I am hard at work trying to write something, so I don't have much time or energy to blog, but two pieces on China that cannot go unremarked. Firstly And Xie again: this time he has picked up on the demographic issues related to China's high savings rate. Also the UN held an experts meeting on ageing in August, and one of the papers was on China: DEMOGRAPHIC DIVIDEND AND PROSPECTS FOR ECONOMIC DEVELOPMENT IN CHINA by Wang Feng, of the University of California Irvine and Andrew Mason, of the University of Hawaii and the East West Center. Just a short couple of extracts to give a taste:
During the last two and half decades, China has undergone demographic as well as economic changes of historic proportions. Demographically, China has transformed itself from a "demographic transitional" society, where reductions in mortality led to rapid population growth and subsequent reductions in fertility led to a slower population growth, to a "post-transitional" society, where life expectancy has reached new heights, fertility has declined to below-replacement level, and rapid population aging is on the horizon. In the not-too-distant future -- in a matter of a few decades -- China’s population will start to shrink, an unprecedented demographic turn in Chinese history in the absence of wars, epidemics, and famines of massive scales. In this process, China will also lose its position as the most populous country in the world.
The rationale for China’s one-child policy was a neo-Malthusian perspective on the relationship between population and development – a view largely dismissed by mainstream economists. The architects of China’s population policy can point, however, to the post-reform economic record as evidence of the success of the policy. This assertion can be questioned on two grounds. The first is the extent to which the transition to low fertility was accelerated by the one-child policy (Wang, 2005). The second, considered in this paper, is the extent to which fertility decline, the slow-down in population growth, and changes in age structure contributed to China’s economic success. In light of the recent and future changes in China's age structure, we also examine and speculate in this paper the role of population age structure changes in affecting China's prospect for economic development in the coming decades of the twenty-first century.
Wednesday, October 19, 2005
Monday, October 17, 2005
The BoJ is Convinced
The entire nine-member board of the Bank of Japan is convinced that deflation in Japan will be over by the end of this year: I only wish I was.
Minutes of the bank's board meeting earlier this month show board members expect year-on-year changes in consumer prices to be zero or to rise slightly at the end of the year.
In recent weeks, senior members of the BoJ, including governor Toshihiko Fukui, have been making statements saying the time is approaching when the bank can consider abandoning quantitative easing and considering raising interest rates.
Minutes of the bank's board meeting earlier this month show board members expect year-on-year changes in consumer prices to be zero or to rise slightly at the end of the year.
In recent weeks, senior members of the BoJ, including governor Toshihiko Fukui, have been making statements saying the time is approaching when the bank can consider abandoning quantitative easing and considering raising interest rates.
Inflationary Pressure From China?
Andy Xie had an interesting and important article in the MS GEF last Friday. He asks whether the epoch of China as a deflationary force on global prices may not be coming to an end. This is an interesting change of tack for Andy, since to date he has been on of the principal exponents of the Chinese 'reserve army of labour' argument wherby internal labour migration (estimated variously to have been of a magnitude of over 150 million people) drives down unit labour costs globally.
Andy is now speculating that this 'broad river' may now be reaching its limits. In particular difficulty in finding new migrants may be having an upwards impact on the 'cheapest cheap' wages. This has to happen at some stage, it is hard to tell whether we are there yet.
Xie speculates that this will impact on prices of products at 'big box retailers'. It will also influence the extent to which the cost push element of rising oil can be adsorbed. Otoh, Xie speculates that, as China moves up the value chain, the deflationary impact may still be felt in a broader range of end products.
China is not deflationary for the global economy at present, I believe. It could be an inflationary factor for one or two years due to cyclical and political reasons. Over time, China may become deflationary again when it moves up the value chain to re-price higher value-added products with Chinese costs. What matters to the market now is that China’s impact on global economy is becoming inflationary
The deflation winners, mainly big-box retailers, could see their gains reversed in the next year or two. Also, the major central banks may have to tighten into a slowing global economy, as the China factor no longer holds inflation back.
Andy is now speculating that this 'broad river' may now be reaching its limits. In particular difficulty in finding new migrants may be having an upwards impact on the 'cheapest cheap' wages. This has to happen at some stage, it is hard to tell whether we are there yet.
Xie speculates that this will impact on prices of products at 'big box retailers'. It will also influence the extent to which the cost push element of rising oil can be adsorbed. Otoh, Xie speculates that, as China moves up the value chain, the deflationary impact may still be felt in a broader range of end products.
China is not deflationary for the global economy at present, I believe. It could be an inflationary factor for one or two years due to cyclical and political reasons. Over time, China may become deflationary again when it moves up the value chain to re-price higher value-added products with Chinese costs. What matters to the market now is that China’s impact on global economy is becoming inflationary
The deflation winners, mainly big-box retailers, could see their gains reversed in the next year or two. Also, the major central banks may have to tighten into a slowing global economy, as the China factor no longer holds inflation back.
Growth or Inflation?
An interesting piece in the FT today highlights some of the issues I've been raising (here, and here) about central bank statements and economic realities.
As the FT points out UK retail sales for September, due on Thursday, are expected to confirm consumer survey reports of weak high street activity. The consensus forecast is for an increase of 0.2 per cent, slowing year-on-year growth rate from 0.8 per cent in August to zero. Employment data have also recently been consistently weak.
Menatime oil price rises have been pushing inflation steadily upwards.
