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Wednesday, November 28, 2007

The Liquidity Crunch Deepens

This news from reuters doesn't sound too promising, not at all it doesn't!

Money markets tightened further on Wednesday with the cost of borrowing euros in the wholesale interbank market hitting fresh 6-1/2 year highs as banks paid a higher premium for cash covering the New Year period.

Cash is getting less available and more expensive in the market since the credit crunch started in August as banks hoard cash as a contingency against credit-related losses. This general shortage is being exacerbated by liquidity concerns over the seasonally thin Christmas and New Year period.

London interbank offered rates (Libor) -- the benchmark lending rates between banks -- for two-month euros rose to 4.73875 percent at their daily fixing, the highest since May 2001. In early August rates were below 4.2 percent.

Libor rates for two-month dollars rose to a one-month high of 5.08563 percent, while sterling rates for the same period rose to a two-month high of 6.63875 percent.

"The level of confidence remains quite low. Banks are still reluctant to lend because of counterparty risk and balance sheet constraints on their own side," said Nathalie Fillet, senior fixed income strategist at BNP Paribas.

"Until recently, banks have been funding on an overnight basis but have now started to secure funding to cover the year-end. Hence, central banks have no choice but to continue to support and flood the market with liquidity."

And to all this can be added the announcement yesterday from the ECB that they are about to inject a further €30bn ($44.3bn) in one-week funds into the banking sector.

For what it's worth here's the most recent 3 month euro libor chart we have available (the BBA only updates the data with a one week time lag).

Also today we have news that China's CSI 300 Index has followed Japan's Topix into bear market territory, I have a much fuller reflection on what is happening to Japan in the Asian context up on Global Economy Matters.

German GFK Consumer Confidence Index December 2007 Down

German consumer confidence fell to the its lowest level in almost two years according to GfK AG's index for December, which is based on a survey of about 2,000 people. The index fell to 4.3 from a revised 4.8 in November, the market- research company said in Nuremberg today. That's the lowest reading since January 2006.

According to GFK:

An upswing in the consumer climate is unlikely, even towards the end of the year. While income expectations rose, economic expectations and the propensity to buy fell. Following the revised 4.8 points in November, the consumer climate forecast for December is 4.3 points.

Well-known economic risk factors, such as the strong euro, turbulences on the international financial markets and high food and energy prices continue to impact on the generally good German economy. A "sense of impending inflation” is currently influencing German consumers and the positive factors which are currently evident, such as the sustained improvement on the job market and rising incomes seem unable to prevent the evaporation of optimism where propensity to buy and economic expectations are concerned. Conversely, income expectations have stabilized at a slightly higher rate in November.

In fact, the rise in income expectations is pretty marginal - from minus 0.7 to zero - and the sub indexes are in non too spectacular shape generally.

What we can say is that the income expectations are now pretty flat, that the expectation about the economic outlook has been steadily deteriorating since June, while the propensity to consume took a nose-dive after December 2006 (isn't that strange, just after the 3% VAT hike that everyone said wouldn't matter) and hasn't budged, except slightly downwards. What this seems to indicate is that German consumers are now preparing for a hard winter (a hard and more elderly one) and, like their Italian counterparts, are busy thinking about saving. Maybe this helps put yesterday's IFO reading in a bit more perspective. I think the IFO was more about current conditions (and how they have mildly surprised on the upside) than about anticipated future ones.

Tuesday, November 27, 2007

Italian Business Confidence November 2007

Well hot on the heels of the small rise in the German IFO business confidence index we find that in contrast the ISAE Italian business confidence index declined in November to the lowest in almost two years as the euro's gains have been acting as a curb on exports. The Isae Institute's business confidence index fell to 92.2 from a revised 92.8 in October, the Rome-based research center reported today. That is the lowest reading since December 2005.

Again, I would draw attention to Claus Vistesen's eurozone Q3 GDP conclusions:

Although the slowdown seems set to be Eurozone and indeed also EU25 wide I will be watching Italy, Greece, and Portugal in particular since these three countries are those most likely to feel the pinch longest and hardest.

