Devaluations didn't work

THE term "currency wars" has sparked a vigorous debate within the economics commentariat. The term was coined by Brazil's then finance minister, Guido Mantega, in 2010 when the real was moving sharply higher, a nice irony given the real's recent falls to record lows. Some saw it as a negative development, talking of beggar-thy-neighbour devaluations designed to grab a bigger share of world trade; eventually, this was a zero sum game since all currencies cannot devalue. The counter-argument was that, on the contrary, this was positive for the world economy. Countries were easing monetary policy, either by cutting interest rates or adopting quantitative easing, and the aggregate effect would be to boost global demand. Parallels were drawn with the 1930s when developed countries abandoned the gold standard and those that devalued first, recovered most quickly.

A new (privately circulated, so no link) note from Stephen King, the senior economic adviser at HSBC, argues that the 1930s parallel is incorrect and that, currently

attempts by individual central banks to boost growth and inflation via currency depreciation have been collectively...Continue reading

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The business of skin

FROM newspapers to music, the media world has been upended by the internet. Porn is no exception. How has the industry survived amid an endless torrent of free adult content?

Shares struggle again

Shares struggle again

QE was not about saving the banks

WHAT has quantitative easing (QE) done for us? Regular readers may be aware that your blogger is not the greatest fan of QE. But it should be criticised for the right reasons, not the wrong ones. It was not, as John McDonnell, the finance spokesman of Britain’s Labour party said on BBC Radio 4 today, about “saving the banks”.

QE was adopted in 2009 because central banks were running out of options. Short-term interest rates had been cut close to zero; it is hard to impose negative rates in an economy where consumers and businesses can hold physical cash (but see Andy Haldane’s recent suggestion).  So the central banks decided to drive down long-term interest rates by buying bonds; when it did so, it credited the account of the seller with newly-created money. The aim, by reducing long-term yields, was to reduce the cost of borrowing for companies and households (through the mortgage market).

In the main, central banks bought government bonds but the Federal Reserve also bought mortgage-backed securities and the European Central Bank is buying some corporate debt. But the Bank of England owns only gilts, not convertible bonds and bank cocos as Jeremy Corbyn supporters on Twitter seem to...Continue reading

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The strangest chart

WE DID not have space for the following chart in our lead note on housing this week, but I think it is worth sharing. It comes from Neal Hudson, of Savills, and reveals a bizarre relationship. For the last forty years the number of new houses built privately has been almost exactly one-tenth the total number of houses bought and sold in a given year. So, for example, if 1m houses are bought or sold in Britain next year (as seems likely) then you can expect about 100,000 houses to be built by private housebuilders. Here is the chart, taken from the Savills website. 

This chart has big implications. Everyone goes on about how Britain needs to build 250,000 or so houses each year to keep up with demand. The chart, of course, implies that unless you get housing transactions up, private builders won't get anywhere near that figure (the public sector build very little...Continue reading

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Doughty but not superhuman

IN THE 1950s Caoyang New Village, then on the outskirts of Shanghai, became one of China’s first model settlements for heroic socialist workers. Thousands moved into its plain, lookalike homes to man its state-owned textile mills. Today, rising from the once-modest streets is a gaudy building intended for a new kind of model citizen: consumers.

Global Harbor (pictured) ranks among the world’s biggest shopping malls, its floor space equivalent to nearly 70 football fields. It blends ersatz European architecture with a distinctly Asian selection of stores. Beneath its vaulting glass domes and mock renaissance murals are a Hello Kitty café, a half-dozen noodle restaurants, jewellery shops dripping with gold and a theatre used for karaoke contests.  

It is only a slight exaggeration to say that China’s economic hopes rest on the faux-Corinthian columns of Global Harbor. With the country’s decades-old investment boom fast dwindling, it needs consumption to kick in as a new driver of growth. This rebalancing has been talked about for years, but has become more urgent as China’s industrial downturn has deepened. The nationwide...Continue reading

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Repeat prescription

THIS was supposed to be the year when the Federal Reserve would raise interest rates, which have sat between zero and 0.25% since late 2008. Shortly after the Fed allowed rates to lift off, pundits presumed that the Bank of England, which since March 2009 has held its base rate at 0.5%, a three-century low, would follow.

But on September 17th the Fed balked. Andrew Haldane, the Bank of England’s chief economist, has meanwhile been airing the prospect of a further cut instead of a rise. Central banks that have raised rates in the past have had to retreat, including the European Central Bank and Sweden’s Riksbank, which has since pushed rates into negative territory (see chart). Yet the longer rates remain so low, the louder the chorus of concern about financial instability, as investors in search of higher returns pile into ever riskier assets.

This week the IMF delivered its riposte to such concerns, in the form of a report that concedes that financial risks are rising, but contends that higher rates are the wrong way to rein them in. Interest rates are low because of the disappointing recovery in advanced economies...Continue reading

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The power of parity

JOAN RIVERS, a comedian who died last year, did not let chores get in the way of a career in showbusiness. “I hate housework,” she joked. “You make the beds, you do the dishes, and six months later, you have to start all over again.”

An escape from unpaid drudgery into paid work seems a distant prospect for millions of women. In South Asia, for instance, women carry out up to 90% of unpaid care work, including cooking, cleaning, and looking after children and the elderly. They are far less visible than men in work outside the home. Women make up less than a quarter of the paid workforce in India and account for just 17% of GDP, a measure of output that excludes unwaged work. By contrast, women contribute 41% of GDP in China.

A new report from the McKinsey Global Institute (MGI), a think-tank, underlines how gender inequality in work and society is itself distributed unequally across the world. The number-crunchers at McKinsey calculated gender-parity scores—gauges of how women fare at work and in society in comparison with men—covering over 90% of the world’s population. They reckon South Asia (India excluded) is...Continue reading

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Greys’ elegy

THE population of the developed world is ageing. Everyone knows that it is happening but no one is sure what it will mean. A new paper from Morgan Stanley, part-written by Charles Goodhart, a former member of the Bank of England’s rate-setting committee, suggests there may be dramatic economic impacts.

In particular, the paper suggests that the greying population may reverse three long-term trends: a decline in real (inflation-adjusted) interest rates, a squeeze on real wages and widening inequality. That is because those trends were driven by previous demographic shifts; first, the entry of the baby boomers into the workforce after 1970 and second, the more than doubling of the globally integrated workforce as China and eastern Europe joined the capitalist system.

This rise in the labour force produced downward pressure on real wages. It also led to slower improvements in productivity, particularly in Europe. As Mr Goodhart writes, “As labour cheapens, managers spend less effort and invest less capital in order to raise productivity.”

