policy I see Graham Searjeant has a piece in the Times today arguing that Mervyn King has the balance wrong between fighting inflation and stimulating growth.

In a sense I think that Searjeant is not entirely fair when he says:

Growth has become even more vital to support an ageing population. The Governor may deny responsibility. The rest of us cannot.

Evidently this is the case, but equally I am sure that Mervyn King is well aware of the fact. However since it is long term *sustainable* growth we are talking about here, and since I don’t doubt this is what he (King) is aiming at, even if his efforts, and the reasoning behind them remain obscure (and here I do think we can blame King) I really don’t think Searjeant’s point sticks in the way he wants. The issue is whether short-term growth is being needlessly sacrificed, and if so, to what?

Short-term growth is being sacrificed IMHO to the god of global imbalances, and the campaign to correct them, and it is these, and not inflation, which are King’s real target. (continued).
Continue reading →

UK Jobless Upward Trend Continues

Posted on by

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.
Continue reading →

China: Eating our Lunch or Taking us to Dinner?

Posted on by

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?

Posted on by

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.
Continue reading →

Hanging In The Balance

Posted on by

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.