Libya – Fastest growing economy in 2012 but what does it mean?

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.

AS & A2 – Global and New Zealand Update for November exams

It is important that you are aware of current issues to do with the New Zealand and the World Economy. Examiners always like students to relate current issues to the economic theory as it gives a good impression of being well read in the subject. Only use these indicators if it is applicable to the question.

Indicators that you might want to mention are as follows:

The New Zealand Economy
The New Zealand economy expanded by 0.6 percent in the June 2012 quarter, while economic growth in the March quarter was revised down slightly to one percent. Favourable weather conditions leading to an increase in milk production was a significant driver of economic growth over the June quarter. The current account deficit rose to $10,087 million in the year ended June 2012, equivalent to 4.9 percent of GDP. Higher profits by foreign-owned New Zealand-operated banks and higher international fuel prices were factors behind the increase in the deficit during the year. Unemployment is currently at 6.8% but is expected to fall below 6% with the predicted increase in GDP. Annual inflation is approaching its trough. It is of the opinion that it will head towards the top end of the Reserve Bank’s target band (3%) by late next year.

The Global Economy
After the Global Financial Crisis (GFC) the debt-burdened economies are still struggling to reduce household debt to pre-crisis levels and monetary and fiscal policies have failed to overcome “liquidity traps”. Rising budget deficits and government debt levels have become more unsustainable. The US have employed the third round of quantitative easing and are buying US$40bn of mortgage backed securities each month as well as indicating that interest rates will remain at near zero levels until 2015. Meanwhile in the eurozone governments have implemented policies of austerity and are taking money out of the circular flow. However in the emerging economies there has been increasing inflation arising from capacity constraints as well as excess credit creation. Overall the deleveraging process can take years as the excesses of the previous credit booms are unwound. The price to be paid is a period of sub-trend economic growth which in Japan’s case ends up in lost decades of growth and diminished productive potential. The main economies are essentially pursuing their own policies especially as the election cycle demands a more domestic focus for government policy – voter concerns are low incomes and rising unemployment. Next month see the US elections and the changing of the guard in China. In early 2013 there is elections in Germany. The International Monetary Fund released their World Economic Outlook in which they downgraded their formal growth outlook. They also described the risk of a global recession as “alarmingly high”.

Economic Indicator: US Trucking Tonnage

Here is a graph I got from the Business Insider website. The American Trucking Association (ATA) Index measures tonnage being moved in the US and its movements correlate quite nicely with that of economic growth in the economy. ATA Chief Economist Bob Costello said. “Manufacturing output was strong in June, which helped tonnage levels.”

Costello said he’s still concerned about businesses sitting on cash instead of hiring more workers or spending it on capital, both of which would give the economy and tonnage a shot in the arm, as they are worried about Europe and the U.S. fiscal cliff at the end of the year. Costello lowered his tonnage outlook for 2012 to the 3% to 3.5% range due to recent economic weakness.

Measuring Poverty

I got this video on Poverty from Ben White on Twitter – very useful for Unit 6 of the Cambridge International A2 Economics course. Produced by the World Bank it asks the following questions:
Do you wonder how we measure poverty?
Do you know how we do it, but have a hard time putting it into simple words?

This 3 minute video explains the methodology that we used, how it works and why it is important. Click here to go to their website.

Skyscraper completion = Economic Downturn

Barclays Capital have produced an interesting indicator in that its Skyscraper Index shows the relationship between construction of the next world’s tallest building and an imminent financial crisis.

Over the past 140 years it is interesting to see the economic environment post skyscraper completion. The Great Depression was matched by 3 record breaking New York skyscrapers. With the completion of the World Trade Center skyscrappers in 1973/4 saw the looming spectre of stagflation (high unemployment and high inflation) in both the US and UK economies. This condition was further compounded by the breakdown of the Bretton Woods Agreement.

The Petronas building in KL was followed by the Asian currency crisis and the Taipei 101 coincided with the early 2000’s recession and the end of the technology bubble. The Burj Khalifa was completed in 2010 which was amidst the current financial crisis. Its increase in height over the previous highest skyscraper is indicative of the extent of the current economic crisis.

Source: Barclays Bank – Equity Research

Here is an image from the Barclays Capital publication which might be useful for the classroom environment. Just click on the image.

