Archive

Archive for the ‘Growth’ Category

Global Financial Instability Flow Chart

February 24, 2014 Leave a comment

Below is a flow chart that shows some of the causes of financial instability in the global economy. Below are the the main points:

* The mismatch in the banking system with regards to paying debt
* Low interest rates and lack collateral required means more lending
* Good debt – productive use in capital investment (however very limited in most countries)
* Bad debt – non-productive assets used for speculation purposes (popular with investors)
* Capital Flows – Governments can fund current a/c deficits with borrowing from overseas
* From this further increases in the supply of money and therefore lending.
* Ends with a property bubble.

Financial Instability

US Job Growth – Manufacturing is not the answer

February 21, 2014 Leave a comment

For the most of 2013 and in his State of the Union address this year, President Obama has supported the idea that investment in the manufacturing sector is a part of the solution to the high unemployment figures in the US. This type of thinking might have worked in the 1950s when employment in a factory was reasonably accessible but it doesn’t account for the changes to the US and global economy.
Historical figures (see table below) show that although there has been an increase in the value of output in the manufacturing sector the goods have been produced by fewer employees with the numbers falling from 19 million in 1980 to 12 million in 2012.

US Manufacturing history

The employment growth has been in the service sector with a third of the total providing services to the manufacturing sector. It is thought that over 50% of the work in the manufacturing sector is services- based e.g. management, sales, support etc. As is obvious with most manufacturing industries, companies have spent more on technology and have been looking to replace labour with machines. As a result of more capital, output per worker in the whole economy increased by 85% between 1980 and 2012. However within manufacturing this increase in productivity amounted to 189%.

If manufacturing is going to generate more jobs there needs to be a greater focus on retraining workers, improvements in infrastructure and agreements that encourage foreign direct investment. Nevertheless are these reforms worthwhile as the manufacturing industry makes up for only 10% of US GDP and employs 10% of the labour force? Would the service sector be a better option?
__________________________________________________

The above is a brief extract from an article published in this month’s econoMAX – click below to subscribe to econoMAX the online magazine of Tutor2u. Each month there are 8 articles of around 600 words on current economic issues.

econoMAX

OECD GDP per capita figures – 2012

February 14, 2014 Leave a comment

Here are Gross domestic product per capita figures for the 34 member countries of the OECD (Organisation for Economic Co-Operation and Development) for the 2012 calendar year on a purchasing power parity (PPP) basis. Purchasing power parity (PPP) is when an amount of money in one country can be exchanged for a quantity of foreign currency, and the two amounts will buy identical baskets of products in both countries – see recent post on the Big Mac Index.

The OECD is a group of countries that share a commitment to democratic government and the market economy. New Zealand has been a member of the OECD since May 1973. Currently, there are 34 member countries, with four new members joining in 2010. These included Chile, Slovenia, Israel, and Estonia.

OECD - GDP per capita 2012

World GDP by country

February 4, 2014 Leave a comment

Just looking at GDP calculations and the size of economies with my A2 class. Below is a graph showing the top 10 economies in the world by GDP and also how Australia and New Zealand compare in size. World GDP in 2012 was US$71,707bn which indicates that the US economy makes up around 21% of global GDP.

Global GDP

Categories: Growth Tags:

Is investment in manufacturing the right choice for the US economy?

February 1, 2014 Leave a comment

For the most of 2013 and in his State of the Union address this year, President Obama has supported the idea that investment in the manufacturing sector is a part of the solution to the high unemployment figures in the US. This type of thinking might have worked in the 1950’s when employment in a factory was reasonably accessible but it doesn’t account for the changes to the US and global economy.

The first graph below shows the % of manufacturing that makes up US GDP. Would it be better to focus on services? Do the US have a comparative advantage in manufacturing anymore? Investment in manufacturing does not actually create the jobs that it once did. Would it therefore be better to focus on the service sector industry (education and medical +12.2%) as that has been the growing sector from 2008 to 2013 whilst manufacturing has been in significant decline -12.5% see second graph below.

