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Friday, February 24, 2006

UK Investment Dearth Continues

Ben Bernanke, it will be remembered, corrected himself: what we have isn't a 'savings glut', it's an investment dearth. Here's another example:

The hoped-for recovery in business investment failed to be sustained at the end of last year as official figures published on Thursday showed business investment contracting at its fastest rate in two years in the final quarter.

The volume of business investment fell by 1 per cent in the last three months of 2005, compared to the previous quarter. The Office for National Statistics said that for the year as a whole, the volume of business investment was £113.1bn, up 1.6 per cent on 2004, against growth of 3.3 per cent in 2004.

The figures illustrate the concerns of Stephen Nickell, the external member of the Bank of England’s monetary policy committee who has voted for a quarter-point cut in interest rates for the past three consecutive months, citing weak prospects for business investment as one reason why economic growth was unlikely to grow fast enough for consumer price inflation to hit the Bank’s 2 per cent target in two years time.

In its latest inflation forecasts, published last week, the MPC downgraded its expectations for the strength of recovery in business investment and Mervyn King, Bank governor, has referred to “puzzle” of weak business investment.

The UK economy is definitely one to watch, something 'funny' is surely going on, the hard part is knowing what it actually is. But it seesm there will be no revival from either business investment or consumer spending in the immediate term.

Thursday, February 23, 2006

On The Japanese Trade Deficit

I'm trying to think about the implications of the economic fundamentals driving Japan's 'sustainable recovery'. What we know is that as the population ages the labour market is tightening. This is pushing up wages but not productivity. There is a consequential 'bounce' in domestic consumption. But what happpens next?

Well my native economic wits tell me that the relative prices of Japanese imports and exports should be affected. This is a complex question since Japanese conglomerates have a well-known 'two tier' pricing system, with the cost pressure normally being felt more internally than externally. So Japanese exports don't necessarily immediately lose competitiveness. Of course the Yen-Dollar rate also has something to do with this.

But in the internal market the price of imported goods should become relatively lower vis-a-vis domestic products. So I started thinking about the trade balance. And Lo & behold:

"Japan recorded its biggest trade shortfall in nearly a quarter of a century and its first in five years, as the normal January slowdown in exports and a rising oil bill combined to reverse a Y914bn surplus in December into a Y349bn deficit."

Well so far so good, this is what theory would seem to predict. Of course there are any number of one-off issue in play:

Economists said the latest number was not a cause for concern since exports normally fell in January because of the long new year’s holiday in Japan, which caused a slowdown in production and shipments.

but then there is this:

Higher imports partly reflected rising domestic demand, as well as the surge in oil prices....Hiroshi Shiraishi, economist at Lehman Brothers, said that, as domestic demand picked up, it was natural — and positive — that the economy would become less dependent on exports. “Going forward, we don’t expect net exports to provide a big boost to gross domestic product,”

Oh, oh.

In the fourth quarter, which showed annualised gross domestic product growth of 5.5 per cent in real terms, domestic demand outpaced net exports as a contributing factor, underlying the self-sustaining nature of Japan’s recovery.

Mr Shiraishi said the volume of imports had picked up 7 per cent in January as Japanese demand for foreign products increased. In yen terms, imports rose 27 per cent to Y5,360bn, spurred by a 67 per cent rise in the oil bill over the previous January.

Morgan Stanley's Takehiro Sato tries to be re-assuring:

"Takehiro Sato, economist at Morgan Stanley, said it was unwise to read too much into one month’s numbers. Weak exports to Asia probably owned to special factors, particularly the Chinese new year, part of which fell in January this year, he said."

He may be right, but then when theory and empirics coincide in this way there is food not for worry, but for thought. Maybe what we are all about to do is an exercise in ordinary language philosophy: checking out what the word 'sustainable' actual means in the day-to-day context.

Wednesday, February 22, 2006

A Very Interesting Morning

Well things really are getting interesting.

We have the news that the Chinese government is resisting US pressure to accelerate the flexibilisation of the renminbi:

Beijing has rebuffed renewed US demands for a faster acceleration of its currency, saying it would maintain its policy of “gradualism” in building a flexible system suited to the development of its own economy.

A statement published on the website of the central bank, the People’s Bank of China, part of its quarterly survey of the economy, said Beijing would maintain a “basically stable” renminbi.

At the same time with the Bernanke handover the US is now locked-in to some interest rate tightening regardless:

The Federal Reserve’s monetary policy body sees current interest rates as appropriate but is entertaining the possibility of further monetary tightening amid stronger economic data, official meeting minutes showed on Tuesday.

Meantime the Japan show trundles on. Danish blogger Claus Vistesen has an interesting and relevant post on this:

Is Japan really getting back on track ? (walled for non-subscribers) The Economist thinks that it is ....

"Japan's GDP grew at a surprisingly strong annualised rate of 5.5% in the fourth quarter of 2005. It looks like the economy may finally be leaving ten years of stagnation behind. But can its export-led growth last long enough to put domestic demand back on track?"

Over in Europe the game of chicken between the ECB, the Comission and the National Governments continues, with some interesting twists.

Spain is now firmly up and over the international radar, especially with the takeover bid from the German group Eon for the Spanish utility company Endesa (incidentally, Indian blogger has an important and interesting post, which is relevant to this, written in connection with the Mittal steel bid for the French steel company Arcelor).

