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, June 29, 2007

Weekly Round Up

Well, while I haven't posted too much here, I have been pretty busy round and about.

In the first place, as I indicate in my last post, this has been Latvia week, with posts on GEM, on Demography Matters, and on Afoe.

I have also been busy thinking about Hungary (which is really going to need watching as we get into the second half of this year, I think), and have posted on the balance of payments situation, the employment position, and the slowdown in retail sales.

Also, over at Italy Economy Watch I have been noting how the Italian economy now shows definite signs of slowing, whilst in Japan, industrial output has been falling for a while now, as have consumer prices (as Claus Vistesen notes here).

Russian Growth and Labour Supply

According to this article, iinvestment in Russia's economy hit a record annual level of 23.1% in May 2007, while Russian GDP is now growing at an annual rate of 7.7%:

“The figure is 20.8% for the first five months of the year,” German Gref said. The minister said the growth was largely due to macroeconomic stability and companies' growing revenues. But he said the other side of the coin was that the $70 billion capital influx expected this year could create inflationary pressure. Inflation was 0.6% in June 1 until 25 and is expected to reach 0.6-0.7% this month. Compared to 0.3% inflation in June 2006, the minister attributed this year's higher rates to lower imports of vegetables, which picked prices 23% in May. The minister said the government hoped to keep the indicator no higher than the 8% target.

Now this mention of inflation should begin to alert us to something which may not be what we were expecting. Russia may well be beginning to experience inflation due to its increasing labour supply problem.

Russia itself is already feeling the population pinch:

Russia's annual inflation rate rose in May to the highest in four months, as a new law on foreign workers boosted prices of fruits and vegetables.

The inflation rate jumped to 7.8 percent from 7.6 percent in April, the Moscow-based Federal Statistics Service said in an e- mailed statement today.

Russia, the world's 10th biggest economy, passed new restrictions this year for foreign employees working in the country's booming retail industry. The government limited the number of trading places given to non-Russians, which boosted food prices and created inflationary pressures, economists said.

And the observant among you will note that Russian economics minister German Gref cites precisely this problem with the supply of vegetables as the explanation for the upward creep in wages.

But the real underlying problem is the growing domestic labour shortage (the population of working age is already falling, and many Russians have been migrating west.) In the Russian case the impact of this general East European labour supply problem is pretty substantial. John Litwack, the World Bank's chief economist in Moscow, estimates that Russia is going to need about a million migrants a year.

To compensate for this(the labour force decline, EH), Russia would need an annual inflow of 1 million immigrants, which is three times as the average official annual flowover the last 15 years, and five times the official flowin recent years.

But this is not only going to be a problem for Russia, since soaking up labour at the rate of around 1 million a year is pretty quickly going to run dry the East European and Central Asian well.

Monday, June 25, 2007

Czech Koruna Carry Trade?

The disparities between the EU8 Eastern Europe economies couldn't be greater at this moment. Latvia badly needs to raise, and basically can't, while the Czech Republic needs to lower, but can't really either:

The Czech koruna fell for a sixth day as speculation the central bank will keep interest rates unchanged at the lowest in the European Union this week attracted carry-trade investors.

The Czech koruna, used by investors as a funding currency for investments in higher-yielding assets elsewhere, slid to a 15-month low against the euro. The Czech benchmark rate is now at 2.75 percent after a quarter-point boost last month and will probably be kept on hold at the central bank's meeting on June 28, according to a Bloomberg survey of economists.

``No rate change should be negative for the koruna as it will leave it exposed to the carry trade, which could create the momentum to test the area of 29.0 per euro again,'' said Elisabeth Gruie, currency strategist at BNP Paribas SA in London.

Meanwhile "The Australian and New Zealand dollars rose to the highest in around two decades on speculation investors were attracted to the yield advantage of the countries' bonds over U.S. debt" while Brazil has a sizeable consumer boom on the back of inflows, and in Vietnam the government tries to steer the Dong steadily down.

Something pretty new is basically at work here, and in country after country traditional monetary policy instruments find themselves frustrated. Getting to grips with the underlying structural dynamics of what is happening represents a major challenge for us all.