The falling cost of labour also produced downward pressure on the prices of...Continue reading

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Rubber barons

YOU can make a good living buying a kilogram of rubber in the Ivory Coast for 50 cents and selling it in Singapore for $1.50. But you would need to buy 10m kilos to make the deal worthwhile. Traders who do not have the necessary $5m must borrow it. Before the financial crisis, big banks like BNP Paribas, Citigroup, HSBC and ING deployed $14 trillion a year on such deals. But new regulations and swingeing fines for serving shady customers, in addition to falling commodity prices, have caused that figure to halve, leaving a host of new lenders jockeying to fill the gap.

The money that commodity producers borrow to help them dig, grow, store, transport or otherwise market their wares is vital to the global economy. But commodity trade finance, as it is known, is having to find new arteries. It is not that banks have lost lots of money in trade finance—far from it. The commodities being shifted serve as collateral for the loans used to buy them, limiting the scope for losses. Instead, the business has become an unintended victim of post-crisis regulation.

A cap on leverage at banks has hit European lenders, the powerhouses of trade finance,...Continue reading

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Pulling rank

Rwanda, business paradise

INDIA is mildly obsessed with rankings. More claims for record-breaking feats come from the country than from any other bar America and Britain, according to Guinness World Records, the publishers of a popular compendium of them. Its politicians like to boast that, as China’s economy falters, India is (or will soon be) the world’s fastest-growing big economy. And this month the commerce department published a ranking of India’s states according to the progress they had made on economic reforms. The initiative was inspired by the World Bank’s annual Doing Business report, which ranks countries on ten criteria, including the ease of starting a business, paying taxes and registering property. India lies a lowly 142nd out of 189 countries on the World Bank’s scorecard, but Narendra Modi, its prime minister, has pledged to propel it into the top 50.

Other leaders have similar ambitions. A favourable spot in the World Bank’s list is useful when pitching for foreign-direct investment or aid. Yet when such a measure becomes a target of policy, it may cease to be a reliable guide. Countries might...Continue reading

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All credit to them

AFTER credit dried up in America in 2008, the Federal Reserve scrabbled for ways to perk up spending. One trick it tried was to offer banks concessionary funding, hoping they would lend more to consumers and so induce Americans to open their wallets. An NBER working paper* published this week by Sumit Agarwal of the National University of Singapore, Souphala Chomsisengphet of the Treasury Department, Neale Mahoney of the University of Chicago and Johannes Stroebel of New York University looks at data from hundreds of millions of credit cards from 2008 to 2014 to work out why the results were so disappointing.

First, the researchers looked for evidence of pent-up demand for consumer credit. That involves comparing the credit-card balances of people who have very similar credit scores but end up on different sides of the various spending-limit thresholds that lenders impose on cardholders. The scale of excess borrowing by those with the higher limit, the theory runs, gives a sense of how much more those with the lower limit would spend if they could suddenly borrow more. This is important, because banks tend to boost their consumer lending not by lowering...Continue reading

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Hard-nosed compassion

THERE are 20m refugees worldwide, most of them children. Some 1.6m Syrians live in Lebanon; even more in Turkey. Humanitarian agencies struggle to meet their basic needs. In July the World Food Programme (WFP) cut assistance to refugees across the Middle East, saying that its regional operation was 81% underfunded. One way to make scarce aid money go further, argues a report* released this month by the Overseas Development Institute and the Centre for Global Development (CGD), two think-tanks, is for donors to give less in kind and more in cash.

Many developing countries hand cash to needy citizens to help them escape poverty. But less than 6% of humanitarian aid last year came in the form of cash. One concern is that refugees, like others in desperate circumstances, may not spend the money well. That’s because the stress of poverty engenders a “scarcity mindset”, as Sendhil Mullainathan of Harvard University calls it, which can lead to bad decision-making, in part through the overvaluation of present benefits over future ones. Abhijit Banerjee and...Continue reading

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Murphy's law unto himself

THE GUARDIAN carried an interesting article on Tuesday, written by Zoe Williams, about Richard Murphy, the architect of Corbynomics. In it, Mr Murphy responds to the critics of his most arresting idea, "people's quantitative easing". Given that Mr Murphy has also responded to our misgivings about PQE (see his blog here, where he accuses us of "misinformation and fairy tales") it is worth looking at what he said.

To recap on PQE: it is a radical twist on a policy that the Bank of England has pursued since 2009. Instead of using newly created money to buy government bonds, as happens under ordinary QE, Jeremy Corbyn seems to want the BoE to use that cash for more productive purposes, by buying bonds from the national investment bank.

The first critique, as Mr Murphy sees his critics, "was that he was threatening the Bank of England’s independence". Mr Murphy responds by arguing the following; please try to read closely:

I’m deeply frustrated,...Continue reading

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Pensions: the new enemy of pay rises

BRITAIN’S productivity crisis—in which output per hour worked fell for six years after the financial crisis—has not stopped wage growth from surging to 2.9% this year. That is good news for Britain’s workers. But, as in America, it would be a mistake to think that this situation is normal. A gap has long existed between productivity and real wages. It has usually gone the other way though; median hourly pay growth typically lags increases in productivity. Data from the Resolution Foundation, a think-tank, shows that whilst productivity has risen by over 60% in Britain since the late 1980s, median pay has grown by less than 40%. Britain's workers have been getting ever more productive, but have not been reaping the gains from their greater efficiency. 

What is to blame for this? Gavin Kelly of the Resolution Foundation argues that the rising importance of “non-wage compensation” is largely to blame. With a fixed labour share of national income, an increase in non-wage compensation (such as pension contributions and payroll taxes) reduces the amount paid in wages. By some estimates, almost half of Britain's “pay...Continue reading

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Why the Paris conference may not be enough

In December talks in Paris involving more than 200 countries may result in a new agreement aimed at reducing carbon emissions. In the months leading up to the conference, The Economist will be publishing guest columns by experts on the economic issues involved. Here, John Quiggin of the University of Queensland, Australia, argues why policymakers need to take further action to reduce carbon emissions if climate change is worse than expected.

WITH global temperature data setting new records each month, "sceptical" positions about climate change have crumbled. Those seeking a more credible basis for opposing action to reduce carbon emissions have shifted their ground. Most have moved to the view advocated by "lukewarmers" like Bjorn Lomborg and Roger Pielke: that unmitigated global warming would not be so bad after all, and that adaptation is the best response.

Surprisingly, advocates of this view cite the authority of the Intergovernmental Panel on Climate Change (IPCC) for this assertion. The leading source for this claim is Jim Manzi, editor of the National Review, who summarises the evidence...Continue reading

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An economy run to benefit producers?

MOST people are aware of their faults and foibles, and understand they are shared by others. They may also understand how these foibles may have significant effects, such as the marshmallow test (kids who resist temptation achieve more later in life) or loss aversion (people sell their winning stocks but hang on to their losers).