German IFO Business Confidence November 2007

Well this certainly is a moment with possible interpretations to suit all tastes. The German IFO just came in with a monthly upward rebound. True the bounce was marginal, up to 140.2 from last months 139.9, but still, up is up. So what do you make of that? Well, if we actually look at the chart we can see the numbers are in fact still well down on the autumn 2006 and spring 2007 readings, which more or less fits in with the general picture we are getting.

Interestingly if we turn to an examination of the sub-components in the index we find that the assessment of current conditions rose to 110.4 from 109.6 in October, while the indicator of expectations slipped to 98.3 from 98.6. German manufacturing is undoubtedly getting a good push from the favourable climate for exports (despite the rapidly rising euro), and especially in Eastern Europe where many of the currencies are directly or indirectly pegged to the euro. This impression is confirmed if we look at the readings for trade and industry, which rose from 7 to 7.6, and for manufacturing, which rose from 17.8 to 19.3 and compare these with construction, which fell to minus 21.3 from minus 20.6 and retail, which fell from minus 6.8 to minus 9.2.

As Claus Vistesen said in his revue of Q3 Eurozone GDP performance:

On the face of it the Q3 GDP release from the Eurozone seems to point to a rebound but we should not be fooled. I know that I tend to be a bit of a party pooper sometimes when it comes to the Eurozone but this time around you need to consider I think that the collective mass of almost all respectable analysts and economic commentators seem to agree with my general forecast. As such, all of us Eurozone watchers had pretty much agreed that Q3 all things equal would show a rebound relative to Q2 but given the monthly real economic data and confidence readings which have been rolling in it would also prove to be short-lived.

I think this is it. Steady as she goes, but the nose of the ship is now pointing downwards.

Moving Money Into Emerging Asia

A number of news items related to capital flows have been catching my eye in recent days.

First off Claus Vistesen has a timely piece examining the possible implications of what seems to be an impending decision in Thailand to finally lift the capital controls imposed by the Bank of Thailand last December in an attempt to curb upward pressure on the Thai currency (the Baht). As Claus says "double digit percentage figures for potential Baht appreciation are already flying all over the place".

The looming Baht appreciation issue only serves to highlight a much broader tendency we are seeing at work in currency and capital markets in recent days, which could best be characterised as involving the search for "yield plus" - in this case yield plus the benefits of currency appreciation. This situation was highlighted with particular poignancy by an article in Bloomberg this morning which explained how the US Dollar itself may now be being used as a "carry currency":

"Using the dollar to pay for purchases of currencies with higher yields is proving to be the most profitable trade in the foreign-exchange market.....

Investors are borrowing dollars and using the money to buy assets in countries with higher interest rates even though U.S. borrowing costs are 4 percentage points more than the Bank of Japan's and 1.75 percentage points above the Swiss National Bank benchmark. In carry trades, speculators get funds in a country with low borrowing costs and invest in one with higher returns, earning the spread between the two."

The logic behind this is really quite a simple one, it is a bet that even though US interest rates are still higher than those in the normal carry currencies the most likely direction of movement for interest rates in the US is down, and as these rates go down so (the thinking goes) will the dollar. Really, as I explained in this post, this then creates a dynamic where it becomes very interesting to borrow in the country whose currency has the greatest potential for long term decline, and to buy (and preferably to buy property, but equities probably come a close second) in those countries whose currencies have the greatest potential for long term appreciation, and whose domestic assets the greatest potential for upward revaluation. We could call this the new found virtue of being poor and developing.

I also came across another Bloomberg piece drawing our attention to a Goldman Sachs report about how many hedge funds are now shifting their Asian investments out of Japan (because of lower returns and poor corporate governance) and into other areas of emerging Asia.

Japan's average return on equity will be about 10.2 percent this fiscal year, compared with 20 percent in the U.S. and 15.7 percent in Asia, according to Matsui. Return on equity is a measure of how well a company uses its cash to generate profit.