Manuf % GDP
US Changes in jobs

China’s Policies and their impact on the Global Economy

January 23, 2014 Leave a comment

Over the last decade the policies implemented by the Chinese authorities have had an unrivaled short-term impact on the global economy. These effects include: very high mineral and oil prices; significant amounts of foreign reserves; deals with countries in Africa to secure resources; pollution levels that are unparalleled by any time in history.
China’s Policies

Historically China’s economic model was based on export-led growth, massive government injections into the economy and access to cheap money. For instance the Chinese authorities have artificially created growth – as well as building ghost cities -
in that a seven year old bridge (built to last for 40 years) was blown up and rebuilt. This generates jobs for construction industry, including contractors for different aspects of the bridge.
Market for Global Commodities

Impact on the Global Economy
As an economy of 1.35bn people (approximately 20% of world population) rapidly industrialises and urbanises it requires a vast amounts of food and non-food commodities. The global market for bulk commodities shows the enormous consumption levels of China and ultimately this led to global commodity prices to treble. (See table above). Another impact is the size of China’s foreign reserve assets and their relationship with the value of China’s currency – the renminbi. China has abandoned its pre-2005 practice of fixing the renminbi against the US dollar, but now uses a flexible peg against where its value is allowed to change. Although there has been some appreciation of the renminbi it is still seen as undervalued against the major currencies – Euro, Yen and US dollar.

__________________________________________________

The above is a brief extract from an article published in this month’s econoMAX – click below to subscribe to econoMAX the online magazine of Tutor2u. Each month there are 8 articles of around 600 words on current economic issues.

econoMAX

Global Housing affordability

January 20, 2014 Leave a comment

The distribution of housing affordability in the 85 major metropolitan markets (those with more than 1,000,000 residents) has deteriorated over the past year – see graphs.

Countries
Hong Kong is least affordable followed by Australia and New Zealand.

Cities
Hong Kong – least affordable, with a Median Multiple of 14.9
Auckland – Multiple of 8.4
London – Multiple of 7.3

Source: 10th Annual Demographia International Housing Affordability: Survey: 2014

Housing afforability countries

Housing affordability cities

Categories: Growth, Inequality Tags:

NZ Weekly Household Expenditure 2010 – 2013

January 16, 2014 Leave a comment

From the December edition of the Parliamentary Monthly Economic Review.

Statistics New Zealand’s latest Household Economic Survey showed that households spent on average $1,111.40 per week in the year ended June 2013, up 9.1 percent (or $92.70 per week) from when the last full household economic survey was undertaken in the year ended June 2010.

The largest increase in expenditure by group in dollar terms was for the transport expenditure group. In this group, households spend $158.30 per week on average, up from $131 per week in the year ended June 2010. The increase was largely due to a rise in the cost of petrol, from $41 per week in 2010 to $49 per week in 2013.

For households that make mortgage repayments, the average weekly mortgage repayment was $356.20 in the year ended June 2013, while for households that pay rent, the average total rent payment was $275.30 per week. Property rates were $43.70 per week, up from $36.80 per week in 2010.

Average Weekly Household Spending 2013

Categories: Growth Tags:

% Change – GDP per person – 1999 – 2014

January 13, 2014 Leave a comment

Useful graphic from The Economist that shows the % change in GDP from 1999 – 2014.
1999 was when the Euro currency was introduced and with Latvia joining the currency bloc at the start of this year that makes 18 members. Spain, Greece, Portugal and Italy have struggled since the GFC especially Italy – negative GDP. Germany’s GDP per person has increased by over 20% since 1999. Benefitting from export revenue in recent times with a weak euro.

GDP by country 1999-2014

Secular Stagnation

January 9, 2014 Leave a comment

saving2The Free Exchange column of The Economist recently had an article which addressed the concern that in order to create or revive economic growth developed economies will just create a bubble environment. However this concept was around in the 1930’s as economist Alvin Hansen thought a slowing of both population growth and technological progress would reduce opportunities for investment. Savings would then accumulate and growth would slow unless the government intervened to bolster demand in the economy. Today interest rates are low and therefore saving has limited avenues to earn reasonable returns from productive investment opportunities. But according to The Economist this story doesn’t fit the current conditions for the following reasons:

1. There is at present an IT revolution
2. Private investment has recovered since the GFC and technology investments are doing very well.

But some investment managers are paid by the value of the share price and these get boosted in the short -run. This encourages them to put large amounts of cash into buy-backs, which raises stock prices, rather than into productive investments that might do more to boost growth.

Saving could also be seen as a reason for secular stagnation. High levels of saving reflect the reduction in consumption and this is thought to have come about by an in the increase in income inequality - high income households save more than those on lower incomes. In 2007 – 23.5% of all American income went to the top 1% of earners – the highest percentage since 1929. Research has shown that saving by the top 5% has been surppressing demand since the mid-1980’s. Carmen Rheinhart and Ken Rogoff in their book “This Time is Different” (which I have blogged on in previous posts) concluded that post war banking crises are followed by weak recoveries, whether or not they were preceded by a surge in income inequality.

A Bubble – what is it?

