Facebook Blogging

Edward Hugh has a lively and enjoyable Facebook community where he publishes frequent breaking news economics links and short updates. If you would like to receive these updates on a regular basis and join the debate please invite Edward as a friend by clicking the Facebook link at the top of the right sidebar.

Friday, December 15, 2006

China: Retail Sales and Industrial Output

Two interesting pieces of information from China this week. In the first place retail sales are growing fast:

China retail sales grew 14.1 percent in November from a year earlier as rising incomes spurred consumer spending in the world's fastest-growing major economy.

Sales rose to 682 billion yuan ($87 billion) after gaining 14.3 percent, the fastest pace in almost two years, in October, the Beijing-based National Bureau of Statistics said today. Economists surveyed by Bloomberg News expected growth to remain unchanged from October.

Chinese consumers are spending more as the government raises minimum wages and increases welfare payments. Gome Electrical Appliances Holdings Ltd. and other retailers are benefiting from Premier Wen Jiabao's efforts to stoke consumption to make the economy less dependent on exports and investment in factories.

So one leg of the rebalancing process - the rise of domestic consumption - may be starting to fall into place .

So what about the other one, the export driven investment boom? Well the rate of growth in industrial output is certainly slowing:

China's industrial production growth held close to a two-year low in November, suggesting the government is achieving a gradual slowdown in the world's fastest-growing major economy.

Output rose 14.9 percent from a year earlier to 793.6 billion yuan ($101 billion) after climbing 14.7 percent in October, the National Bureau of Statistics said today. The figure may ease concern that the effects of a government clampdown on investment are waning after exports surged to a record last month, aggravating tensions with trade partners.

China's economy grew 10.4 percent in the third quarter, slowing for the first time in a year. The economy expanded 11.3 percent in the prior three months, the fastest pace in more than a decade.

Exports in November surged by 32.8 percent, matching the largest gain in a year. Retail sales growth stayed close to October's almost two-year high. Consumer prices rose by the most in 20 months, while producer-price inflation unexpectedly slowed.

So now the possibility exists that these excesses are rebalancing themselves. The next question is, if that is the case how will the slowdown in the acquisition of machinery and equipment affect the two major prior beneficiaries, Germany and Japan? Will they feel the squeeze, or will they simply move on to India?

December Tankan Index

Well the latest edition of the Bank of Japan’s Tankan survey is now public property, and it does register a marginal increase to 25 from 24 last time. Perhaps just as significantly though the companies surveyed expect the index to decline to 22 next time round, which means that the forward looking component is not overly strong.

Perhaps the most noteworthy point in the FT article was this one:

"One of the mysteries of the present recovery, now in its fifth year, is the slow pace at which record corporate profits and a tight labour market have transferred to wages and consumption. Mr Ogawa said companies would have to start increasing the share of profits given to labour over the next year or so, but he didn’t expect any dramatic rise in wages.

Well I hope that by now this feature of the Japanese situation should no longer be a mystery for regular readers of Bonobo Land or Demography Matters, or for that matter for readers of Claus Vistesen's blog. Basically a rising median age is affecting the savings component relative to consumption, while at the same time the tightening labour market is more a reflection of a reducing potential labour force than anything else. Thus:

The diffusion index for employment conditions at big companies in all industries registered minus 11, compared with minus 8 in September. A negative number reflects a labour shortage, a situation that is expected to deteriorate over the next three months when the index is projected to reach minus 13.

Given Japan's demographic not only should we expect this situation to deteriorate, it is hard to see how it can do other than deteriorate, and deteriorate.

Incidentally we have another version of the every cloud has a silver lining story running in Japan at the present time:

"Capital Economics, a London-based research company, said a rate rise next week would be “more Santa than Scrooge” since it could actually improve consumer sentiment by boosting the interest paid on savings. Economists regard domestic an improvement in consumption as vital to keep the recovery going and to consolidate the defeat of deflation."

Well the last time I thought about it, rising interest rates were thought to encourage saving, not discourage it. So although there may be some sort of wealth effect somewhere, the NET impact is sure to be negative for spending, not to mention what rising interest rates would do to the servicing problem for Japan's enormous mountain of public debt.

Incidentally, Claus and I are now both cross-posting on the Japan Economy Watch blog.

