Tag Archives: economy

Italy’s Supply Constraint

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The OECD estimates the current potential capacity growth rate of the Italian economy at 1.25% a year. Actually I suspect even this very low number is over-optimistic. Growth since 2002 has been as follows: 2003 – 0.1%: 2004 – 0.9%: 2005 – 0.1%. To be sure forecast growth for this year is somewhat higher, at 1.4%, and optimists are expecting this to be more or less repeated next year. But I suspect this outcome is unlikely simply because the global economy now seems to be slowing (and in particular the ever important US economy),so the strongly advantageous situation of 2006 is unlikely to be repeated, while next year the Italian government has promised to introduce an important package of spending reductions which are bound to negatively affect growth, at least in the short term..

But why is potential growth capacity in Italy so low?
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Visit Hungary Now!

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Because they devalued the forint this summer, so everything is now about 7% cheaper.

Well, they didn’t actually devalue it. No. I mean, that would imply there had been a… devaluation. Ha ha, how silly. No, what happened was that the Bank of Hungary moved the band in which the forint was allowed to float freely. Whereupon the forint freely floated down from around 250/euro to more like 275/euro. So, it was a sudden fast downward change in the value of the currency caused by central bank action. Which is not a “devaluation” at all.

(The forint lost about 10% of its value in a month; you can see the graphic here. It has since clawed back about a third of that loss. Still, a Euro will go about 7% further than it would in May, and about 10% further than in March.)

Nobody seems to have paid much attention, but I think there are some points of interest here.
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A pro-dismal bias in economics?

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In a comment to his earlier assessment of the OECD’s new economic outlook, Jasper is raising an interesting, almost philosophical question that I think is worth a discussion in its own right. He claims that –

Economists should study the economy so they can finetune it to suit the needs of the people living inside this economy. They seem to be studying the economy so they can promote policies that finetune the people to suit the needs of the economy.

I would argue that Jasper’s statement correctly captures the sentiment, but not the rationalised opinion, among a growing part of the European population. The disconnect is palpable. So the question seems to be whether our governing institutions (and those trying to capture the essence of reality for them) are not able to accurately understand the people’s true preferences, whether our institutions do not allow an accurate externalisation thereof, or whether this is not simply a matter of lack of understanding.
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Why France MUST Reform – MUST, I Tell You!

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Since the withdrawal of the CPE and the resulting collateral damage to Dominique de Villepin, not to mention Nicolas Sarkozy’s unexpected appearance as a unity figure at the height of the crisis, it’s rapidly being promulgated as conventional wisdom that France “is ungovernable”/refuses to “reform”/cannot be “reformed”. There is only one problem with this discourse, very popular in anglophone leader columns and the like, which is that it’s nonsense.

It’s quite often been raised here on AFOE that the French economy isn’t actually in trouble. Growth, although not great, is ticking along, inflation is controlled, unemployment is higher than the UK but lower than Italy or Germany, and the demographics (as Edward Hugh will no doubt point out) look a lot better than many other countries. Certainly, there’s more youth unemployment than one might like, but almost all the figures for this are wildly misleading. The percentage rate of unemployment in the 15-24 years age group looks scary high, but is actually a very small percentage of that group–because most of them are in education or vocational training of some form and hence not part of the labour force. Unemployment as a percentage of the age group is rather lower than the national rate and not much different from that elsewhere in Europe. (Le Monde ran a useful little chart of this in a supplement yesterday that doesn’t seem to be on the web.) Much – indeed most – of the difference in employment growth between France and the UK in recent years has been accounted for by the UK government going on a hiring binge.

So why the crisis atmosphere? More, as ever, below the fold..
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Italy Had Zero GDP Growth In 2005

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I am sure some people must sometimes feel I am exaggerating when I try to explain the rather dire straits which I feel the Italian economy has fallen into. If you are one of those people I would ask you to take a good look at the latest data release:

Official statistics published on Wednesday showed Italy experienced zero growth in 2005 underlining the dire state of the country’s economy and dealing a blow to Prime Minister Silvio Berlusconi’s election campaign…..Istat, the official statistics institute, said that the weak data contrasted with the US’s 3.5 per cent, the UK’s 1.8 per cent, the 0.9 per cent of Germany and Spain’s 3.4 per cent.