This highlights the problem with the different 'measures' of inflation - the European HICP or 'core inflation' (less the 'volatile' fuel and food ite,s). How you feel about this in part depends on where you are looking from. Vis -a-vis the 'consumer', what they feel is the real and important rise in their expenses, as indicated by the HICP. This hits them where it hurts, in the pocket. This is certainly one extremely valid point of view. Getting through to the end of the month.
The central banker, however, has a different problem set. The issue facing the central banker is whether this year's increase in oil prices (the CPI/HICP level effect) will feed through to next years inflation in the core areas (the rate effect). This is why if you want to decide what to do about interest rate policy the core CPI is important. The fact that it is trending downwards must indicate something (the harder part of the question would be what).
So the central banker needs to decide whether those consumer expectations are valid, and hence raise rates, or whether consumers are feeling a temporary squeeze and so put rates on hold to help them get through the 'soft spot' (which post Katrina may be a rather hard 'soft spot').
I can't help feeling that those who claim the 'core inflation' readings are missing the Big Picture are rather shooting themselves in the foot here. They are, I think, concerned with the strain being placed on the low income consumer (for which well done) but by making so much fuss about the importance of the 'unadjusted' CPI they are in danger of seeming to argue for a faster pace of interest rate rises.
This would give the consumer 2005/2006 the worst of both worlds: a high real inflation rate, and extra mortgage (etc) payments to boot.
The central banker's problem is complicated by the fact that that he may well want to take into account other issues like house prices and the US current account deficit, and give all these things a relative weighting.
The FT quotes Morgan Stanley's Melanie Baker as warning that inflation could stick above the BoE’s 2 per cent target until December 2006 (this would be the knock-on year on year impact of the oil hike) and that a prolonged overshoot, lasting until the third quarter of 2008, is possible (and this would be the secondary impact problem) depending on oil price developments.
The decision set is all about how to evealuate the risk of the latter.
Meantime Brandeis economist (and former Fed research director) Stephen Cecchetti has some sound explanation of all this here (Hat Tip to Dave Altig at MacroBlog)
Cecchetti also raises the valid point that in real terms, and taking the actual US CPI readings as the yardstick (currently running at 4.7% y-o-y), with a fed funds rate of 3.75%, real rates are still negative and hence pretty 'accommodative'. But then we are in the aftermath of Katrina, and the consumer is getting the 'big squeeze'. Also if the CPI does peak, and inflation trend down even while the fed continues raising the situation could soon normalise to the target 'neutral' real rate of around 2 tyo 2.5%. In fact my advice would be to watch for the backdraft, since a much bigger problem may come with strong disinflation when there is a serious slowdown in the US economy (which isn't, btw, now).
As the FT points out UK retail sales for September, due on Thursday, are expected to confirm consumer survey reports of weak high street activity. The consensus forecast is for an increase of 0.2 per cent, slowing year-on-year growth rate from 0.8 per cent in August to zero. Employment data have also recently been consistently weak.
Menatime oil price rises have been pushing inflation steadily upwards.
This highlights the problem with the different 'measures' of inflation - the European HICP or 'core inflation' (less the 'volatile' fuel and food ite,s). How you feel about this in part depends on where you are looking from. Vis -a-vis the 'consumer', what they feel is the real and important rise in their expenses, as indicated by the HICP. This hits them where it hurts, in the pocket. This is certainly one extremely valid point of view. Getting through to the end of the month.
The central banker, however, has a different problem set. The issue facing the central banker is whether this year's increase in oil prices (the CPI/HICP level effect) will feed through to next years inflation in the core areas (the rate effect). This is why if you want to decide what to do about interest rate policy the core CPI is important. The fact that it is trending downwards must indicate something (the harder part of the question would be what).
So the central banker needs to decide whether those consumer expectations are valid, and hence raise rates, or whether consumers are feeling a temporary squeeze and so put rates on hold to help them get through the 'soft spot' (which post Katrina may be a rather hard 'soft spot').
I can't help feeling that those who claim the 'core inflation' readings are missing the Big Picture are rather shooting themselves in the foot here. They are, I think, concerned with the strain being placed on the low income consumer (for which well done) but by making so much fuss about the importance of the 'unadjusted' CPI they are in danger of seeming to argue for a faster pace of interest rate rises.
This would give the consumer 2005/2006 the worst of both worlds: a high real inflation rate, and extra mortgage (etc) payments to boot.
The central banker's problem is complicated by the fact that that he may well want to take into account other issues like house prices and the US current account deficit, and give all these things a relative weighting.
The FT quotes Morgan Stanley's Melanie Baker as warning that inflation could stick above the BoE’s 2 per cent target until December 2006 (this would be the knock-on year on year impact of the oil hike) and that a prolonged overshoot, lasting until the third quarter of 2008, is possible (and this would be the secondary impact problem) depending on oil price developments.
The decision set is all about how to evealuate the risk of the latter.
Meantime Brandeis economist (and former Fed research director) Stephen Cecchetti has some sound explanation of all this here (Hat Tip to Dave Altig at MacroBlog)
Cecchetti also raises the valid point that in real terms, and taking the actual US CPI readings as the yardstick (currently running at 4.7% y-o-y), with a fed funds rate of 3.75%, real rates are still negative and hence pretty 'accommodative'. But then we are in the aftermath of Katrina, and the consumer is getting the 'big squeeze'. Also if the CPI does peak, and inflation trend down even while the fed continues raising the situation could soon normalise to the target 'neutral' real rate of around 2 tyo 2.5%. In fact my advice would be to watch for the backdraft, since a much bigger problem may come with strong disinflation when there is a serious slowdown in the US economy (which isn't, btw, now).
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