US finds China on their shoulder

Another great Economist graphic which shows that China has already overtaken America on well over half of 21 different indicators, including manufacturing output, exports and fixed investment. The chart below predicts when China will surpass America on the rest. By 2014, for example, it could be the world’s biggest importer and have the largest retail sales. America still tops a few league tables by a wider margin. Its stockmarket capitalisation is four times bigger than China’s, and it spends five times as much on defence. Even though China’s defence budget is growing faster, on recent growth rates America’s will remain larger until 2025.

Quirky Economic Indicator – length of a ladder

Listening to “From Our Own Correspondent” on the BBC World Service I came across an interesting piece by Kate Adie on Global Trade. With the downturn in global trade the international transport industry has been very much affected. Those that have been associated with the distribution of goods get an early indication of the slowdown in global growth. The obvious indicators are: idle cranes, queues of merchant ships dwindle etc. But what about the speed of cargo ships and the length of ladders to climb aboard?

When the world economy was “steaming” ahead the captain of a merchant ship said that they cruised at 20 knots but when the economic crisis of 2008 arrived we slowed to 16 knots. A harbour pilot summed up the state of world trade by the length of the ladders that he climbs on the sides of ships.

A long climb up the ladder signifies that the ship is high in the water and exports are correspondingly low.

A short climb up the ladder signifies that the ship is low in the water and exports are correspondingly high.

The seafarers say that they take air to China before they load up with goods for the US.

Economic & Financial Indicators

The “Weekend Herald” last Saturday showed the Associated Press’ Global Economy Tracker which monitors economic and financial data in 30 countries which represents more than 80 per cent of global output. With the A2 exam approaching some of these figures might be of use in essays when talking about current extremes in the global economy. It also makes interesting reading when you consider the frequency of which some countries appear in the positive and negative side of the indicators – Switzerland, Greece, Japan, and the Scandinavian countries.

Do Central Banks need to reinvent policy?

To some the role of central banks was of prime importance in the financial crisis and the substantial increases in the incomes of those employed in the financial sector.

Since the days of stagflation in the US and UK in the 1970’s inflation has been the number one target for central bankers. US President Jimmy Carter’s attempts to follow Keynes’s formula and spend his way out of trouble were going nowhere and the newly appointed Paul Volcker (US Fed Governor in the 1970’s) saw inflation as the worst of all economic evils. Below is an extract of an interview from the PBS series “Commanding Heights”

“It came to be considered part of Keynesian doctrine that a little bit of inflation is a good thing. And of course what happens then, you get a little bit of inflation, then you need a little more, because it peps up the economy. People get used to it, and it loses its effectiveness. Like an antibiotic, you need a new one; you need a new one. Well, I certainly thought that inflation was a dragon that was eating at our innards, so the need was to slay that dragon.”

The policy of the time was Keynesian – inject more money into the system in order to get the economy moving again. This was also the case in the UK in the early 1970’s but Jim Callaghan’s (Labour PM in the UK ousted by Thatcher in 1979) speech in 1976 had reluctantly recognised that this policy had run its course and a monetarist doctrine was about to become prevalent. Below is an extract from the speech.

“We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment. That is the history of the last twenty years”

With this paranoia about inflation central bankers began to implement a monetary policy targeting inflation in the medium term. In NZ the Reserve Bank Act 1989 established “price stability” as the main objective of the RBNZ. “Price stability” is defined in the PTA (Policy Target Agreement) as keeping inflation between 1 to 3% (originally 0-2%) – measured by the percentage change in CPI. Around the world central banks were adopting a more independent approach to policy implementation and with targeting inflation a new prevailing attitude seemed to be like an osmosis and suggesting that low prices = macro-economic stability as well. Also, raising interest rates is an unpopular political move and governments could now blame the central bank for this contractionary measure.

However, the rise of asset prices were largely ignored by central banks and although inflation remained relatively stable, this was in part due to the disinflation of the emerging markets that were now becoming more a part of the global market. Therefore with low inflation, central banks could afford to lower interest rates and ultimately stimulate a lot of borrowing which increased asset prices. The Rethinking Central Banking report (written by a group of economists, financiers and policy makers) recommend an “international monetary policy committee” which can look at the bigger picture in the global economy.