These findings have made a bit of a dent in orthodox economics, hence the acceptance of "nudge" approaches which aim to influence consumer behaviour by framing their choices in particular ways. Auto-enrolment into pension schemes (requiring workers to opt out, rather than opt in) is the best example. In broad terms, however, I don't think behavioural insights have changed the way that people think about economics. A free market is one in which producers compete to sell goods to consumers on the basis of price, or quality. Competition works to the benefit of consumers, leading to innovation and the elimination of shoddy goods; a restaurant that serves disgusting food, or has terrible service, will soon go out of business.

However, while we can all think of markets that do work like that (smartphones, for example), we can also think of plenty that don't.  In their new book, "Phishing for Phools: The Economics of Manipulation and Deception", Robert Shiller and George Akerlof look at markets where customers are enticed to buy...Continue reading

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Why Britain is not so unequal after all

ONE of the key aims of taxation and public spending is to redistribute income from rich to poor. The way most statisticians, economists and policymakers think about this is in terms of a cross-sectional snapshot: what the distribution of wealth or income is between different people in a population in a single year. But we might care more about lifetime incomes: in the modern labour market, many people now have very high incomes in certain parts of their lives, and much lower ones at other times.

A new paper by the Institute for Fiscal Studies (IFS) shines a new light on how well the British tax system redistributes incomes over people's lifetimes, in addition to using the cross-sectional approach. It presents several interesting findings. For a start, it finds that lifetime inequality in Britain has always been much lower than cross-sectional inequality (see first chart). This is because the poorest in any given year are not always poor for their entire lives; the IFS's simulations suggest that those who, over the whole of their life, are in the lowest 10%, only spend an average of a fifth of their lifetimes at the...Continue reading

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Noxious business

VOLKSWAGEN confessed to cheating on emissions tests in America in the latest corporate blow-up. How do firms deal with costly disasters both accidental and self-induced?

A crisis of confidence

EUROPEAN stocks are taking another battering this morning with the Dax down 285 points, or 2.9%, at the time of writing. A further fall in commodity prices seems to be the immediate trigger but that may in turn be due to concerns about growth in Asia; the Asian Development Bank cut its forecast for GDP growth this year by half a percentage point (from 6.3% to 5.8%). Its China growth forecast is the slowest rate since 1990.

Markets have been relatively immune to weak growth in past years because of the backstop provided by the monetary authorities; bad economic news was treated as good news because it would lead to lower rates or more quantitative easing. But what we have seen this summer is a sense that the authorities are not in control of events. The Chinese devaluation was not a huge move but the confusion surrounding it (and the slump in Chinese equities) created an impression of dithering. The Federal Reserve has not helped confidence either. It was not so much that the Fed failed to push up rates (probably the...Continue reading

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Three economic crises, cutting rates and banning cash

ANDY Haldane, the Bank of England's chief economist, has given some of the more thought-provoking speeches of any central banker in recent years (see here and here). His latest effort is bound to capture a few headlines, not least because it heads off in three separate, but interesting, directions.

The first is to ponder what central banks can do at the zero interest rate bound if the economy falls back into recession. The average amount of monetary loosening by a central bank in a recession is 3 to 5 percentage points but that, of course, requires rates to get to 3-5% in the first place. As the Fed showed yesterday, they are struggling to get rates up by even a quarter of a point.  That leaves central banks with three options. The first is to alter the inflation target, say from 2% to 4%. Economists struggle to find any adverse effects of mild inflation; it is only double-digit rates that seem to be damaging. But how can central banks get there? The hope is that, by committing to such a target, sentiment will change; workers will demand higher wages to compensate and this will, by itself, create inflationary pressures. Mr Haldane worries...Continue reading

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The zero rate trap

SO THE Federal Reserve didn't push the button after all. All the speculation and the debate will now have to focus on October or (more probably) December for the first increase since 2006. On balance, we feel this was a sensible decision; the Fed didn't want to join the ranks of banks that tightened too soon. 

But the zero rate regime illustrates the old adage that "it is better to travel hopefully than to arrive". And that is neatly illustrated in a new blog post from a Bank of England staffer, May Rostom. Most British homeowners have variable rate mortgages (or short-term fixed rate deals) so interest rate cuts staved off a potential disaster in the housing market. The good news is that fewer people were forced out of their homes; the bad news is that the housing market didn't "clear" as it did in the US, with prices returning to more affordable levels.

As the economy recovered in 2012-13, house prices took off again, particularly in London.  The ratio of house prices to...Continue reading

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Why good jobs numbers may never be enough

THE Federal Reserve’s interest-rate-setters opted for caution when they voted not to raise rates at today’s meeting. On some measures, things look better than when the rate-setting committee last met in June. The committee’s median growth forecast for 2015 has risen from 1.9% to 2.1%. Unemployment has fallen faster than expected, to 5.1%. But with the inflation outlook weakening, the Fed chose not to rush into a rate rise. This was the right choice (see article). But the longer the Fed holds off in the face of strong jobs data, the tougher its communication challenge will become.

Global economic weakness has brought down the Fed’s inflation forecasts. Commodity prices continue to fall, while the relative strength of the American economy means the dollar has strengthened, depressing the price of imports. Janet Yellen, the Fed’s chairman, thinks those trends will be transitory. On that basis, she says there is “an argument” to raise rates now, to get ahead of a pick-up in inflation once these...Continue reading

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Global concerns mean the Fed leaves rates unchanged

THE world will have to wait for the first American rate increase of the Twitter and iPhone age. Citing concerns about the global economy, the Fed decided to leave rates unchanged at 0-0.25%. Jeffrey Lacker was the one Fed governor to dissent, arguing for a quarter-point increase.

In the run-up to the announcement, investors seemed to have anticipated the Fed's inaction but markets were concerned by the tone of the statement. The Dow Jones Industrial Average and the S&P 500 bounced around as investors absorbed the news. But bond yields fell with the 10-year yield dropping from 2.26% just before the announcement to 2.22%, and the 2-year yield falling from 0.775% to 0.72%.

The medium-term casualty of the announcement will be the dollar. The greenback had been strengthening for much of the year (see chart) on the expectation that higher rates would attract foreign capital. But the dollar dropped against the euro and the yen in the absence of higher rates.

In a sense, the statement may add to investor uncertainty. Rather than looking simply at the domestic economy, the Fed is now taking notice of global developments. But that makes it harder for investors to assess which data to monitor and when the Fed will consider the global backdrop has improved. Further volatility...Continue reading

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The great British housing-market chart-athon

TO HELP readers understand Britain's bubbly housing market, we have assembled a list of charts .

The chart below is taken from the Bank of England. It's a very rough estimate, which I have adjusted for inflation. The trend is quite clear: in the last forty years, house prices have increased rapidly. (You can find similar trends in data from Nationwide, a building society; inflation-adjusted house prices have soared in recent years.) 