And it’s not as if 2005 was a bad year for the global economy generally, the world economy steamed ahead at a rate of around 4.25% last year, driven by systematic development in India and China and strong growth in the US. Italy has now had an annual growth rate of around 1% per annum over the last decade, and I see no good reason to justify the expectation that this is going to perk upwards sharply anytime soon.

Latin America’s First Woman President

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A continent renowned for its supposed machismo seems about to get its first female president, Michelle Bachelet. This in itself is interesting, but equally interesting is the divide that can be seen across the continent between a more or less pragmatic group of politicians – Bachelet herself, Kirchner in Argentina, Lula in Brazil, or, to take a name not widely mentioned, Medellin’s new mayor Sergio Fajardo Valderrama, and the more “mediatic” group – Hugo Chavez, Evo Morales and Commandante Marcos.

“Although originally from the hard-leftwing of Chile’s Socialist party, Ms Bachelet is expected to pursue broadly the same mixed economy policies as President Ricardo Lagos. She would inherit sound public finances and an economy that grew by more than 6 per cent last year. Mr Piñera is also an economic moderate, unlikely to change significantly the direction of Latin America’s most successful economy.”

Of course, my explanation for this very striking differential can be found here.

China: 20% Bigger Than We Thought?

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The Chinese economy could be 20% bigger than previously estimated. Since almost everything about Chinese data should have ‘best guess’ status, this probably hardly comes as a surprise, and indeed the estimate itself should be treated with the customary caution, but yes, that is the conclusion which is apparently being drawn from the latest national economic census conducted by the National Bureau of Statistics earlier this year.

A spokesman for the National Bureau of Statistics said on Tuesday it will announce the findings of the census and its impact on the calculation on gross domestic product at a press conference next week.

The NBS refused to say by how much it would revise the GDP figures, but it is expected that the new measure will show the economy is larger by about 20 per cent.

Also in the news, China has now become the world’s largest exporter of information and communication technology goods, according to an OECD reported out today

China overtook the United States in 2004 to become the world’s leading exporter of information and communications technology (ICT) goods such as mobile phones, laptop computers and digital cameras, according to OECD data.

China exported USD 180 billion worth of ICT goods in 2004, compared with U.S. exports in the same category valued at USD 149 billion. In 2003, the U.S. led with exports of ICT goods worth USD 137 billion, followed by China with USD 123 billion.

China’s share of total world trade in ICT goods, including both imports and exports, rose to USD 329 billion in 2004, up from USD 234 billion in 2003 and USD 35 billion in 1996. By comparison, the U.S. share of total world trade stood at USD 375 billion in 2004, USD 301 billion in 2003 and USD 230 billion in 1996..

Evidently China is still on the up and up, and rather faster than we anticipated. As well as being the number one exporter of ICT equipment, China is also the world’s number one investor, as Stephen Roach reported a few days back:

Despite its relatively small share in the global economy — only about 5% of world GDP (at market exchange rates) — China now spends more on fixed investment than any country in the world. In dollar terms, China’s fixed asset investment was running at an annual rate of close to $1,100 billion in the first three quarters of 2005 (at market exchange rates) — in excess of annualized 2005 investment totals in the US ($987 billion), Japan ($733 billion), and the Euro-zone ($651 billion). If China’s investment boom remains unchecked and its currency continues to appreciate, its dominance in shaping the global investment cycle will only grow.