Meanwhile, Japanese companies are fending off purchases by foreign firms seeking to boost share prices, by buying stakes in each other or taking so-called poison pill measures. Some 400 Japanese companies, or 10 percent of all publicly traded firms, have taken steps to ward off hostile takeovers, according to a Nikkei newspaper survey published in October.

Hedge funds investing in Japan have seen outflows of about $7 billion, while Asia ex-Japan has seen inflows of about $17 billion through October this year, according to data provided by Eurekahedge, a Singapore-based hedge-fund research company.

On another front the New York Times reported on a growing trend in Japan among individual investors for reallocating funds they have invested in the U.S. to faster growing emerging markets. Japanese investors, it seems, have reduced holdings of domestic mutual funds investing in the U.S. in 16 of the past 17 months.

In fact investment inflows in overseas-oriented funds have consistently grown at a higher clip than the outflow from U.S. funds. An estimated half of Japan's $14 trillion in personal savings is believed to be invested overseas in search of higher returns, especially in terms of yield, given Japan's extraordinarily low returns on deposits and bonds. At the same time, Japanese investors are gradually beginning to diversify their holdings, after having only embraced mutual fund investing about a decade ago. According to data from Daiwa Fund Consulting, Japanese investors have invested the dollar equivalent of $17.5B into emerging market funds over the past year, while reducing holdings of North American funds by $4B. Fund management companies have taken notice, resulting in a 36% increase in the number of emerging market mutual funds to 183 in total (vs. 137 U.S.-focused funds).

Conclusion: hedge funds are reducing their involvement in Japan, and Japanese investors are reducing their exposure to the US, and they are both headed for emerging markets, and in particular emerging Asia and Latin American where a favourable combination of both assett price apppreciation, higher interest rates and currency appreciation appear to offer a much better longer term return. Morgan Stanley's Stephen Jen got near to the core of the issue last Friday when he pointed out that:

"If one had invested US$100 in 1985, the investment would be now worth US$739 for global real estate, US$639 for equities, US$403 for global bonds, US$264 for non-energy commodities and only US$182 for crude oil (including the recent surge in oil prices toward US$100 a barrel)."

So where in the world are equity and real estate values about to get (in dollar terms) the big ride up? I don't think the answer to this question is too taxing, even your average garden-variety hedge fund manager has the capacity to see this. The real question is how fast will it all happen, and has the dollar past an interim "point-of-no-return", or are we about to see a temporary dollar resurgence? Very hard to call this one, I think.

Afterthought: there does seem to be news to suit all tastes and appetites though, since Bloomberg also report that the rumourology has it that the Chinese government - via China Investment Corp. - is considering investing money in Japanese real estate. I would have thought the interests of their citizens would be better served by putting the money in Indian, Turkish or Brazilian real estate, but then, as they say, there are opinions around at the moment to cater for all tastes.

You can find a better explanation of the logic which I think is driving all of this in this post here.

Monday, November 26, 2007

Global Recoupling, Japanese Exports and the Great Transformation

Claus - who has an excellent and highly entertaining post up on his personal blog about the quandry which must exist in almost everyone's mind concerning what is actually happening to the dollar at the moment, and whither lies its future - drew my attention earlier this week to this interesting piece from Nouriel Roubini about global recoupling. Actually the Roubini post raises a number of points, all of them interesting ones, and some of them not as semantic as they seem at first sight.

But in order to get in the frame of mind to think about all of this, why don't we take a quick look at the latest set of trade figures from Japan. As Bloomberg tell us:

Japan's exports rose to a record in October as companies shipped more cars and electronics to Asia and Europe, easing concern that a slowdown in the U.S. will cool the economy's expansion.

Exports climbed 13.9 percent from a year earlier, the Finance Ministry said in Tokyo today, double September's pace. That helped lift the trade surplus 66.1 percent to 1.02 trillion yen ($9.3 billion) as imports gained 8.6 percent.

