Tag Archives: growth

China: Eating our Lunch or Taking us to Dinner?

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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).

Hanging In The Balance

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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.

Older and Older

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I think this is no longer news, but the OECD held a press conference yesterday to inform us that we are all living longer, but we still aren’t working longer, and that somehow these two facts don’t fit with our existing pension arrangements. Well perhaps it isn’t exactly news, but it still needs to sink-in somewhere. So I guess this is why yesterday the OECD were drawing everyone’s attention to a new report they have prepared on the basis of 21 separate country reports compiled as part of a thematic review of policies to improve labour market prospects for older workers initiated in 2001. The whole thing will get icing and a cherry at what is being called a High-Level Policy Forum to be held next Tuesday (18 October) at Palais d’Egmont. More details on the reports and the accompanying older workers forum can be found here).

At present, many public policies and workplace practices discourage older people from carrying on working. On average in OECD countries, fewer than 60% of people aged between 50 and 64 have a job, compared with 75% of people in the 25-49 age group (see Chart 1).

Such policies and practices are relics of a bygone age and unsustainable at a time when population ageing is straining public finances and holding back higher living standards. If there is no change in work patterns, the ratio of older inactive persons per worker will almost double in the OECD area over the next decades, from around 38% in 2000 to just over 70% in 2050.

This, in turn, would lead to higher taxes and/or lower benefits, coupled with slower economic growth. On the basis of unchanged patterns, OECD analysis shows, GDP growth per capita in the OECD area could shrink to around 1.7 % per year over the next three decades, about 30% below the average annual rates witnessed between 1970 and 2000.

Incidentally, I think this figure for sustained *per capita* growth of 1.7% across the OECD over the next decades is extraordinarily optimistic. If you strip out some of the large economies where the ageing problems are considerably more moderate – US, UK, France – I juts can’t see how the rest are going to sustain any per capita increase at all. What they will be into is damage containment. Unfortunately, as we can see, they seem to be in no special hurry to get on with even this.

Why Finland?

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I just put up a post on the economic situation of Finland. Now I am putting another. Why the sudden interest? What is there about the Finnish economy which could be of interest to more people than the five million or so who actually live there?
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Eurozone More Exposed?

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Chief OECD economist Jean Philippe Cotis wasn’t only proferring recommendations to the Federal reserve yesterday. He was also not backward in coming forward with his opinions about future growth in the eurozone. Even if Cotis isn’t exactly my favourite economist I feel here he may be a little nearer the truth.

The occasion for M. Cotis’ observations was the official press briefing for an interim OECD assessment of the economic situation in Europe, the United States and Japan.
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Optimism On The German Economy

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Both New Economist and MacroBlog seem very upbeat about the prospects for the German economy. Macroblog cites Bloomberg and says “Things are definitely looking up“. New Economist is rather more guarded, pointing to the IMF forecast, and the recent Federal Statistics Office announcement that second quarter growth came in at 0%. But New Economist find faith in an (old) Economist view that things are getting better in Germany’s surprising economy (ask Doug on the main page about the surprising bit 🙂 ). As New Economist says “Of course the Economist can get it wrong, but in thbis case maybe they’re onto something”, while as Edward replies “of course the IMF can get it wrong, but in this case maybe they’re onto something”

The Financial Times definitely comes down on the side of the optimism camp, but in their case with significant prudence:

However, fears Germany?s election system might result in a fractious ?grand coalition? between the CDU and Social Democrats may have damped expectations more recently and economists remain cautious about the strength of any German upswing. Holger Schmieding, economist at Bank of America, warned that expectations were fickle and that ?the economic upswings heralded by major surges in the ZEW in mid-2002 and early 2004 both turned out to be disappointingly shallow and short-lived?.

As for me, well, for my part
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A curious trend in the Balkans

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2000-2004: Under the rule of the Social Democrat Party (PSD) and Prime Minister Adrian Nastase, Romania enjoys four consecutive years of rapid economic growth. Romania’s GDP increases by an average of nearly 6% per year; for the first time since the end of Communism, the country has four years without a recession. Meanwhile, Romania joins NATO and is accepted for EU accession in 2007.

December 2004: voters reject Nastase and PSD, voting in the opposition in a weak coalition government.

2001-2005: Under the rule of the National Movement Simeon II (NDST) and Prime Minister Simeon Saxecoburgotski, Bulgaria enjoys four consecutive years of rapid economic growth. Bulgaria’s GDP increases by an average of around 5% per year; for the first time since the end of Communism, the country has four years without a recession. Meanwhile, Bulgaria joins NATO and is accepted for EU accession in 2007.

June 2005: Voters reject Saxecoburgotski and NDST, voting in the opposition, which now appears likely to form a weak coalition government.

2001-2005: Under the rule of the Socialist Party and Prime Minister Fatos Nano, Albania enjoys four consecutive years of rapid economic growth. Albania’s GDP increases by an average of about 6% per year; for the first time since the end of Communism, the country has four years without a recession. Meanwhile, Albania is accepted into the Partnership for Peace and moves from being an impoverished semi-pariah to a serious candidate for EU accession sometime in the next decade.

July 2005: Voters reject Nano and the Socialists, returning to former President Sali Berisha, out of office since 1997. Berisha will form a coalition government with several minor parties.

What’s going on here?
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UK Economy Slowing

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The UK economy showed its weakest year-on-year performance for 12 years during the second quarter of this year, and manufacturing seemed to enter recession. Gross domestic product (GDP) growth on a 12-month comparison stood at 1.7 percent during the second quarter — the weakest 12-month performance since the first quarter of 1993.

The annual growth rate dropped from 2.1 per cent to 1.7 per cent, which marks the lowest rate of growth since the first quarter of 1993 and almost half of the 3.2 per cent growth rate achieved only in 2004.

Output by manufacturing companies declined 0.7 per cent after a fall of 0.9 per cent in the first quarter, confirming that the sector had dropped into a technical recession, which is defined as two consecutive quarters of falling output.

Unified Growth Theory

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According to Oded Galor it has become evident that in the absence of a unified growth theory that is consistent with the entire process of development, the understanding of the contemporary growth process would be limited and distorted. He quote Copernicus to the effect that:

?It is as though an artist were to gather the hands, feet, head and other members for his images from diverse models, each part perfectly drawn, but not related to a single body, and since they in no way match each other, the result would be monster rather than man.?
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