Thursday, December 14, 2006

Russia Still Turning The Energy Screw?

Well obviously news like this doesn't exactly send me off jumping up and down with glee:

Russia is preparing to cut off natural gas supplies to neighbouring Belarus and Georgia unless the two former Soviet republics agree by the year-end to pay much higher prices in 2007.

As the FT notes this comes nearly exactly a year after the Russia actually did cut of supplies to the Ukraine, this sort of news is in no way reassuring:

Coming a year after Gazprom, the Russian gas giant, briefly cut gas to Ukraine in a similar pricing dispute, such a move could provoke further international criticism that Moscow is using energy as a political tool. It might also intensify pressure on Russia to ratify the European Energy Charter treaty, which would require such disagreements to be resolved through arbitration.

Personally I have no great confidence that the signing of an agreement would be any real guarantee of gas supplies for the EU in a push comes to shove situation. The fact that Iran is the other major gas supplier on which the EU hopes to rely also somehow doesn't inspire an enormous amount of confidence either:

Georgia says it can replace Russian gas with supplies from neighbouring Azerbaijan and from Iran. But as well as trying to raise prices to $230 to Azerbaijan, Russia is reducing its gas exports to the country next year, limiting Azerbaijan’s scope to re-export surpluses to Georgia.

What we need is some really serious and coherent political assessment of where Russia and Iran are headed, and what kind of situations might arise if these two suppliers were ever to decide to try to collude in some way or other.

Obviously the path on which both countries seem set only threatens to produce more problematic situations in the future, and with the demographic outlook for Russia being so bleak (and here) I cannot help fearing that most observers are underestimating the potential for instability and consequent problems.

Certainly this kind of debate is to the point, but still leaves far too many questions unanswered for my linking. Russia certainly at this point could in no way be called a fascist stead, but where is it headed, and just what kind of socio-economic dynamic is operating in Russia right now? These are big questions, and at the present time they remain questions without answers.

Above all what the EU seems to lack is any clear energy strategy which doesn't involve dependence on Russia and Iran, and maybe this is the most worrying detail of all.

Wednesday, December 13, 2006

Chile Blazes the Trail

Something I agree with from Martin Wolfe for a change (behind the firewall unfortunately). As I have been noting here on Bonobo Land Chile certainly seems on the up and up these days. As I suggest in this post (and also here) Chile's demographics are pretty favourable these days (which is something which can't be said for say Bolivia or Ecuador), and if you add to that the very positive political dynamics then they certainly seem set to carve their place as Latin America's first tiger. I also like the way Bachelet has handled the Pinochet death issue, to ashes he has gone, and as ashes he shall remain. There is quite a good cartoon in one Spanish newspaper which has him trapped in a kind of netherland, he tries the door to heaven (the judges are away sick), same problem with hell, and then with pergatory. It seems he now wants at trial, but has difficulty getting one.

The deaths of Augusto Pinochet and the failing health of Fidel Castro mark the end of an era for Latin America. We should look back at the bearded revolutionaries and military despots, ideological fervour and utopian dreams, without any regret. Despite the recrudescent populism of Hugo Chávez in Venezuela and Evo Morales in Bolivia, a more sober style of democratic politics is cementing its hold across the region.

This is the theme of a fascinating book by Javier Santiso, deputy director of the development centre of the Organisation for Economic Co-operation and Development.* “Since its independence,” he argues, “one of Latin America’s core dependencies has been its belief in miracles: the miracles forged by the Marxist or free-market magicians, revolutionaries and counter-revolutionaries, on the basis of a few grand theories and paradigms.” There is, instead, “a dual movement of economic reforms and a transition to democracy”, a move to “the political economy of the possible”.

There does however seem to be room for improvement. Chile's growth has slowed somewhat recently and this has produced a heated debate inside the country as this article in the FT explains:

Andrés Velasco, the current economics minister, shows little sign of being a man under fire, patiently defending his government’s plans to smooth the rate of expansion and reduce the volatility resulting from highs and lows in the price of copper, which accounts for almost 60 per cent of exports.

Critics say the government’s rigid adherence to macro-economic orthodoxy has undermined its ability to take advantage of copper prices, which have tripled in the past three years. Mr Velasco rejects this. “They get short-term macro-economic performance and longer-term growth trends mixed up,” he says.