Shipments to China and the European Union surged to the highest ever, cushioning a drop in exports to the U.S., where the worst housing recession since 1991 is crimping demand. Toyota Motor Corp.'s profit rose 11 percent last quarter, helped by sales of Camry sedans in Europe and Asia.
This is, if you will, the headline grabbing story, the one that everyone notices. Record Japanese exports, with a shift in emphasis away from the US and towards Europe and China. (You can find the details in this PDF from the Japanese Finance Ministry).

Now as we can see from the chart below, Japanese exports have been doing very well indeed in value terms since the start of 2006, and even in recent months have been holding up well in ever more difficult circumstances:

Digging a little deeper, and taking a look at the year on year chart for 2007, we can see there has been a very pronounced rate of increase over 2006, and in particular we might like to note how October's pace has in fact bounced back from the slowdown which was noted in September:

But it is when we come to the actual export shares that things get really interesting, since what we find when we come to look at the composition of Japanese exports is that exports to the US actually declined year on year in October, while exports to China and the EU have continued to accelerate (as they say, to some extent exchange rates do matter) and indeed Japan is even now close to closing the trade deficit it has been running with China.

And this perhaps explains why a Japan analyst like Morgan Stanley's Takehiro Sato has been talking about "decoupling" in the Japan context, not because Japan's economy is being driven finally by internal demand (far from it), but because the direction of exports is changing, and in particular Japan is now much more sensitive to growth in Europe and some emerging economies (Asean, China) than it is to the ups and downs which occur in the US. (For a fuller explanation of the entire Japan situation see our Japan Economy Watch blog, and most recently this post from Claus).

Decoupling or Recoupling?

Returning for a moment to semantic issues, it may well worth noting that there appear to be two bipolar couplets in circulation at the present time . On the one hand we have the "recoupling-decoupling" contrast and on the other the "hard landing-soft landing" one. Now this is neither the time nor the place to enter into an examination of what it is that those who use the expression "hard landing" in the US economy context might mean when they do so (other than to say that there seem to be interpretations around to suit all palates, but that I personally do not consider that a mere recession would constitute a sufficient condition to justify use of the expression "hard landing", and while I think the odds of garden variety recessions in the United States economy and elsewhere in the developed world in 2008 are over 50%, most of this will be a far cry from what I would be willing to term a hard landing).

Instead I would like to focus here on thinking about what we mean when we talk about "decoupling-recoupling", and I have chosen the Japan case to get us started, since I think it offers and easy way in.

Basically there seem to be two versions of the "decoupling" thesis knocking about. The first of these (which is now very definitely going out of fashion very fast) was based on the idea that the global economy was finally decoupling itself from the US one due to the fact that key global engines among the G7-type economies - and in particular Germany and Japan (and following in both cases lengthy periods of structural reforms) - were finally coming out of a long period of sub-par economic growth and achieving "home grown", domestic-demand-driven, sustainable recoveries in a way which would enable them to take more of the global strain during what was perceived as being a period of inevitable US "correction".

Claus and I never actually bought this story, in particular we didn't buy it since we never thought that domestic demand would recover in countries like Germany, Japan and Italy in the way in which many were expecting, essentially for age-related demographic reasons. I think history has, more or less, borne us out on that one.

But there is another sense of "decoupling" (which is the one Claus and I prefer to call "recoupling", although this is not recoupling in the way in which Nouriel Roubini uses the expression, which seems to refer to a renewed coupling to a US economy which is on its way down) and this is to do with the way in which certain emerging market economies (the EU 10, Ukraine, Russia, China, India, Turkey, Brazil, Argentina, Chile etc) are now accounting for a very substantial proportion of global growth (Claus and I have yet to do the detailed numbers on this, but suffice it to say that India, China and Russia alone will account for over 30 % of the growth in the global economy in 2007). This is a far cry from the central role which the US economy was playing in global growth in the late 1990s. So in this sense something fundamental has changed, and this is what Claus and I are calling "recoupling".