More Pressure on the Yield Curve

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One of the things about targeting expectations, and factoring-in changes, is that the world moves on at a very rapid clip these days. So the ECB rate rise in now, really, yesterday’s news. The big issue today is the fact that the easing cycle in the eurozone may already be over (we need to see the data going forward before we can be sure about anything here). Anyway, one thing the markets are sure about is that eurozone interest rates aren’t going anywhere very significant in the near future, and one of the consequences of this is the fact that 10 year German bund yields are on their way down again, as is the euro. (On this I continue to maintain my long held view that the situation is asymmetric: good news from the US, and bad news from the eurozone will send the dollar up, while the opposite will simply see exchange rates marking time. All of this has a floor, of course, somewhere, but I think we are still some distance from touching it). Of course all of this implies that the dangers of yield curve inversion in the US are now real and ever-present.

European bonds may gain for a second week, their first back-to-back set of increases in more than three months, on speculation any interest-rate increases from the European Central Bank will be limited.

The ECB raised its benchmark rate to 2.25 percent yesterday, the first time it has lifted borrowing costs in five years. ECB President Jean-Claude Trichet said the increase left rates in line with the bank’s goal of containing inflation, sending bond yields to a one-month low.

“There will be no additional rate hike immediately after this one, and the cycle will end at a relatively low level,” said Kornelius Purps, a fixed-income strategist at HVB Group in Munich. “That should be supportive for the bond market.” Economists at HVB forecast one more rate increase of a quarter percentage point next year.

The dollar rose for a second day against the euro on speculation a government report will show the U.S. economy added the most jobs in four months in November.

The U.S. currency also headed for a third week of gains versus the yen on speculation faster growth in the world’s largest economy will prompt the Federal Reserve to raise interest rates faster central banks than in Japan and Europe.

“There are no signs that the economy is slowing down,” said Niels Christensen, a currency strategist at Societe Generale SA in Paris. “Rate expectations in Europe and Japan are no match for the Fed, and so the dollar will keep rising.”

Between A Rock And A Hard Place

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US Economist Arnold Harberger once asked what Thailand, the Dominican Republic, Zimbabwe, Greece, and Bolivia had in common that merited their being placed in the same growth regression analysis. I can’t help having the same feeling about Germany, France, Italy and Spain. As I indicated in a post on A Few Euros More yesterday, its sometimes hard to see the common thread.

Be that as it may, this post is only about one of the ‘big four’: Italy. As I say in the Afem post, Italy is bucking the trend. Unfortunately it is bucking it in the wrong direction.
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More Growth In The Eurozone

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I think I’d better rephrase that: more overall growth, but a very mixed bag. In deriving aggregate numbers for the zone, four big economies really matter: Spain, France, Germany and Italy. Now each of these economies actually has different characteristics, so it is not clear what ‘the general picture’ means here.

Spain is the European economy whose current growth characteristic seem to resemble most those of the USA: above average growth (around 3.5% per annum), high dependency on housing and construction for the ‘extra growth’, high and rapidly growing private indebtedness (around 20% y-o-y) and a large current account deficit. Where Spain doesn’t resemble the US is in productivity, which has been more or less negative in recent years.

France is , as I’ve been suggesting, relatively ebullient despite the lack of all those labour reforms, and seems to be ‘on a roll’ at the moment. Driven by internal consumer demand and exports France managed an annualised 2.8% in the third quarter. Ironically, possibly France represents the big-four Eurozone economy with the most sustainable and balanced growth trajectory right now.

The German economy is growing at an unexpectedly high rate, but this extra-spurt is virtually all explained by the rapid increase in exports (helped of course by the fall in the euro).Investment, fuelled by the demand for all those exports, was also up. Meanhwile internal consumer demand is possibly even falling. (Growth in the third quarter was at an annual rate of 2.4% up from an annualised 0.8% in the second quarter).

And Italy, which as I keep mentioning is definitely now the ‘poor sister’ of the eurozone, with an identity crisis about what kind of economy it actually is, and a rapidly ageing population producing huge fiscal pressure. (On this see Morgan Stanley’s Vicenzo Guzzo yesterday). Italian growth actually bucked the trend in the third quarter and was lower than in the second quarter (dropping from a 2.8% annual rate to a 1.2% one).

All of this leaves me with the feeling: ‘Eurozone’ which eurozone?