In an interview with the Financial Times, Mr Velasco blamed the slowdown in growth this year on short-term supply shocks, among them strikes and accidents in Chile’s largest copper mines and rising international oil prices.

On top of that, Argentina unexpectedly almost doubled the price of the natural gas it exports to Chile and cut volumes. Chile depends on Argentina’s gas for more than a third of its electricity generation, though industry was most affected by the cuts, being forced to use diesel fuel at up to five times the cost.

Although he has come under pressure to take advantage of increasing revenues from the copper boom to pump up spending in needy areas, Mr Velasco is sticking firmly to the counter-cyclical fiscal rule introduced in 2000. It requires a structural budget surplus of 1 per cent of gross domestic product, with spending targeted to revenues based on long-term copper prices, which for 2006 were calculated at $0.99 per pound – less than a third of the highs reached this year.

Mr Velasco says that because of this rule, Chile has had “dramatic success” in stabilising growth and he rejects criticisms that Chile should be growing more because of high copper prices: “The very purpose of macro-economic policy in Chile is to insulate economic activity at home from commodity prices abroad.”

Volatile growth caused by copper prices “was precisely Chile’s problem for decades and to have overcome that is the biggest achievement of macro-economic policy in Chile”.

However, in spite of success in stabilising the economy, the sagging growth has prompted a chorus of criticism, notably from the so-called “group of 20” of Chile’s leading economists, who are calling for the phasing out of the 1 per cent surplus rule to allow greater spending on education and to promote competition through tax breaks for businesses.

“We have to pay more attention to micro-economic problems but the government lacks ambition to carry out serious reforms in this area,” says Harald Beyer, of the centre-right CEP think-tank in Santiago and one of the group.

Felipe Larraín of the University of Chile, another of the 20 economists, highlights four main problems that must be tackled to stimulate growth: low education standards, a lack of innovation, rigidity in labour markets and over-regulation in areas such as the environment.

Whatever the ins and outs of immediate policy issues (it is hard from this distance to judge) I am sure Chile is now firmly set on the right path. So let's hope Argentina and Brazil now continue to follow suit.

Tuesday, December 12, 2006

The French Enigma

There's a lot of interest focusing on the future evolution of the Eurozone economies at the moment. Claus Vistesen has been following the debate closely on his blog (and in particular this post).

Many observers are at this point fairly optimistic about the future of the eurozone economies as a group, but, as I keep pointing out, domestic consumption in both Italy and Germany continues to remain weak, and there may be sound theoretical reasons for assuming that this situation isn't going to change, and at the same time these two countries also face fiscal tightening problems as we enter 2007, due to the costs imposed by their rapidly ageing populations.

As Claus says:

Many Eurozone countries indeed need structural reforms .....Yet the thing we must ask ourselves is whether this will be enough? And this dear readers is where demographics come in and more specifically why we need to look at the population structure of for example Germany and Italy in order to really understand what is going on before our eyes. Why for example is consumer spending persistently low in these two countries and why is Germany running a trade surplus of 6% of GDP.

Of course, the ageing population in Europe is not a topic which has just appeared on the center stage of economic discussion and neither is the need for structural reform in Europe. In fact, these two aspects are often tied together; in order to amend the effects of an ageing population we need structural reforms on the labour market (to free up ressources), pension systems (cost cutting), and health care systems (cost cutting). The last two cannot be accomodated by slashing benefits all together and as such fiscal tightening is an integral part of this; just look at Italy and Germany at the moment.

But will structual reforms really neutralize the effects of ageing population effects in Europe? The bets are still out but I would argue that this is highly unlikely.

Now there is a lot of talk about Germany and Italy here, and there are of course other countries in the 12 nation zone, in particular Spain and France.

In fact France is an interesting case here, since in theory France's ageing problem is a lot less severe in the short term than that of either Germany and or Italy, and indeed in recent years, and despite having carried out a lot less in the way of structural reforms than Germany, French GDP growth has consistently outperformed the other two.

Which is why it was really something of a shock when France turned in a zero % third quarter GDP growth reading. Not that it should have been a complete surprise, since the slowdown in the rate of increase in industrial production in France in June and July was already something of an early warning for those who were watching.