This situation can be observed quite clearly in the two charts which follow, which are based on calculations made from data available in the IMF October 2007 World Economic Outlook database. Now, as can be seen in the first chart the weight of the US economy in the entire global economy has been declining since 2001 (and that of Japan since the early 1990s). At the same time - and again particularly since 2001 - the weight of the soc called BRIC economies (Brazil, Russia, China and India) has been rising steadily. This is just one example - and a very crude one at that - of why Claus and I consider that demographics is so important, since it is precisely the population volume of the BRIC countries (and the fact that they start their development process from a very low base, ie they were allowed to become very poor comparatively, for whatever reason) that makes this transformation so significant.

Again, if we come to look at shares in world GDP growth we can see the steadily rising importance of these economies in recent years and the significantly weaker role of "home grown" US growth. The impact of the collapse of the Tech stocks/internet boom in 2001 is clear enough in the chart, as is the fact that everyone went down at the same time, and this is the old form of "coupling" wherein the US economy due, to its size (and hence specific weight) and "above-par" growth potential played a key role, and, as can be seen, when the US went down, then god save the rest. The present debate is really about what will happen if the rising dollar cost of oil and the ongoing difficulties in the financial sector caused by the sub-prime problem leads the US into recession in 2008. Will everyone else follow this time? In 1999 the US economy represented 30.91% of world GDP, and in 2007 this percentage will be down to 22.4% (on my calculations based on the forceast made by the IMF in October 2007). In 200 the US economy accounted for a staggering 40.71% of global growth, and by 2007 this share is expected to be down to 6.43%. So there are prima-facie reasons for thinking that this time round the impact of any US slowdown will not be as acutely felt in some parts of the globe as was the case in 2000, but which parts of the globe will be more affected and which less so?

The Global Economy, Who is Linked to Who?

What we have on our hands then is another type of "recoupling" (a very fertile metaphor this one, I think), and one which analysts like Richard Katz are missing, I feel, when they continue to put considerable emphasis on the "round tripping" component in those Japanese exports which are initially sent to the Asian Tigers and China (in the sense that many of these are assumed to be components for assembly and subsequent re-export) since I think we are increasingly seeing an element of autonomous local-consumption-driven demand in places like S Korea and now indeed inside China itself. Komatsu's recent decision to build a new factory inside Japan wasn't primarily driven by anticipated demand for earth moving equipment in the US economy it seems to me.

Komatsu Ltd., the world's second- largest maker of earth-moving equipment, said it will spend 5.3 billion yen ($48 million) to build a factory in central Japan to make excavators to meet rising overseas demand.

The company will spend the money on acquiring 104,500 square meters (26 acres) of land near Kanazawa port, and on construction costs of the factory, the Tokyo-based company said today in faxed statement. The plant, which will build excavators weighing 400 tons, will start production in August 2009 and will have a capacity to make 30 units annually.

Komatsu's investment follows domestic rival Hitachi Construction Machinery Co.'s move in increasing production capacity for giant excavators used in mining projects as demand expands in Indonesia, China and Russia. In January, Komatsu constructed its first domestic factory in 13 years to make large- size wheel loaders and dump trucks used in mining.

And looking at Japan exports in depth I really don't really see this indirect US dependence effect. Europe, China and Asean are all now very important for Japan, in their own right, and quite apart from the US cyclical connection, and obviously even in the event of a US recession US exports will not simply disappear from the map, they will simply reduce slightly rather than growing, but then they are already reducing and Japan is - at the time of writing - still maintaining healthy export growth. And then, of course, there will be India. So in this sense the declining share of the US economy in global growth does have a direct interpretation, since it means a decling dependence of export driven economies like Germany and Japan on extra spending on the part of the US consumer.

At the end of the day, however, I think I do need to add a kind of dollar-effect "caveat emptor" here. What we are talking about is a declining share of the US in the global economy in dollar value terms, and this decline is, by-and-large, being produced not by a large scale reduction in the rate of domestic GDP growth in the US, but by a relative decline in the value of the dollar, and as a knock-on consequence, a relative decline in the net worth of USA Inc. But be careful, since if the US economy was never worth the very high value that it acquired earlier due to the very high dollar exchange rates, it may well not be worth as little as future valuations may put on it should the dollar continue its decline.