Since the FT article on Eon-Endesa seems to move back-and-forth from under the firescreen, here is the rest of the piece below:

Wulf Bernotat, Eon chief executive, said he expected few anti-trust problems from the European Union as the companies’ markets did not overlap. He also hoped Spanish political opposition would not sink the deal.

He said: “We believe that the Spanish government should let Endesa’s shareholders decide.” Madrid had been aiming to forge a gas and electricity giant capable of competing with others in Europe.

But Fernando Moraleda, a Spanish government spokesman, said Madrid was convinced that in energy it was ”in the general interest of the nation to have a Spanish company”.

Many analysts believe Brussels and Madrid will find few grounds to reject the deal as Eon has no established presence in Spain. “We think it can’t be blocked,” said Graham Weale, head of the European energy group at Global Insight, the consultancy.

Eon is offering €27.50 per Endesa share, about 30 per cent above Tuesday’s value of Gas Natural’s share-heavy offer, announced last September. It will fund it through the more than €15bn of cash it has on its balance sheets plus new bank loans.

On Tuesday evening Endesa, Spain’s largest utility, said a preliminary assessment of the all-cash offer from Eon did not “adequately reflect the true value of Endesa”.

Bankers and industry executives said they did not expect a counterbid from Gas Natural, which could be hard-pressed to raise the additional funding. But they do believe other companies could act soon, among them Eon’s domestic rival RWE, which is expected to outline its acquisition strategy on Wednesday.

Many European utilities have bulging war-chests after benefiting from high energy prices.

The need to finance new investments means that further consolidation seems likely, bankers and industry executives said. European utilities are also looking to pick up new customers abroad as their home markets are deregulated.

Many analysts see between three and six main European energy utilities once the anticipated shake-out is complete. Earlier this week, Mr Bernotat said he expected to see just three dominant utilities across the continent, Eon among them.

On Tuesday Enel, the cash-rich Italian utility, said it was looking at several companies in Spain, France and eastern Europe, adding that Belgium’s Electrabel was among them.

Eon is advised by HSBC. Endesa’s advisers include JP Morgan, Deutsche Bank, Citigroup, Lehman Brothers, Credit Suisse, Merrill Lynch and BNP Paribas.

Monday, February 20, 2006

Japan Back With The Leaders?

The FT's David Turner had this incredible article in the FT over the weekend (behind the great firewall I'm afraid):

Growth puts Japan back with the leaders

Unexpectedly strong growth in the last quarter propelled Japan's economy once again into being a world leader, promising an end to 15 years in the doldrums when periodic economic revivals dissolved into false dawns.

The world's second biggest economy grew 1.4 per cent in the fourth quarter – far in excess of the 0.3 per cent growth recorded in the US and growth of 0.4 per cent in the European Union.

Japan's economy once again a world leader? IMHO this is terribly premature and extraordinarily ill-advised. In particular it is clear just how ill advised it is if you read another article in the same newspaper (this time David Pilling):

"The tightening of Japan’s labour market is arguably the single most important sign that the country’s economy, after years of adjusting in the aftermath of the bubble, has finally normalised."

Wrong David, the tightening of Japan's labour market is a sign that Japan is an ageing society, with a shrinking available labour force. This is not a good sign: show me your productivity numbers is what I say. To plagiarise Solow, we can see the crowth everywhere, except in the productivity numbers. Methinks we are in for some rude surprises.

"As a result of increasing job security, consumers, who until recently had been running down their savings to preserve their living standards, have opened their wallets a little further. That has persuaded companies to invest in capital and still more workers to meet what is expected to be steadily growing domestic demand."

Of course what is happening in Japan is a first, something of a great experiment (although there are signs that something similar may be happening in Italy, another society with similar problems). There has been a lot of speculation about just how the fact that the forseeable labour shortage would lead to a 'capital deepening' process as labour became relatively more expensive. Well, labour is becoming relatively more expensive, so now we will get to see how the capital deepening part works out in practice. This will be an interesting test for neo-classical theory.

Here are links to some more, and equally revealing articles in the FT:

Japan 'creating sub-class of poorly paid

Huge changes in Japan's labour market are creating a dangerous divide between well-paid, well-trained workers in permanent employment and a sub-class of poorly paid workers with low skills and fragile job security, the Organisation for Economic Co-operation and Development has warned.

The report, which makes calls to tackle deflation and assert fiscal control, highlighted the downsides of greater labour market flexibility.

Fewer Japanese

The future has arrived slightly quicker than expected in Japan, with the news that last year, for the first time since records started in 1950, the country's male population fell. The decline was fractional, and could be totally attributed to more men moving out of, rather than into, Japan, probably because of company transfers. Nonetheless, this was a demographic outcome waiting to happen because of the country's falling birth rate, which set a record low in population growth of only 0.05 per cent last year. Japanese experts are now predicting that next year will see the first decline in the country's overall population.

The shrinking of the workforce and the swelling number of pensioners is a trend occurring across many developed, and some developing, countries. Indeed, thanks to its one-child policy, China is forecast to see the ratio of working age people to pensioners collapse from more than 6:1 in 2000 to fewer than 2:1 in 2050 as that country ages faster than any other in history.