January 4, 2014 Leave a comment

bubble2Yale University economist and Nobel Laureate Robert Shiller describes a bubble as a “psycho-economic phenomenon. It’s like a mental illness. It is marked on excessive enthusiasm, participation of the news media and feelings of regret among people who weren’t in the bubble”

Others have suggested that bubbles are an increase in the price of an assets of no more than two standard deviations above the trend taking inflation into account. Bubbles have been a lot more prevalent since the 1960’s and this reflects the liberalising of financial markets and the end of the Bretton Woods system of fixed exchange rates in the 1970’s. Many economists have struggled to understand bubbles as in a rational and perfectly informed market assets that are overpriced should be sold. However the frenzy of the market can last much longer than investors think and the bursting of the bubble will be a gradual and slow process or a sudden drop in prices.

Housing bubbles tended to be supported by the banking industry.

* As most people take out a mortgage from a bank, rising house prices encourage banks to lend out more money as there is more security for them. However this greater availability of credit allows borrowers to afford higher prices.

* In contrast when the banks become reluctant to lend money and house prices can drop greatly. According to The Economist’s house price- indicators property in New Zealand (or should that be Auckland), Australia and Canada is overvalued. However could higher prices just reflect the level of income inequality that is clearly visible in most developed economies and conspicuous consumption. Thorstein Veblen wrote about this in his book The Theory of the Leisure Class (1899).

Categories: Economic Cycle, Growth, Inequality Tags:

Aussies still looking at strong export sector

December 18, 2013 1 comment

The graph from National Australia Bank below shows the components of Australian GDP from 2007-2013 with forecasts for 2014 and 2015. GDP consists of C+I+G+(X-M) so from the graph you can see that:

C = Private Consumption
I = Business Investment
G = Government Demand
(X-M) = Net Exports

Note:
* There is anticipated an increase in non-mining investment with investment in the mining sector slowing down as completion nears.
* An increase in private consumption as well as net exports holding its own.
* The relationship between business investment and the increase in net exports
* Pace of growth is below the trend over 2014-2015 which means that that population growth will be greater than the number of new jobs created.

Aussie Resource

Categories: Growth, Trade Tags: , ,

ANZ Truckometer

December 11, 2013 Leave a comment

Heard about this indicator on National Radio Morning Report programme this morning and is another variable that can be useful to gauge the state of the economy. The ANZ Truckometer is a set of two economic indicators derived using traffic volume data from around the country. Traffic flows are a real-time and real-world proxy for economic activity –particularly for the New Zealand economy, where a large proportion of freight is moved by road. It represents an extremely timely barometer of economic momentum. The ANZ Heavy Traffic Index shows a strong contemporaneous relationship to GDP, while the ANZ Light Traffic Index has a six month lead on activity as measured by GDP. Notice the change around 2007/08 with the GFC.

Truckometer

Categories: Growth Tags:

Milk Production vs Profit vs Risk

December 11, 2013 Leave a comment

Here is graph from a presentation at the University of Waikato Teachers Day. It shows the milk volume, the profit, and the risk involved. Notice the minimum risk and maximum profit points as well as a social optimum

Milk Production

Importance of Tourism in New Zealand

December 10, 2013 Leave a comment

Grant Cleland in the November Monthly Economic Review focused on the Tourism Industry in New Zealand. Here are some figures which outline its importance to the New Zealand economy.

The direct value-added contribution to GDP of the tourism industry was $7,250 million in the year ended March 2013, or approximately 3.7 percent of GDP. When the indirect value-added effects* of $9,805 million are included, the total contribution of the tourism industry was 8.7 percent of GDP. The contribution of the tourism industry to GDP (including both direct and indirect contributions) peaked at 9.9 percent in the year ended March 2003.

International tourism expenditure in the year ended March 2013 contributed 16.1 percent of New Zealand’s export receipts of both goods and services for that year. As such, it is one of New Zealand’s largest export earners. Statistics New Zealand ranked international tourism export receipts second in terms of export value, behind dairy products (including casein) which had exports totaling $12,349 million in the year ended March 2013. Meat and meat product exports equaled $5,279 million in the March year.

* these are the intermediate purchases of the ‘accommodation’ and ‘cafes and restaurants’ industries include items such as electricity, bedding, and food purchased from other industries or imports. Source: Statistics New Zealand.

NZ Tourism 2009-13

Categories: Growth Tags: ,

New Zealand’s Trade with China

November 11, 2013 Leave a comment

Here are some charts and commentary from the BNZ which are particularly useful for New Zealand Trade and the potential growth of the agricultural sector.
—————————————————————————–

NZ’s most significant exports to China are dairy products (39% of total), forestry (24%), tourism (12%), and meat (10%). With the possible exception of forestry, all of these sectors stand to benefit from ongoing urbanisation in China, the continued rise of the middle class, and rising household income and consumption levels. Not only is Chinese demand expected to strengthen further, but domestic production in many cases will fall well short of consumption. Exports from NZ will have a big opportunity in helping make up the shortfall.