What explains this? The most obvious culprit is a lack of supply. The chart that any watcher of the British housing market knows off by heart is the following, which shows the construction of new dwellings since 1970. In recent decades the public sector has got out of the way; these days very little local-authority housing is built. 

However, this chart does...Continue reading

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Caste iron

Stained by commerce

IN MOST countries a stint at a big international bank is no disqualification for a top job at a central bank. Mark Carney of the Bank of England (ex-Goldman Sachs), Mario Draghi of the European Central Bank (Goldman again) and Bill Dudley of the Federal Reserve Bank of New York (yes, Goldman too) are three prime exhibits. Yet the nomination of François Villeroy de Galhau, until recently a senior executive at BNP Paribas, as the new governor of the Bank of France has prompted an unusual rumpus.

Mr Villeroy de Galhau (pictured) is the impeccable product of French elite education. He graduated from not one but two of the country’s top public graduate schools—the Ecole Nationale d’Administration and Polytechnique—and is a former member of the inspection des finances, an elite corps of finance-ministry officials. Situated on what friends call “the Catholic left”, he also has long had ties to the Socialist Party of President François Hollande. Before joining BNP in 2003, he was chief of staff to two Socialist finance ministers, Christian Sautter and Dominique...Continue reading

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Flow dynamics

THE man who calls himself Jack is a caricature of a small-time gangster. Sporting a chunky Louis Vuitton belt, a gold necklace and gold-rimmed sunglasses, he chomps on a Cuban cigar. He says he has come to a pawnshop across the street from the Ponte 16 casino in Macau, a gambling Mecca and former Portuguese colony that is administered separately from the rest of China, only for its fine Cohibas. But when asked for advice about how to exchange yuan held within China for foreign currency—a transaction officially limited by China’s capital controls—he breaks into a laugh and flashes a Chinese bank card. “Just swipe it,” he says. “However much money you have in your China account, you can transfer it here.”

Macau’s role as an illicit way station to move cash out of China, away from the government’s prying eyes, is nothing new. In recent months, though, things have been busier than normal. Capital outflows were already on the rise because of worries about the economy. During the summer, after the stockmarket crashed and the government let the yuan weaken, they soared. Official data indicate that more than $150 billion...Continue reading

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Whose model is it anyway?

A SIMPLE way to judge the solidity of a bank is to compare the amount of money it can afford to lose without keeling over to the size and riskiness of its business. After the financial crisis, regulators sensibly worked to boost the first figure: banks now fund their lending less with money they borrow themselves, often from depositors, and more with capital belonging to their shareholders. That was the easy bit. Trying to get to the bottom of how risky banks are, and so how much capital each requires, is now top of regulators’ minds. Beyond further denting the sector’s profits, the outcome of their review threatens to introduce risks of its own.

Although seemingly arcane, the level of capital banks need is central to their profitability—and, they argue, to their ability to finance the real economy. With interest rates close to zero in much of the rich world, borrowed money is cheap for banks, if not virtually free. Shareholder funds, on the other hand, cost them around 10% a year—the return typically demanded by investors for agreeing to bear the first losses in a sector with a tendency to blow up. So the debate between bankers and their watchdogs...Continue reading

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Looking for the lifeboats

MORE investors fear the American stockmarket is overvalued than at any moment since 2000, according to Robert Shiller of Yale University. Recent research by Deutsche Bank, meanwhile, suggests that government bonds are as expensive as they have ever been. So it makes sense for investors to consider what assets they should buy to hedge against a sudden plunge in the value of equities or bonds.

New research by AQR, a fund-management group, looks at the ten worst quarters for global equities and government bonds between 1972 and 2014. On average, equities lost more than 18% during such quarters while bonds, a less volatile asset, lost 3.9%.

These two asset classes are often seen as complementary: the classic “balanced” portfolio comprises 60% equities and 40% government bonds. Shares are riskier and benefit from economic growth; bonds are safer but their value is eroded by inflation. The AQR numbers show that government bonds do act as a useful hedge for equities, earning an average return of 4.8% in the quarters when shares plummeted. That is good news: both assets may look overvalued but they are unlikely to fall in...Continue reading

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Part-time palaver

WHAT is an employee? Judges in several American courts are grappling with just this question. Most notably, some drivers for Uber, an app-based taxi service, are suing to have themselves declared employees, rather than independent contractors, in a bid to gain more rights. With technology making it ever easier to farm out small tasks, and freelancing on the rise, the traditional definition of employment may eventually break down. Yet the importance of the “employee” label—and the benefits that come with it—is often overstated.

Historically, the challenge for economists has been to explain employment rather than contracting. Firms with employees use plans and hierarchies to get things done; those who use contractors rely on markets and prices instead. In 1937 Ronald Coase, an economist, argued that this comes down to transaction costs. For instance, it is difficult to contract on output when it is tough to judge quality (as with, say, a spreadsheet). When transaction costs are high, it may be better to replace contractors with employees, who are paid for their input rather than outputs.

A corollary to Coase’s theory is that when...Continue reading

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Becalmed

AT THE blustery Port of Tilbury, on the eastern outskirts of London, the word in the air is diversification. Less space is being given over to conventional container shipping. Instead, the port’s owners are investing in new projects. A large metal skeleton will soon become a refrigerated storage unit, to hold perishables on their way to Britain’s supermarkets. According to Tilbury’s chief operating officer, Perry Glading, the country’s container ports have a problem with overcapacity. Tilbury’s response is to use the port’s 1,000-acre site as flexibly as possible.

World trade data bear out Mr Glading’s caution. In South Korea, a bellwether for the global economy, exports of goods fell by almost 15% year on year in August in dollar terms. In China, the most important link in global supply chains, exports were down by over 5%. British and American exports have also been slipping. In the first six months of the year global merchandise trade shrank by more than 13% year on year. From the mid-1980s until the middle of the last decade, annual trade growth stood at 7%.

The recent falls can be partly explained by changes in prices. The...Continue reading

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Far-out and far left

BRITAIN'S Labour party has a new leader and possibly a new, radical economic agenda, Africa's farms aren't growing and the upside to tube strikes

Why tube strikes help Londoners

SINCE 2000 London has seen around 40 strikes on the Underground. The chaos which accompanies them are a short-term drag on the capital’s economy. The Federation of Small Businesses, an industry body, estimated that the one-day strike in July cost London £300m ($462m). But a new paper, by researchers at the universities of Oxford and Cambridge, points to the long-term benefits of tube strikes. 

The focus of the paper is Londoners’ commuting patterns, before and after industrial action takes place. It looks at a two-day strike in February 2014, which the National Union of Rail, Maritime and Transport Workers called in response to plans to close ticket offices and make voluntary redundancies. In that strike, some union members continued to work: the effect was that 171 out of 270 tube stations closed for the day. Some commuters were not much affected by the strike, while others were less lucky.