So what I am trying to do here is distinguish between two things, the level of interdendence of the advanced economies on one another, and the key factors driving the exceptional growth we are currently seeing in the global economy. At the end of the 1990s this growth was driven by exceptional performance in the US, and now it is driven by exceptional - and one-off - catch-up growth in some huge developing economies. So the times have changed, and with them the risks of contagion from any locally based US problems. At the end of the day, however, Nouriel Roubini certainly is right in the sense that most of the EU isn't decoupled in any strong sense from cyclical movements in the US (or shielded from the impact on local property markets of the current global credit crunch), but I don't feel he is really adequately addressing the extent to which the global role of the US itself is reducing.

Two processes seem to me to be underpinning this decline. Firstly what for want of a better expression could be called the rise of the giant pandas (or pehaps the "bears", "pandas" and "elephants" following the "tigers" and the "lynxes", but well, I don't know, perhaps we are now gradually talking about all the animals imagineable across the entire human "zoo"), and secondly there is the ongoing slide in the dollar. Of course indirectly - and via the intermediary of a temporary upward structural shift in the euro - the former is really producing the latter as the already battered Bretton Woods II architecture gets steadily ground down. Both the US global GDP growth share and its absolute value share are now on the slide, and with that, logically, the level of direct coupling between the global business cycle and the US one. Indeed, with domestic US consumption taking a hit from rising energy costs and the internal credit crunch, it may in fact be the case that a US economy in need of exports for growth on a greater scale than hitherto is more closely coupled to the rest of the world than it was and in this sense some of the arrows on all our flow charts may have changed their direction.

Returning then to where we started, Claus informs us that he is "thinking a lot at the moment on this whole shift in global liquidity and capital flows and where this is all going", and he is surely not the only one. Is the move out of the dollar which we have been seeing all this year simply a temporary, cyclical, phenomen, or is there now a deeper longer term structural process underway? Many excellent conventional currency analysts, like for example Morgan Stanley's Stephen Jen, continue to assume that the dollar is now near its bottom. This may or may not be the case, I am really not sure. Normally I would go with Jen, if this process is simply a cyclical one then it would be reasonable to assume that the euro cannot rise much further without placing unbearable strain on the export dependent engines of the eurozone economy (indeed arguably it has already done so, and Angela Merkel this weekend added her name to the list of those voicing concern). But what if the move into the euro is but a stepping stone, and what if the ultimate global reserve currencies are the yuan and the rupee? If size is what counts - and the transition in the interwar years of the last century from the pound sterling to the dollar suggests that it does - then this would seem to be the logical end state of this transformation, a sort of Bretton Woods III with a much more diversified set of currencies in central bank reserves, and among these not the least significant being the newly developed economy currencies. And don't lets forget that if the central banks are now more than ever concerned about maintaining and even increasing the value of all those reserves they hold, then it makes much more sense to hold more of the weighting in currencies which are likely to rise in relative value than in those which are likely to fall over - say - a 10 to 20 year window.

So a large scale sea change would seem to be underway, and the only real question is whether a point of no return has been reached this time round, or whether the tide will again fall back (and the dollar recover some of its lost ground), before the water finally comes washing back in one unstoppable flood.

And decision time on this is surely not far away now, since the eurozone is in particular difficulty this time round given that both the export dependent parts of the zone (namely Germany and Italy, but increasingly I imagine smaller players like Finland and Austria) are now struggling with the high value of the euro, while at the same time the property-boom-driven members (Spain, Greece, Ireland) are being weighed down in the ever-tightening grip of the credit crunch. And again, as Claus and I have been arguing time and time again (and here), all of this does then leave the eurozone (via the Germany/Austria/Italy corridor) incredibly exposed to any financial and real economy problems which may be (or in fact arguably are) on the point of breaking out in Eastern Europe. It is the "coupling" with the emerging economies in Eastern Europe (which are surely much more vulnerable and exposed at the moment than are the mainstream BRIC economies and other developing powerhouses like Turkey, or even Argentina).

