Tuesday, January 30, 2007
This piece from the FT which in general simply confirms the overall picture, does contain a useful perspective on how the dynamics of intergenerational transition may be also affecting the non pass-through of improved employment into spending:
Hiroshi Shiraishi, economist at Lehman Brothers, said he expected the divergence between strong corporate health and weak wages and consumption to persist.
Companies were taking a bigger share of profits worldwide, he said, but the trend was particularly stark in Japan where the component of more demanding foreign shareholders had increased sharply in the 1990s. “Corporations are increasingly more focused on the shareholder,” he said. “Especially at big companies, the workers’ share of corporate earnings is dropping very sharply.”
Second, said Mr Shiraishi, high-paid babyboomers born after the war were beginning to retire in large numbers and were being replaced by much lower-paid graduates. That trend would continue for several years, suppressing wages, he said.
Finally, the weak yen, though good for exporters, was squeezing profit margins of companies that needed to buy commodity inputs from abroad. “Small companies in particular are finding it difficult to pass on these costs by way of higher prices, so this is forcing them to restrain wages.”
Although the headline number for December edged up 0.1 per cent to 4.1 per cent, the more significant jobs to jobs-seekers ratio climbed to 1.08, the tightest labour conditions since 1992. That means there are now 108 jobs for every 100 people seeking work.
Japan's factory production rose to a record, while household spending fell, underscoring the central bank's concern that growth has bypassed consumers and left the economy dependent on exports to expand.
Industrial production climbed a seasonally adjusted 0.7 percent in December, the trade ministry said in Tokyo today. Household spending declined for a 12th month, falling 1.9 percent from a year earlier, the statistics bureau said.
Without a recovery in consumer spending, Bank of Japan Governor Toshihiko Fukui may delay raising the benchmark overnight lending rate from 0.25 percent, the lowest among major economies. Wages grew 0.1 percent in the third quarter of 2006, when average corporate profits surged 15.5 percent.
This a really only serves to confirm the picture Claus has been arguing. I suppose it would be rather strong language to state that the entire consensus view was almost "out to lunch" on what was actually happening in the real world these days. Something important is happening in Japan, the sign of things to come (and lets just wait till we get round to some real data for Germany for January 2007), while at the other end of the scale people seem to totally underestimate India's growth potential, and the issue is one and the same in each case: demographics. On the one hand what we are seeing is a demographic penalty, and on the other a demographic dividend. Of course, in order to appreciate that this is the case you need to at least consider the possibility - contrary to classic textbook wisdom - that demography may be an important part of the macro growth picture.
Reading through the press this morning I couldn't help being struck by this piece on Serbia:
In its "Serbian Financial Report" Research and Markets says that it agrees with IMF that strong credit growth in Serbia has started eroding financial stability.
The Fund underlined the high level of euroization and the fact that almost all credits extended are in EUR, which exposes borrowers (and thus indirectly the lenders) to considerable foreign exchange risks.What we seem to have looming in some parts of Eastern Europe is the return of what Krugman used to call "balance sheet consequences" which could follow the rapid downward unwinding of a currency, but in this case based on the level of private, rather than public or corporate, debt. Nonetheless the impact of such an eventuality on domestic consumption would be significant were it to occur.
Oh, and don't miss this:
At the start of August, the National Bank of Serbia (NBS) announced changes in its monetary policy, which include the start of inflation targeting.
The target of the central bank will be core inflation (covering some 55% of all prices) with its first objectives being 7- 9% y/y inflation at the end of 2006 and 4-8% y/y at the end of 2007.
In line with the new policy, NBS also decided to change the instruments for achieving its monetary objectives. Its main policy instrument in the future will be the 2-week repo interest rate, which will be determined by the Monetary Council at its regular sittings. Up until now, the central bank used mostly the mandatory reserve requirement ratio to conduct its monetary policy.
The key policy rate is currently set at 18% and is used for determination of the other basic interest rates used by the central bank.Well with inflation running at over 10% and policy rates at 18%, it isn't hard to see the attraction of euro denominated debt, but the currency risk has to be huge, since it is hard to see real and sustained economic growth with this level of interest rates. And of course Serbia still doesn't have a government, while the Kosovo wild-card looms large:
The president began consultations Monday on forming a new government in Serbia, a process complicated by a U.N. envoy's presentation of a plan for the breakaway province of Kosovo.....
A compromise among Serbia's political groups could take weeks or months, and is complicated by the upcoming release of a U.N. report on resolving Kosovo's disputed status.
U.N. special envoy Martti Ahtisaari plans to visit Belgrade on Friday to present his proposal to Serb leaders. He then will present the plan to ethnic Albanian leaders in Kosovo's provincial capital, Pristina.
"We never said we were going to wait for a new government" to be formed in Serbia, Ahtisaari spokesman Remi Dourlot said.
Kostunica has insisted the Kosovo talks should wait until a new Serbian government is in place. Saying that, as caretaker premier, he has no mandate to discuss Kosovo's future, Kostunica has vowed not to attend the meetings with the envoy.
His conservative Popular Coalition denounced Ahtisaari's decision to visit Belgrade before a new government was formed. "This seems like Serbia is treated like a colony which will do anything it is told," spokesman Andreja Mladenovic said. "We cannot communicate in such a way."
So why all the interest in what many would consider to be small and rather minor countries like Serbia and Hungary? Well really the Eastern Europe correspondent over at The Economist, Edward Lucas summed it all up in his latest Europe.View column:’Forget, for a moment, the headline stories from central and eastern Europe―the pipeline politics, the corruption scandals, the treasonous tycoons. The big story in the ex-communist world is people. Too few are being born. Too many are dying. And tens of millions have changed country.’
And this process at the end of the day is going to be extremely de-stabilising, and have important macro economic consequences which reach far beyond the frontiers of the countries concerned, as Claus Vistesen tries to explain here.
I have, btw, posted a more substantial piece on the Serbian economy on GEM.