However growth across the zone generally has been so strong through 2007 that one would have expected France to pick up again, but apparently this was not to be:

French industrial production unexpectedly fell in October after economic growth stagnated in the third quarter. Production at factories, utilities and mines fell 0.1 percent from September, when it fell a revised 0.8 percent, Insee, the national statistics office, said today in Paris. Economists expected a gain of 0.5 percent, according to the median of 22 forecasts in a Bloomberg News survey. Manufacturing of machinery and equipment fell 0.2 percent.

As I suggest, personally I was surprised when France came in so weak in the third quarter:

France's economy failed to grow in the June-September period, resulting in the smallest job creation since the second quarter of 2005. The 8.8 percent jobless rate, though down from 10.1 percent in May 2001, remains the highest in the 12-country euro region, according to Eurostat.

Now domestic consumption as I have also suggested is endemically weak in Italy and Germany, but they have been able to leverage exports to some extent (Germany a lot more than Italy):

``Industrial production in France isn't taking off,'' said Sylvain Broyer, an economist at Natixis in Paris. ``Growth in Europe is being pushed by investment, and France isn't strong with investment goods like other countries, such as Germany and Italy, are.''

So we could draw the conclusion that the French economy could survive better if internal consumer demand in some other eurozone countries was stronger, but since this isn't the case the weakness in consumption in Italy and Germany then feeds back into France.

This is just a hypothesis at this stage, but it did receive a bit more support from today's trade data from France:

France's trade deficit widened in October for the first month in three as the rising euro undercut exports and boosted imports. The shortfall grew to 2.71 billion euros ($3.6 billion) from 1.51 billion euros a month earlier, the Trade Ministry in Paris said today.

and this whole evolution has now lead INSEE to substantially revise downwards its growth estimate for 2007:

French economic growth will slow in the first half of 2007 as foreign demand cools, the national statistics office forecast.

The world's economic expansion will fade in 2007 to its weakest in four years, dragged down by a U.S. slowdown, the Organization for Economic Cooperation and Development said last month. Insee sees exports of manufactured goods rising 1 percent in each of the first two quarters, down from 2 percent in the last three months of 2006. Import growth will also slow to 1.5 percent from 2.2 percent, it said.

So what we have at the moment is indeed a curious situation as the two weaker economies continue to outperform what has, until now, been thought to be the rather stronger one. My own view is that in the course of time things will return to their natural order and Italy and Germany will underperform France in 2007 (and possibly by a wide margin) but for the time being we remain with the enigma, which is undoubtedly in some way associated with continuing euro strength. So it will now be interesting to watch this situation moving forward, and particulary over at the ECB where we may reasonably expect enthusiasm for further rate rises to begin to cool notably.

Immigrants and Italian GDP Growth

Looking for something else I just stumbled across this:

Italy’s 3.6 foreign residents are an added asset to the country’s economy and their labours account for 6.1% of its GDP, some 86.7 billion euros in 2005, according to a new report.

Published Monday in the authoritative financial daily Il Sole 24 Ore, the report pointed out how Italy’s immigrants were responsible for “keeping the nation from suffering two heavy recessions in recent years”.

Without their contribution, Il Sole explained, “Italy’s GDP would have fallen by 0.1% in 2002, 0.6% in 2003 and 0.9% in 2005.

Almost 2.1 million immigrants hold regular jobs and they totally dominate the domestic services sector, accounting for 80% of the sector’s contribution to the country’s GDP to the tune of 9.6 billion euros.

Immigrants play an even bigger role in the services sector contributing 37 billion euros to the nation’s wealth, equal to 4.3% of the sector’s GDP.

According to the report, the contribution immigrants make to the economy has been growing constantly.

From 1993 to 2000, GDP rose 15.4% in real terms, but this would have been 13.5% without immigrants, Il Sole calculated.

In the following five years, GDP rose by 3.2% “of which 3.1% was thanks to the work of immigrants. This is equal to 96% of the increase,” the study concluded.

The data presented here is fascinating. The picture is pretty similar in Spain, although since Spain's population ex-immigration isn't actually falling all we can say is that Spain's economy has risen substantially more than it would.

I suppose I don't need to ram this point home, but it does rather confirm my argument that those countries with ageing populations who cannot attract immigrants will actually see GDP shrink at some stage.