This is why I use the expression "great transformation" in the title to this post, since this is what we seem to be witnessing. Hitler's Wermacht general's may well have proved incapable of "breaking out" of the ring of encirclement which the Russian army had placed around them in Stalingrad, but the BRIC economies really now do seem to have it within their grasp to make what would really be a historic "panda-" rather than panzer-lead breakout from the economic encirclement and poverty in which they have been trapped for so many decades now.

Basically in both the above-mentioned cases demography does seem to be playing quite a central role, since demographically informed economic theory can help us understand both why some (though not all, ie Russia is different) of the BRIC economies are finally in a position to "break out" (the demographic dividend) and why those developed economies whose populations have median ages over 40 ( a select group whose number is little by little becoming a larger and larger proportion of the G23 economies - although notably this group does NOT include the US, the UK or France) are not able to generate sufficient domestic demand growth to take over the reigns from a weakened US economy and actually act as structural drivers of the global economy, but are instead destined to ride on the backs of those economies which may be considered to form part of the new group of emerging economy growth leaders (in the case of Japan China and emerging Asia, and in the case of Germany Central and Eastern Europe).

As I say demography helps us understand both these phenomenon (and possibly even how they are interconnected) since the key factor in explaining why it is the above mentioned group of emerging economies who are leading the charge (and not another group, always stripping out, of course, those commodity driven economies which are themselves riding on the back of the global growth boom) is the attainment of near- or below- replacement fertility and with this the possibility of a "normal" (which is not we can now see "normal" as understood by neo classical economics) expansion wherein domestic demand begins to achieve the status of an autonomous and independent driver of growth. This process is also known as the demographic dividend and I have recently explained in detail how this is working out in the case of Argentina (and here in the case of Turkey).

So we do have some sort of "recoupling" process at work out there, but it is not clear at this point just how sustainable this is. China's economy is, for example (and is extremely well known), extraordinarily dependent on exports, and even if some of the weight of these exports can be shifted towards Europe, it is not clear that China can resist a slowdown in both Europe and the US, and clearly it is not clear that Japan can resist a slowdown in the US, Europe and China etc etc.

So even if the global economy is now recoupled when compared with the position we had at the end of the 1990s this does not mean that it has become "uncoupled", indeed as I have been arguing repeatedly globalisation now means that the global economy as a whole is more tightly "coupled" now than it has ever been.

There is another detail which I would wish to draw attention to here before signing off, and that is that not all the emerging economies are alike. I have already suggested that methodologically it may well be necesssary to strip out the high fertility oil exporters (Nigeria, the gulf states, Venezuela etc) which for their own reasons may well be unable to generate stable autonomous local-demand-driven growth, but we also need to think about the cases of those emerging societies which have now had below replacement fertility for two decades or more. This would be principally the whole of Eastern Europe (including Russia) and of course China (with the one child policy). What is not clear in these cases is where they are going to get the labour supply from as we move forward to fuel both catch up growth in labour intensive sectors like construction and some kinds of manufacturing industry (the lower value added components) and the new human capital in sufficient quantities to make possible the rapid transition from one sector to another which is necessary to achieve the potential high rates of productivity growth.

This is why what has been happening in the Baltics and Bulgaria (where growing labour shortages coupled with construction booms are sending inflation rapidly through the roof) seems to us to be so important. The Baltic economies may - to use the words of the Economist - be "pipsqueaks", but they are a very useful and important laboratory. What, we need to ask ourselves, will happen if the "Balitic syndrome" spreads to Romania, and then to Poland? And what if Russia then follows in a domino-like chain? And what, oh woe of woes, will happen if this process (really I would argue when, rather than if) reaches China (and just how far are we away from this possibility?). So with these rather preocuppying thoughts I will leave you on this rather grey and wintry day here in Barcelona. Recoupling is taking place, but which of the chain links will hold, and which will break. Aha, if only we knew!