NZ exports to China


Chinese protein demand soaring

There is a strong and well proven link between rising incomes and changes in diet (see chart below). The gradual westernisation of the Chinese diet has seen per- capita consumption of protein soar over the past decade or so. In contrast, per capita consumption of traditional foods such as rice is in decline.

China Protein Cons

Urbanisation has further stepped up Chinese demand for protein. Compared with the less diversified diets of rural communities, city dwellers have a varied diet richer in animal proteins and fats, and characterised by higher consumption of meat, poultry, milk and other dairy products.

Data from the Chinese National Bureau of Statistics shows per capita consumption of dairy products (excluding butter) has climbed from 7kg/person in 1992 to 20kg/person in 2012. Meat consumption has risen from 13kg/person to 23kg/person over the same period.
Per capita protein consumption for urban households is roughly three times that of rural households.

China looking at sustainable and balanced growth

November 7, 2013 Leave a comment

Historically China’s economic model was based on export-led growth, massive government injections into the economy and access to cheap money. This is not sustainable and although you can keep blowing up bridges and build cities that nobody lives in at some point it becomes unsustainable. Furthermore since the global financial crisis economies have increased protectionist policies to look after their own economy. Therefore the Chinese government need to refocus the growth of the economy on domestic consumption rather than building things – Gross Fixed Capital Formation. So much more C than I in the GDP Expenditure equation. EG:

GDP = C↑+ I↓+ G + (X-M)

The chart below from the BNZ shows that Consumption ( C ) accounts for just 35% of the Chinese economy which is significantly below what is apparent in the developed world. Domestic Consumption in the US economy is over 70% of GDP. It will take many years for China to get near this level of consumption.

Household Cons % GDP

NZ General Social Survey 2012 – Wellbeing

October 25, 2013 Leave a comment

The New Zealand General Social Survey of 2012 showed some interesting facts regarding wellbeing:

An estimated 87 percent of people were ‘satisfied’ or ‘very satisfied’ with their lives overall.

Four aspects of life were important in determining people’s overall life satisfaction: health, money, relationships, and housing.
In 2012 an estimated:

* 60 percent of New Zealanders rated their health as ‘excellent’ or ‘very good’
* 52 percent had ‘more than enough’ or ‘enough’ money to meet their everyday needs
* 69 percent had not felt lonely in the last four weeks
* 67 percent had no major problems with the house or flat they lived in.

- 21 percent of New Zealanders had good outcomes in all four of these (ie excellent or very good health, more than enough or enough money, never felt lonely, and no major housing problems). 

- 98 percent of those with four good outcomes were satisfied or very satisfied with their lives overall.

- 5.4 percent of New Zealanders did not have a good outcome in any of the four aspects of life. Of these people, 56 percent were satisfied or very satisfied with their lives overall.

NZ General Survey

Categories: Growth Tags: ,

NZ net immigration highest for 10 years

October 23, 2013 Leave a comment

The BNZ Markets Outlook reported an annualised increase in net immigration by 33,000 the highest since 2003. The boost mainly comes from the fall in migrant departures. This will impact on aggregate demand and the RBNZ have talked in monetary policy statements about increases in potential growth (like the housing market) and the impact it will have on a tightening of monetary policy later next year – remember also the Christchurch rebuild.

NZ Pop

NZ Lamb and Dairy Outlook 2013/14

October 13, 2013 Leave a comment

Bayleys Real Estate Country magazine included an article on the outlook for New Zealand’s agricultural sector which was written by NZX Agrifax.

Dairy Sector

NZ DairyWith regard to the Dairy Industry the effect of the drought in the latter part of 2012/13 season slowed production. This was also the case with other countries as the domestic market seems to have absorbed their output. So this lack of supply combined with a steady growth on demand has resulted in high dairy prices for a sustained period of time. With prices remaining high there is now the chance that milk production will increase especially in the US where their elasticity of supply of milk is fairly elastic. New Zealand is forecast to have a good milk production season as pastures have recovered from the drought. See graph below for forecasted milk prices.


Lamb Sector

NZ DairyThe recovery in lamb prices has mainly been down to the increasing demand from the Chinese market. During the first 10 months of the season, over 80,000 tonnes of lamb was exported there which accounts for 29% of NZ’s total lamb exports. That’s up from 44,000 tonnes over the same period last year. There has been in particular an increase in demand for higher value items such as legs and shoulders. This led to an increase in price as supplies to traditional markets was now reduced.

Follow

Get every new post delivered to your Inbox.

Join 618 other followers

%d bloggers like this: