Here is a clip from PBS on the German economy as to why it is has been so successful.
* The secret to Germany’s success seems to be evident in small-to-medium-sized family firms that manufacture some highly specialized and indispensable piece of equipment. The Germans like to say, we make the thing that goes inside the thing that goes inside the thing.
* With just a quarter of America’s population and a quarter of its GDP, Germany exports more than the United States in total
* Germany have 1 percent of the labour force of the world, and 10 percent of the world exports.
Below is a chart from the National Australia Bank publication “AustralianMarkets Weekly”. It is interesting to see how each area contributes (or has a negative impact) to US growth. This is particularly useful when doing GDP Expenditure approach in Unit 5 of teh A2 course where you can breakdown the equation C+I+G+(X-M).
Some points to note:
* Consumption has started to increase from the negative status it had post GFC.
* Net exports after being positive in early 2009 have dropped into negative status with only small positive changes of late
* Business investment has started to creep into a positive contributor to GDP
* Government contributions to GDP have varied during the period with a negative impact in 2010 and 2011 before assisting GDP in Q3 2012.
Over the last 4 years the Icelandic economy has gone from financial disintegration to an emerging recovery and in doing so has taken a different policy stance than other economies faced with similar economic conditions.
How have they recovered?
1. The government guaranteed the deposits of Icelandic citizens in the banks but this did not apply to foreign investors. The banks that held foreign assets are currently being broken down and assets are being sold to pay off creditors.
2. The weak Krona has been the catalyst to recovery and exports in fish, aluminum, and tourism are up by over 10% from 2010.
3. The IMF and other Nordic countries were forthcoming with loans in order to try and stabilise the already volatile economy.
The table shows the problems that faced the Icelandic economy in 2009. With unemployment on the rise and inflation at 18.6% there was not only stagflation but the government’s debt to GDP ratio has continued to climb as officials protect the social safety net.
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.
Part of the Cambridge A2 syllabus studies Macro Economic conflicts of Policy Objectives. Here I am looking at GDP, Unemployment, and Inflation (improving Trade figures is another objective also). The objectives are:
* Stable low inflation with prices rising within the target range of 1% – 3% per year
* Sustainable growth – as measured by the rate of growth of real gross domestic product
* Low unemployment – the government wants to achieve full-employment
New Zealand Growth, Jobs and Prices — 3 Key Macro Objectives Inflation, jobs and growth
1. Inflation and unemployment:
From the graph above you can see that low levels of unemployment have created higher prices – demand-pull inflation. Also note that as unemployment has increased there is a short-term trade-off between unemployment and inflation. Notice the increase in inflation in 2010-2011 as this is when the rate of GST was increased from 12.5% to 15%. Also today we have falling inflation (0.8% below the 1-3% band set by the RBNZ) and unemployment in on the rise – 7.3%
2. Economic growth and inflation
With increasing growth levels prices started to increase in 2007 going above the 3% threshold in 2008. This suggests that there were capacity issues in the economy and the aggregate supply curve was becoming very inelastic. In subsequent years the level of growth has dropped and with it the inflation rate.
3. Economic Growth and Unemployment
Usually you find that with increasing levels of GDP growth unemployment figures tend to gravitate downward. This was apparent between 2006-2008 – GDP was positive and unemployment did fall to approximately 3.6%. However from 2009 onwards you can see that growth has been positive but unemployment has also started to rise.
The Daily Chart in The Economist recently looked at the fastest growing and contracting economies since 1980. The main points:
Fastest Growing: In 2012 Libya with 122% growth came out on top – due to the recovery of oil production. However you must remember that this is a % change from the previous year when the economy contracted by about 60% with the civil unrest and the departure of foreign oil companies. Statistically this creates a smaller base when you calculate % change.
If a country’s GDP shrinks by 60%, it must grow by 150% just to restore its former size. Thus even if Libya fulfills the IMF’s forecast for this year, its GDP will still be smaller than it was in 2010
The Economist also looked at other countries that had fast growth rates but this was predominately due to a disaster of some sort in the preceding year or the discovery of a natural resource.
Equitorial Guinea – In the 1990‘s very poor and depended on cocoa and timber for income. 1996 they discovered oil and attracted FDI. After producing 80,000 barrels per day increasing GDP by 150%.
Kuwait – contracted 41% during the first Gulf War on 1991 but grew 50% the next year as growth started to return.
Here are some statistics – from November NZ Parliamentary Review – referring to the importance of tourism to New Zealand – looks at tourism expenditure and the contribution to employment in the economy.
Some points of note:
2012 – Total tourism expenditure by product:
– $5,119 million – other (which excludes fuel and other automotive products retail sales)
– $4,165 million – air passenger transport of
– $2,900 million – food and beverage serving services.
Generally tourism has been consistent with its contribution to GDP and the value in money terms to the NZ economy. However 8.6 was its lowest as a % but highest in dollar value.
The total number of full-time equivalents (FTEs) associated with the tourism industry was 186,900 in the year ended March 2012 – 9.6 percent of total employment.
Export Revenues Year ended March 2012
* Tourism – $9,558 million
* Dairy Products – $12,704 million
* Meat products – $5,389 million
Dairy products the engine of growth for New Zealand.
Championed as an economy which has effectively weathered the GFC, Sweden’s output is now starting to slow. Like Germany their economy is very export dependent and specialises in high-value manufacturing and therefore has been affected by the slowdown in both Europe and China.
50% of GDP is export related and because of the global downturn industrial production is down 5% this year although the strong Swedish Krona hasn’t helped matters. The Swedes have some concerning debt issues in that households have a debt-to-income ration of 149% – the Dutch rate is even higher 250% and the Danes are at 267% – see graph below. However the public sector debt is low and gross national debt is 37% of GDP. For the private sector the house prices have increased relative to incomes and rents and this is in a country with so much land and so little population ought to be a worry for policymakers. With unemployment on the rise households will find it harder to to pay off their debts and the banks might have to take some big losses.
Gross debt-to-income ratio of households % Source: http://epp.eurostat.ec.europa.eu
* Dairy produces 25% of export revenue in NZ
* It makes up 33% of the world dairy industry
* Fonterra makes up 90% of the dairy industry in NZ
* Fonterra’s annual revenue = NZ$20 billion
* Fonterra opeates in 100 countries and has 10,500 farmer owners.
* 20% of New Zealand Dairy products go to China
Recently Fonterra had made it clear that it is prepared to let non-farmer investors buy in for the first time – they intend to raise NZ$500m with the issue. Why are they looking to non-farmer investor? Although they have made shrewd investments in Asia and Latin America, in more developed markets health worries and higher prices have cut demand. Countries like China are a threat to the Fonterra’s standing on world markets. Furthermore with milk prices down 20% from last year farmers are concerned that non-farming ownership will cut their return further and that there will be a move away from a farmer-owned co-operative.
Free Exchange in The Economist debated this topic and went into detail concerning the Fiscal Multiplier. It refers to the change in GDP that is due to a change in government fiscal policy – taxes and spending. They use the following examples
Multiplier = 1.5 Government Spending down $1 = overall spending down = $1.5
Multiplier = 0.5 Government Spending down $1 = overall spending down = $0.5
Therefore the value of the multiplier is the crucial variable and a value that is greater than the level of GDP you maybe able to close the deficit but this results in a higher debt to GDP ratio than it started with. Estimates of the fiscal multiplier have been approximately 1% or below and the IMF have suggested that if you cut deficits by 1% of GDP it will have an impact of 0.5% of GDP – multiplier value of 0.5. What has been suggested is that:
Spending cuts may “crowd in” private-sector activity: if governments are using up scarce capital and labour then austerity creates room for private firms to expand. In open economies, austerity’s bite can be passed on to other countries through reduced imports. Most important of all, monetary policy can act as a counterweight to fiscal policy. Spending cuts that threaten to drag growth below a desired level should prompt monetary easing, limiting the multiplier.
However timing is everything and austerity measures now are not conducive to favourable outcomes for the following reasons:
1. With many economies implementing the same measures the impact can’t be deflected onto others.
2. Austerity measures normally might free up resources for private use but that mattered far less when unemployment and saving were high.
3. With interest rates at near-zero levels there was little scope for any additional monetary stimulus to offset the fiscal tightening. Monetary policy has run out of ammunition.
The accelerator theory states that investment is determined by the RATE AT WHICH INCOME, AND HENCE OUTPUT, CHANGES OVER TIME. The principle states simply that unless the rate of increase in consumption is maintained, the previous level of investment will not be maintained.
This theory assumes that firms try to maintain some constant relationship between the level of output and the stock of capital required to produce that output. In other words, we assume a constant capital-output ratio which can be expressed in either physical terms or money terms. The accelerator helps us to understand how small changes in demand in one sector can be magnified and spread throughout the economy. The example below assumes that the firm starts with 8 machines each year and 1 machine wears out each year and that each machine can produce 100 units of output per year. In the second year, demand rises for capital goods rises by 200% (from 1 to 3). When the rate of growth of demand for consumer goods slows in year 4, demand for capital goods falls. In year 6 demand drops and they is no requirement for any investment.
Limitations of Accelerator:
* Firms can meet output with stocks – may not need investment
* Changes in technology may mean firms don’t need to invest in as much capital as before
* Firms need to be convinced that demand is long-term to warrant investment
* Limited supply of technology available
Below is a graphic showing the levels of unemployment for each month since 1948 and if the economy during that time was in a recession (square in cell). Some points of note:
*In 1953 the level of unemployment was between 2-3% but the US economy was in a recession for the latter part of the year
*The majority of 1960 saw recessionary conditions with unemployment around 6-7%
*1974-75 the economy experienced stagflation – high unemployment and high inflation
*1980-83 periods of high unemployment – the early Reagan years and free market policies.
*1998-2001 – very low levels of unemployment followed by the impact of the 9/11 attacks and the recession that followed
*The financial crisis of 2008 saw 19 consecutive months of recession and unemployment reached between 10-11% in 2009. Since then it has been above 7%.
The New York Times recently reported that the Japanese authorities are once again trying to stimulate a rather moribund economy with injecting more money into the circular flow.
* A ¥11 trillion is to be added to an asset buying programme
* The Bank of Japan will supply banks with cheap long-term funds in the hope of stimulating borrowing.
* Base interest rate to stay at 0-0.1% – see graph below
* These measures will stay in place until inflation has reached at least 1% – Bank of Japan forecast of this figure is March 2014.
There has been some return to growth with the reconstruction after the 2011 earthquake and tsunami. However global demand has declines and the issue of territory with China hasn’t helped – Japanese goods are not being favoured by Chinese consumers. Japan’s deflationary decade hasn’t been helped with a contracting population and monetary policy needs to be accompanied by government fiscal policy as private sector companies don’t have the confidence to invest in major expansions. To this end the government have thrown money at the economy to the tune of ¥422.6 billion (in the form of government spending) but this is already twice the size of the Japanese economy. A strengthening yen hasn’t helped matters as exporters find their products uncompetitive.
* Nigeria produces 2.7m barrels a day
* 400,000 barrels of oil a day were stolen in April 2012
* $400bn of Nigeria’s oil revenue has been stolen or misplaced since independence in 1960
* Its 4 refineries work far below capacity, forcing Nigeria to import most of its fuel
* Government subsidies for petrol cost $16bn in 2011
* Fraud of $6.8bn has been exposed over a subsidy for petrol imports
* Pipeline sabotage accounts for more than 50% of the oil spills in Nigeria’s oil producing delta.
Regulatory uncertainty has assisted in making Nigeria’s oil industry stagnant – output is the same as it was a decade ago. However the major concern is that all this oil wealth should have benefited the population but the majority of them still live on less than $2 per day.
Brian Gaynor in the Saturday NZ Herald reinforced the belief that borrowing in New Zealand must be in an area that is going to generate growth. He presented the lending figures over the last 10 years for Agriculture, Business and Individuals and made the following points:
1. Export revenue from agriculture has increased from $7.3bn in 2001/02 to $16.7bn 2011/12.
2. Agricultural debt has made a positive contribution to the economy
3. There are very limited benefits of $102.7bn of residential mortgage debt over the past ten years.
4. Additional individual borrowings have been mainly used to push up prices of existing houses, rather than building new homes
5. Additional debt has to be shifted away from existing housing and into the productive sector – agriculture and house construction
6. The government needs to develop policies with regard to overseas ownership of land.
New Zealand has the potential to be the bread basket of the Asia Pacific region and the financial returns to the economy are significant. However there has to be an increase in investment and lending to the agricultural sector if it is to be successful.
Some figures for September show that the Chinese economy is tentatively starting to come out of its slowdown.
Exports rose to 9.9%
GDP for Q3 rose by 7.4%
CPI – 1.9%
The CPI figure is encouraging in that it gives the Peoples’ Bank of China plenty of room to ease monetary policy if they need to as the Inflation target rate is 4%. They have also pumped an additional US$42.15bn into the economy in order to stimulate growth. According to the National Australia Bank (NAB) the use of these measures appears to be the preferred method of monetary easing ahead of the start of the Communist Party Congress which starts on 8 November, where a new leadership team is set to be installed. The installation of the new leadership team could pave the way for a cut to the reserve requirement ratio and for fiscal stimulus. Many commentators envisage a soft landing for China.
The table below from the Australian Markets Weekly (Published by National Australia Bank) shows the fiscal position of euro-zone and other developed nations. As you can see the PIIGS (Portugal, Ireland, Italy, Greece, Spain) of the euro-zone countries have very high gross debt to GDP levels except for Spain. Japan has the highest but is also the only economy involved in fiscal loosening – see column 4. Notice the severity of tightening in some euro-zone countries as austerity measures start to be implemented. It does seem a little strange that Australia’s tightening in fiscal policy is greater than that of the UK and the US and not that far from the IMF‟s estimate of “austerity” announced for Italy.
The memo items are also of interest in that they show the nominal GDP, debt and budget balance in $USbn. In nominal GDP you have USA, China, Japan, Germany as the leading economies by output levels. China overtook Japan this year.
The Economist recently did a Special Report on India and one of the problems that it mentioned was the lack of a manufacturing sector. Unfortunately unlike the rest of South-East Asian economies over 50% of the workforce are still involved in the agricultural sector. However it is interesting to see the breakdown of GDP per sector:
Service sector makes up 59% of GDP and is still expanding,
Agriculture 19% and
The Economist suggests that more factories could provide jobs that would ease the pressure of 13m people that join the Indian workforce every year. What are the issues regarding its expansion:
* Bureaucracy and a poor infrastructure
* Labour costs are relatively high compared to other East Asian countries
* High cost of credit
* Weaker ruppee makes it advantageous for overseas companies to base their production
But there seems no prospect of a big leap in Indian manufacturing in the near future. And if services are to keep expanding, the country needs huge quantities of skilled labour that will not be easy to come by.
Source: The Economist – September 29th 2012
Western European economies went back into recession (defined as two consecutive quarters of negative GDP) as the injection of demand into the circular flow was more than offset by public austerity programmes in certain countries. The conditions in the Euro-zone don’t seem to be very conducive to any sort of recovery – contractionary fiscal policy is prevalent in many countries and a lack of confidence across the region stifles any upturn.
Greece is still has serious concerns over any recovery – IMF boss Christine Lagarde stated that Greece should be given “a bit more time”.
“This is what I have advocated for Spain, Portugal and what we are advocating for Greece. An additional two years was necessary for the country to actually face the fiscal consolidation programme that is considered.”
However there is still some more hardship to come before any sort of economic recovery. I was surprised at the German growth levels over the last tow quarters. Quite like this graph showing annual GDP in the Euro-zone.
Nobel Laureate Joseph Stiglitz came out strongly against the recent QE3 by the US Fed and the ECB’s announcement that it would buy government bonds of indebted eurozone member countries. With this announcement stock prices in the US reached post-recession highs although some worried about future inflation and significant government spending. According to Stiglitz these concerns are unwarranted as there is so much underutilisation and no serious risk of inflation. But the US Fed and the ECB sent three clear messages:
1. Previous actions didn’t work – ie QE1 and 2
2. The US Fed announcement that it will keep rates low until 2015 and buy $40bn worth of mortgage backed securities suggested the recovery is not going to take place soon.
3. The Fed and the ECB are saying that the markets won’t restore full employment soon – fiscal stimulus is needed.
In textbook economics increased liquidity means more lending, mostly to investors thereby shifting the AD curve to the right and thereby increasing demand and employment. But if you consider Spain an increase in liquidity will be cancelled out by an austerity package.
For both Europe and America, the danger now is that politicians and markets believe that monetary policy can revive the economy. Unfortunately, its main impact at this point is to distract attention from measures that would truly stimulate growth, including an expansionary fiscal policy and financial-sector reforms that boost lending. Joseph Stiglitz
Here is a great graphic from the BNZ showing how the NZ dollar performed in September. You could say that it strengthened on the back of notably QE3 from the US Fed and the improving global growth sentiment. Furthermore the NZ economy has performed well under trying circumstances.
June quarter GDP accounts revealed the NZ economy finished Q2 1.6% bigger than where it began the year. That is solid economic growth under ordinary circumstances. But given the ongoing challenging and uncertain global economic environment we should not under sell this achievement. It is the strongest six month expansion we have seen in the past five years. Source: BNZ