The authors compare the behaviour of those hit by the strike to those that were not. To do so, they gather anonymised data from Oyster cards, the payment gizmos that Londoners use to enter and leave the tube. They end up with data on about 18,000 Londoners over a 20-day period who...Continue reading

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Trying to limit the flow of non-Europeans has backfired

FIGURES published last month showed that British net migration was 330,000 in the year to March, the highest on record. This confirmed what was already clear: recent efforts to halt immigration have been largely futile. With freedom of movement guaranteed in the European Economic Area (EEA), the Conservative-led coalition was forced to focus on reducing immigration from elsewhere. In 2011, a range of restrictions on non-EEA immigration were introduced. Populist politicians have bemoaned their narrow focus; economists the impact they have had on business.

 

New research will infuriate the former and provide some consolation to the latter. According to a paper by Cinzia Rienzo of the National Institute of Economic and Social Research and Carlos Vargas-Silva of Oxford University, restricting high-skilled non-European migration has not only had little impact on the overall number of people coming to Britain, it may also have encouraged migration from Europe. 

 

The researchers used the rate of growth in the number of high-skilled migrants prior to the introduction of restrictions in 2011, adjusting for labour-market conditions, to create a counterfactual in which laws restricting high-skilled non-European migration had not been passed. Under such a scenario, the number of educated migrants coming to Britain from both...Continue reading

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Many unhappy returns

IF YOU think that financial assets are expensive at the moment, you are not alone. Deutsche Bank has looked at the prices of equities, bonds and residential property in 15 countries as far back as 1800. The average valuation of the three asset classes is above the level of 2007 and close to an all-time high (see chart).  

Of the three assets, bonds are the priciest. A combination of very low inflation and big purchases of government bonds by central banks means that nominal yields are close to record lows; real yields (ie, accounting for inflation, using a five-year average) have been lower only 17% of the time. For equities, because of the lack of long-term profit numbers, Deutsche compared share prices with nominal GDP. On this basis, equity-market values have been higher only 23% of the time (though shares looked dearer before August’s sell-off). For houses, Deutsche was only able to find data from 1970. It calculates that real house prices peaked in 2007 and are now at average levels.

The three asset classes have not always moved in tandem (which is why the average plotted in the chart does not reach one or...Continue reading

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Tightening pains

It can get uncomfortable

ECONOMISTS and investors are not only worried about when the Federal Reserve will start to push up interest rates. Just as important is the scale and length of the tightening cycle—how much the Fed will need to tighten policy, and how long it will take to do so. There have been 12 American tightening cycles since 1955, and they have lasted just under two years on average. In five of the past seven instances, however, the Fed has relented in a year or less, largely because inflation has been relatively subdued in recent decades.

The inflationary periods of the 1970s and early 1980s saw the biggest increases in interest rates; that helped push the mean increase over the 12 cycles to five percentage points. But the median change may be a better guide to the coming cycle; it stands at just over three percentage points.

Central banks tend to push up rates when the economy is growing rapidly and inflationary pressures are emerging. If they overdo it, the economy may tip into recession. On average, a recession has followed about three years after the Fed’s first hike. Yet that is partly...Continue reading

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Vision and reality

SHOWPAD is a fast-growing business, which demonstrates that European capital markets can work well. The firm, founded in the Belgian city of Ghent in 2011, provides an innovative software platform that allows companies to keep in touch with their salesforces through a variety of mobile devices, enabling them to see what pitches work and thus improving their marketing. In 2013 it got $2m of funding from Hummingbird Ventures, a venture-capital fund also operating out of Ghent; last year it attracted a further $8.5m from Hummingbird and Dawn Capital, a London-based fund. That support has allowed Showpad to set up offices in San Francisco and London, scaling up its operations to employ around 100 staff. Some 750 firms are now using the service; the firm expects its recurring revenues to reach $10m this year.

This happy pairing of European investors and European entrepreneurs is far from unique. As startup industries have bloomed in several cities in the European Union, including Berlin, London and Stockholm, the amount of money raised by European venture-capital funds has surged. Even so, they have a long way to go to catch up with their...Continue reading

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No way out

Investors in Puerto Rican bonds have been waiting nervously ever since Alejandro García Padilla, the American territory’s governor, announced in late June that its debts were unpayable. On September 9th he released a recovery plan that puts the island’s cash shortfall at $28 billion in 2016-20, or 40% of its current, shrinking annual output. The plan also proposes a series of budget cuts, tax increases and other reforms to cut the shortfall in half. As for the rest, it merely says the government is “working on a voluntary exchange offer”, without giving any details. But the island’s many creditors, who hold debt from 17 public entities, each offering varying degrees of protection, are about as likely to volunteer en masse for haircuts as the government is to pay them on time and in full.

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More red lights than green

PITY the central banker. When models of the economy go haywire, academics can retreat to their offices to fix them. But even when signals flash red, amber and green at once (see chart), central banks must continue to steer the economy. When the Federal Reserve’s interest-rate-setters meet on September 16th-17th, there is a decent chance they will raise rates for the first time since 2006. The consequences of such a decision are shrouded in uncertainty, due to the strange behaviour of the American economy since the financial crisis.

Before the crash, economic models said central bankers had a straightforward task. So long as inflation expectations stayed on target, the Fed could more or less focus on the labour market. High unemployment would allow firms to hire workers on the cheap, keeping their costs and prices subdued. A fizzier labour market would cause wages—and hence prices—to froth. The job of the central bank was to tweak rates to keep things in balance.

Yet in the six years since America’s economy hit rock-bottom, it has defied this textbook model. In late 2009 unemployment reached a high of 10%. Such abundant...Continue reading

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Crime and leniency

“YOU can’t rob a bank on charm and personality,” noted Willy Sutton, the prolific American criminal whose tool of choice was a Tommy gun. No matter how likeable the larcenist, a stickup is invariably an unpleasant experience for employees. According to a new paper* by Paola Acevedo of Tilburg University and Steven Ongena of the University of Zurich, the trauma affects how bankers subsequently do business.

The authors look at bank lending after heists in Colombia, a country where 835 bank robberies took place between 2003 and 2011. They find that loan officers treat would-be borrowers differently in the aftermath of an armed robbery. Loan volumes did not change, but the duration of loans issued in the first 90 days after a stickup is 70% longer. The average Colombian loan matures in 5.4 months, but a newly burgled branch typically lends for 8.7 months. The traumatised loan officers also demand collateral more of the time, and more of it, but offer slightly lower interest rates than normal.

All of these changes reduce the need to deal with new customers in person. Lending for longer periods pushes repayment meetings further into the...Continue reading

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Indecorous leave to remain

“CITIZENSHIP must not be up for sale,” said Viviane Reding, then a vice-president of the European Commission, last year. Residency, it seems, is another matter. Though not as brazen as the small Caribbean states that sell foreigners passports for a few hundred thousand dollars, roughly half of the members of the European Union now offer long-term visas to big foreign investors. America has done so since 1990; Britain since 1994. In 2012 and 2013 Greece, Portugal, and Spain piled in, hoping to succour their sickly economies.

Such visas do not come cheap. Britain just raised its price: would-be residents must now invest £2m ($3.1m). The Portuguese government offers one of the least expensive schemes, but its cut-price offering still involves putting €500,000 ($560,000) into property (see chart).

Despite the steep price tag, demand has been surging, thanks in part to Chinese millionaires. So far, 80% of visas granted under Portugal’s scheme have gone to applicants from China. In 2014 90% of American investor visas were awarded to Chinese, up from 19% a decade earlier. There have been more Chinese applicants to the...Continue reading

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Prudence and profligacy

 

THE word “austerity” entered the public discourse after the global recession punched a hole in public finances across the rich world. Governments scrambled to paint themselves as the most prudent, either to win votes (Britain), or to persuade their creditors that they could cut no more (Greece). But matching the rhetoric to the reality by measuring exactly how austere governments have been is not straightforward.

A simplistic approach would be to look at how much governments have managed to reduce borrowing (the difference between taxes and spending). But borrowing may change for reasons other than self-denial. In the middle of a debt crisis, ballooning spending on interest payments will mask efforts to squeeze public services or state pensions. By the same token, an economic recovery that nudges people off unemployment benefits and into jobs pulls down spending and boosts tax receipts, with the appearance, but not the pain, of austerity.

A better method is to look at changes in the cyclically adjusted primary budget balance—ie, the surplus or deficit after stripping out interest payments and temporary effects...Continue reading

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Keeping it simple is stupid

"A DEMOCRATIC society in its thirst for liberty may fall under the influence of bad leaders" worried Plato who also feared that "popular acclaim will attend on the man who tells the people what they want to hear rather than what truly benefits them." These worries seem all the more pertinent today, as a quarter to a third of the electorate in many countries seems willing to lend support to candidates from out of the mainstream.

The problem is not so much that such candidates have new ideas, but that they are dangerously simplistic. The journalist HL Mencken remarked that "For every complex problem, there is an answer that is clear, simple and wrong." The idea may be building a wall on America's southern (or even northern) border; it might be raising £120 billion in "missing" tax revenues; it might be "getting a better deal" with Iran on nuclear inspections; it might be rejecting austerity for Greece while simultaneously staying in the euro. 

When mainstream politicians respond to these ideas,...Continue reading

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Forecasting a global recession

IT IS rare for economists, particularly those at an investment bank, to forecast a recession. For a start, it is difficult to get it right; a recession is by definition a change in trend and economies tend to extrapolate past trends. But secondly, it is a career risk. One economist once told your blogger "I never forecast a recession. If I'm right, no-one will thank me; if I'm wrong, I'll be fired."

Perhaps it is no surprise that the forthright Willem Buiter, once a member of the Bank of England's monetary policy committee, has been willing to go out on a limb; he has called gold a "6000-year old bubble". He says a global recession is the "most likely" outcome with a 55% probability. But it is worth noting that he defines a global recession, not as a period of falling output, but as

a period during which the actual unemployment rate is above the natural employment rate or Nairu, or during which there is a negative output gap; the level of actual GDP is below the level of potential GDP. To avoid excessive attention to mini-recessions, this period of excess capacity should have a duration of a year or longer.

Translating this definition of a moderate recession into GDP growth rates for the next few years, a moderate global recession starting in the second half of 2016 means global real GDP growth at market exchange rates declining from its likely...Continue reading

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Tumble and fall

THE commodities crash forces the mining and trading group behemoth, Glencore, to drastically adjust its balance sheet as global trade stalls and the copper market swoons

A short history of the world’s wackiest bond

UKRAINE has secured a deal with its creditors on $18 billion-worth of external debt. The creditors, represented by a number of big financial firms, agreed to a 20% write-off of the principal. One bond included in the discussions is $3 billion that Ukraine owes to Russia. For those who have not kept up with Ukraine’s debt negotiations, here is a quick refresher.

Russia lent Ukraine $3 billion in December 2013. The bond was arranged by Western law firms (including White & Case and Clifford Chance) and is listed on the Irish stock exchange. The bond was essentially a bribe to Viktor Yanukovych, Ukraine’s now-ousted president, who was dithering between European and Eurasian integration. Senior Ukrainian officials say that the government itself never saw the money; most probably it was spirited out of the country by Mr Yanukoyvch’s cronies. 

Since its issue, the bond has caused Ukraine big problems. A bizarre clause in the bond says that if Ukraine’s debt-to-GDP ratio exceeds...Continue reading

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The woes of rich commodity exporters

BEFORE the financial crisis, gambling on resource extraction seemed to be a one-way bet for the Australian and Canadian governments. During the commodities super-cycle of the mid-2000s, China absorbed new supplies of metals and energy as quickly as projects could be brought on stream, keeping global prices high. Boom towns sprung up in Alberta in Canada and Western Australia to house miners and builders constructing expensive pipelines and terminals. Only last year the Australian prime minister, Tony Abbott (pictured on the left), announced that coal was “good for humanity” as he opened a mine in Queensland.

But times have changed. Commodity prices are falling. Iron ore, oil and coal are all trading at less than half of their prices in 2011. This is causing problems for governments of developed nations that have relied on mining and energy sectors for growth in recent years. Canada, the world’s fourth-largest oil exporter, is now in recession, thanks to lower spending on machinery and equipment for the energy sector. Growth has also slowed to a crawl in Australia: exports in the second quarter subtracted a hefty 0.7 percentage points from...Continue reading

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How China’s cash injections add up to quantitative squeezing

NARY a week has gone by this year without news of China’s extraordinary injections of cash into its own economy. The central bank has pumped hundreds of billions of yuan into the financial system through an admixture of short-term, open-market operations; medium-term credit instruments; and direct loans to state-owned banks. Many have described it as Chinese-style quantitative easing (QE). When a central bank buys up assets to expand its balance-sheet, it is indeed a modern-day form of money printing, and deserves to be labelled as QE. There is just one rather inconvenient fact when Chinese finances are examined more closely: in purely quantitative terms, the central bank has been tightening, not easing. And it has been doing so for several years already.

The chart below shows the balance-sheets of the world’s four major central banks. The QE paths of the Federal Reserve, the European Central Bank and the Bank of Japan are well documented by the size of their assets, depicted by the blue lines in the chart. The Fed’s balance-sheet swelled in three large steps: QE1, primarily in 2009; QE2, from late 2010 to mid-2011; and QE3, the final surge that started in late 2012 and ended last year. For the ECB, the squiggle shows a...Continue reading

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New jobs numbers do little to illuminate the Fed's path

THOSE hoping for an end to the suspense will be disappointed. America’s  labour market update—the last before the Federal Reserve’s meeting on September 17^th—did not provide much clarity about the chance of an imminent rise in interest rates. For months, Fed officials have emphasized that their decision on when to raise rates will depend on the data. But with no further major data releases before the meeting, the outcome remains a cliffhanger.

Employers added 173,000 workers to their payrolls in August; below the average of 247,000 for the preceding year, but enough to bring unemployment down to 5.1% from 5.3%. Joblessness is now roughly at the Fed’s estimate of its so-called natural rate, which stands at  5%-5.2%. If unemployment falls much further, the Fed’s models predict that wage growth and inflation will accelerate. As a result, the Fed’s hawks will argue at the September meeting that it is time to see off the coming inflationary surge by raising rates.  

But what if these forecasts are wrong? There are two key sources of uncertainty. The first is Fed’s estimate of equilibrium unemployment . A recent note by Andrew Figura and David Ratner, two Fed researchers, floats...Continue reading

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Turbulent markets in the suspect six

EMERGING markets had another turbulent week. The MSCI EM stock index, comprising stocks from across the developing world, fell 3.2%. The JPMorgan Emerging Market Currency index was down 1.4%, dropping to its lowest level since the benchmark was created in 1999. Losses in equities and currencies across emerging markets have now reached what the Institute of International Finance (IIF), an industry association, calls “crisis proportions”.

There are two main explanations for the recent sell-off. The first is a slowdown in economic growth. Since last year, the International Monetary Fund has cut its 2015 growth forecast for emerging markets from 5.3% to 4.3%. Reduced Chinese demand for iron ore, copper, soyabeans and other raw materials has weighed on commodity exporters, contributing to a drop-off in global trade. According to the Bureau for Economic Policy Analysis (CPB), the Dutch state's economic-forecasting agency, emerging market export volumes fell 3.3% in the first half of 2015.

Expectations of interest rate hikes in America and Britain are another driver...Continue reading

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A signal to do more

AS EXPECTED, the European Central Bank did not ease policy when its governing council met today. However, the ECB underlined its determination to take further measures, if necessary, to get inflation, currently just 0.2%, back to the goal of nearly 2%. Speaking at the press conference after the meeting, Mario Draghi, the ECB’s president, stressed the council’s willingness, readiness and capacity to act.

Revised forecasts made clear why the ECB may have to step up its quantitative-easing programme, announced in January and launched in March. Three months ago, central-bank staff envisaged GDP growing by 1.5% this year, 1.9% in 2016 and 2.0% in 2017. These forecasts have been lowered to 1.4%, 1.7% and 1.8% respectively. Mr Draghi said that the downward revisions were mainly because external demand is now expected to be weaker.

Inflation is also set to be lower than previously forecast. In June, staff projections showed consumer prices rising by 0.3% in 2015, 1.5% in 2016 and 1.8% in 2017. The latest forecasts are for inflation of only 0.1% this year, rising to 1.1% in 2016 and 1.7% in 2017. These downward revisions have occurred mainly owing to lower than expected oil prices.

Even these lower forecasts may turn out to be over-optimistic since the cut-off points for data were between August 12th and 21st. That meant they did not reflect the panic in...Continue reading

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Like manna from heaven

From Arabia with love

“GULF house”, says Dinesh Kumar every few seconds, gesturing out of the window of a car as it drives through Vennicode, in south-west India. His commentary is hardly necessary. The new houses, built with money sent home by people working in Dubai, Oman and other Gulf countries, flash like gold teeth in this backwater village surrounded by coconut palms. Vennicode has a brand new private school, too, as well as huge advertisements for jewellery shops and much more traffic than its narrow roads can handle. It is a tribute to emigration.

Last year India received $70 billion in remittances—more than any other country in the world. The state of Kerala, where Vennicode is located, got far more than its fair share. A comprehensive household survey organised by Irudaya Rajan of the Centre for Development Studies, a local academic institution, finds that 2.4m Keralites were living and working overseas in 2014. The money they send home is equivalent to fully 36% of the state’s domestic product. “For all practical purposes, it’s a remittance economy,” says C.P. John of the state...Continue reading

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A tax on the poor

AFTER sweating through a day’s work under the hot Dubai sun, the last thing an Indian construction worker wants is to donate a slug of his earnings to a bank or money-transfer outfit. Yet that is what he must do. On average, 6.9 cents of every dollar remitted to India from another country is eaten up by fees and foreign-exchange margins, according to the World Bank. Indians get off relatively lightly. A sub-Saharan African migrant loses an average of 9.7 cents.

In 2009 the G8 pledged to cut the average cost of international remittances to 5% of the sum sent within five years. Rates have since come down, but not by much: the average is now 7.7%. And the implicit tax on remittances is even higher than these figures suggest, since they are based on transfers of $200, but many payments are smaller.

In part, Dilip Ratha of the World Bank blames the exclusive agreements signed by banks and other companies involved in handling remittances. By reducing competition, these keep prices high. Some countries, including India, have banned such tie-ups, but they remain common in Africa. In 2014 the Overseas Development Institute, a...Continue reading

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Still in business

FINANCIAL markets started September as they ended August, with share prices falling and investors fretting about China’s cooling economy. The latest sell-off was triggered by a survey of Chinese purchasing managers which suggested that manufacturing had contracted in August. Nerves were further pinched by grim data on exports from South Korea, on manufacturing from Taiwan and on growth from Brazil. Rich countries are also affected: GDP in Australia, a big exporter of raw materials to China, slowed almost to a standstill.

Amid the misery in emerging markets, one economy stands out for its comparative resilience. Figures released at the end of August showed that GDP rose by 7% in the second quarter, year on year. India’s official growth rate is thus on a par with China’s and much stronger than that of trouble spots such as Brazil, Russia and South Africa (see chart).

As in China, the GDP figures probably overstate...Continue reading

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Emerging troubles

IN THEORY, HSBC and Standard Chartered, two British banks with large Asian operations, are still mulling whether they should relocate their headquarters somewhere east of Suez. Given the turmoil that has afflicted emerging markets in recent weeks—and a useful tax break from the British government—few now expect the duo to decamp. Having been celebrated by investors for global networks spanning the likes of China, India and Brazil, banks are now being punished for them.

Emerging markets boomed partly on the back of cheap funds that Citigroup, HSBC, StanChart and others helped shovel their way—a flow now operating in reverse. Bankers battled to lend money to firms digging mines, erecting skyscrapers and building factories on the assumption that growth in China would never falter.

Those loans look less canny now that China’s slowing economy and tumbling commodity prices have dimmed the currencies and prospects of many emerging markets. A few customers will undoubtedly default, starting with firms which borrowed in dollars but relied on income in ringgit, rand or rupiah to meet repayments.

Loan losses are starting to...Continue reading

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Inflated claims

AS THE world’s biggest exporter, China dominates global shipments of everything from smartphones to sofas. Recently, attention has turned to another Chinese export that appears to be washing up on distant shores: deflation. China’s producer-price index (PPI) has been falling for 41 months straight. Economic growth is slowing; many Chinese industries are suffering from overcapacity; its ravenous appetite for commodities is waning. All that slack must surely be putting downward pressure on prices across much of the world.

It is not the first time that China has been accused of exporting deflation. Before the global financial crisis, China’s impact on world prices seemed a good thing, making televisions and fridges more affordable. Now, it is seen as baleful. The worry is that anaemic inflation is hurting the world economy. Consumers have less incentive to spend, companies have less reason to invest and debts, fixed in nominal terms, remain onerous.

Yet several studies show that China was never quite the deflationary force that it was said to be before the crisis—or at least that it caused both inflation and deflation. By the...Continue reading

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With great power

WELCOME back from the holidays. After suffering their worst month in more than three years in August, American equities again fell sharply on September 1st, along with shares in Europe and Japan. This sudden bout of turmoil owes much to doubts about the continuation of two great economic experiments. And it also reflects the aftermath of a huge philosophical change about the role that governments should play in the markets.

The first experiment is the Chinese attempt to shift their economy away from an investment- and export-led model towards one based on consumption. The Chinese are also grappling with the consequences of a debt-fuelled boom and with the effect of volatility in their property, equity and currency markets. Many investors fear they will be unable to manage this transition successfully, and the impact on other economies (a sharp fall in South Korea’s exports, disappointing second-quarter growth in Australia) is becoming clear.

Quantitative easing (QE) in the developed world is the other great experiment. Holding down bond yields may have prevented the financial crisis from turning into another Depression. But interest rates...Continue reading

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Please don’t raise rates, Ms Yellen

JUST a week after turbulence hit financial markets in China, hitting investor confidence around the world, today the International Monetary Fund released a downbeat note about global economic growth. The IMF pointed to a slowdown in growth across both advanced as well as emerging economies in the first half of 2015, and warned that financial turmoil, slow productivity growth and falling commodity prices will dampen prospects for the rest of the year.

Still, the note appears to be sending out a more striking message to policymakers than investors, telling the Federal Reserve and the Bank of England, the two central banks closest to raising interest rates, to hold off any hikes for a little longer. The Bank of England’s rate-setters are due to gather on September 10th, and Janet Yellen will chair the Fed’s next meeting on September 16th. Both are currently considering raising rates for the first time since the financial crisis. But the IMF believes that “in most advanced economies substantial output gaps and below-target inflation suggest that the monetary stance must stay accommodative”. Or, in other words, rates need to stay lower...Continue reading

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The long-term bearish case on emerging markets

ONCE upon a time, it was hard to find anyone with a bad word for the emerging markets. In the early 1990s, there was a lot of talk about their faster growth and young populations; then in the 2000s, EM equities outperformed those in the developed world with ease. (The four BRICs returned between 294% and 884%, while the S&P 500 and European markets were flat).

But the mood has changed dramatically and now it is hard to find anyone with a good word to say about them. It is probably worth focusing on those analysts who have been consistently bearish such as Manoj Pradhan of Morgan Stanley, who published a research note called "The Great EM Unwind" two years ago. In that note he warned that 

EM economies are being buffeted by three historical build-ups being unwound at around the same time: i) US QE is being unwound by generating higher real rates and a stronger dollar - this hurts EM capital accounts; ii) China's build-up of leverage is being unwound as part of a process that will take trend growth lower - this hurts EM current accounts; and iii) Credit growth in some EM economies is being unwound, with domestic demand likely to suffer 

That all looks pretty prescient although his crystal ball didn't seem to reveal the big plunge in commodity prices. His latest note offers some relief, arguing that this is not an...Continue reading

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Uninspiring

EARLIER this year, a genuine revival in the euro area appeared to be under way. European equity markets were buoyant and consumers had become more confident. The recovery, which had been faltering and feeble since the spring of 2013, looked set to accelerate. That bout of optimism has proved fleeting and there is now increasing doubt about whether the euro area can pull itself out of a rut of low inflation and sluggish growth. The European Central Bank (ECB) is not expected to act on September 3rd when its governing council meets. But it may well indicate a preparedness to provide more stimulus, if necessary.

Even before the recent panic in financial markets about the Chinese economic slowdown, the euro-zone recovery was losing momentum. After growing by 0.4% in both late 2014 and early 2015, GDP increased in the second quarter by 0.3%. Annualised, that was a pace of 1.3%, barely a trot compared with...Continue reading

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China is scaring away foreign investors with its efforts to defend shares

THE ups and downs of China’s stockmarket have become plainly, painfully visible to the world. Less transparent, but perhaps more damaging in years to come, has been another kind of rollercoaster. The government has gone from the concerted wooing of international investors to doing just about everything in its power to keep them out. That of course is not China’s intent. Its goal is to stabilise share prices and, to that end, it still welcomes cash from abroad. But the cumulative result of its interventions in recent weeks has been to scare away investors.

China’s stockmarket has never been for the faint of heart. Big, inexplicable swings in share prices are bad enough. The regulatory labyrinth that foreigners have to navigate just to earn the privilege of joining the fray has long been even more forbidding. But over the past year it looked like China was finally getting serious about opening its stockmarket to the world.

A new...Continue reading

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Chinese ripples

ANOTHER week of market volatility sees the Fed possibly going ahead with a rate rise, Chinese manufacturing drop and oil prices see saw

When a 26% plunge in GDP feels fine

WITH unemployment at 25%, government debt at more than 170% of GDP, and the country’s politics in turmoil, the 26% peak-to-trough decline in output brought about by the euro-zone crisis has been highly traumatic for Greece. Yet the government of Macau, the one-time Portuguese colony now the world’s gambling capital, just released figures showing that the territory’s GDP fell by 26.4% year-on-year in the second quarter. But at first blush Macau’s real economy appears to be doing rather fine. In spite of the steep fall in GDP, unemployment remained at its full employment level of 1.8%, private consumption grew and the territory’s government ran a budget surplus. Is the Macanese economy also about to run off a cliff?

 

It turns out that not all GDP is created equal. Macau, which in 2014 boasted GDP per head of $89,000, owes its prosperity to its casinos, which alone account for almost half of total output. The Chinese government’s anti-corruption campaign has caused gaming revenues to decline by 40% and other tourism revenues to fall by 21.5%. With gaming and tourism accounting for such a large share of total...Continue reading

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