According to Jeremy Warner in the Daily Telegraph:

The bottom line is that central banks need to be much more open about precisely what their objectives are, mindful of the international implications of what they do, and clear about what circumstances would trigger particular courses of action.

The Balassa-Samuelson effect

The Balassa-Samuelson effect was recently mentioned in The Economist magazine and refers to the fact that countries with higher per capita real incomes have a higher real exchange rate. There tends to be more investment and productivity in industries that are producing goods for export – emerging economies. This is in comparison to the service sector which tends to be more domestically based. However, a rise in productivity in the tradable goods sector will tend to drive up wages in this sector and, as labour is assumed to be mobile across sectors, push up wages in the non-tradable sector. As the latter increase is not matched by a productivity increase, it will raise costs and prices in the non-tradable goods sector and thereby lead to a rise in inflation – see diagram below.

With this theory in mind The Economist was debating when China would overtake the US as the world’s largest economy. How quickly the gap narrows depends on three things one of which is the inflation gap between China and the USA. Inflation tends to be higher in fast-growing emerging economies than in slow-growing rich ones. Fast productivity growth in export industries raises average wage costs across the economy, including in non-traded services where productivity is sluggish. This ultimately increases average inflation and the projection from The Economist assumes a 4% inflation rate in China compared to 2% in the US.

Quirky Economic Indicators

Famous for its Big Mac Index (an informal way of measuring the purchasing power parity between two currencies) The Economist recently asked readers to send in their wacky economic indicators. A vet claimed that his business leads the economic cycle by 6 months – in tough times pet owners are quick to cut back on vaccinations and non-essential surgery. A leader’s hairline has also been seen as an indicator – when they recede economies are likely to follow. The most relevant indicator came from an investment analyst who noted the number of searches on google for “gold price”. During the start of the financial crisis in 2008 the gold price tumbled but the number of searches on google for the “gold price” increased markedly. The chart below shows that the number of gold-price searches shoots up when consumer confidence dives and subsides when households perk up again.

Some other interesting indicators I have come across include:

The Briefcase Indicator
Alan Greenspan (former US Fed Chariman) had the ‘Briefcase Indicator’. Cameras from CNBC would follow him on the mornings of Federal Open Market Committee meetings as he arrived at the Fed. The theory went that if his briefcase was thin his mind was untroubled and the economy was well. But if it was stuffed full, rumour had it that he was up all night and a rate hike was on the cards. For the record Greenspan explained in his book “The Age of Turbulence” that the size of his briefcase was solely a function of whether he packed his lunch.

More Mosquito Bites
In Maricopa County, Arizona, there are a vast number of house that have been abandoned by their owners – forelosures. Within these properties are swimming pools or ponds which are now unattended. Before the financial crisis local authorities only treated 2,500 but in 2009 after the housing market collapse 4,000 were treated.

Tractor Sales in NZ
A favourite of mine and one that I blogged on earlier is new tractor registrations. If the primary sector is doing well NZ is also. Within an advanced agricultural base, tractors form a crucial part of the production process and has played a significant role in the increase in productivity in New Zealand since the removal of subsidies. Looking at the number of new tractor registrations there was a significant fall in the post subsidy period of 1984 – 1988 where the number fell from 2,218 to 711 respectively. This reflected the elimination of concessionary farm loans, price supports, low-interest loans, disaster relief, weed eradication subsidies and special training programmes to get them through the hard times.

R-Word Index
The recession index (the R-word index) is an informal index created by The Economist which counts how many stories in the Washington Post and the New York Times using the word “recession” in a quarter. This simple formula pinpointed the start of recessions in 1981, 1990, and 2001, but was misleading in the early 1990s, when the index indicated a recession for a year after it had officially ended in March 1991.

NZ$ strength and its impact

Here is another very useful graphic from the BNZ where they tracked the NZ$ to US$ rate and have noted events that seem to correlate with the movement in the currency. With the vast majority of trade done in US$ this means that when exporters change their US$ into NZ$ they have to pay more of the their US$’s which ultimately affects their profit margins. Below are some comments from exporters in NZ.

“You wake up every morning and the dollar has moved a cent or two cents higher – you feel like cutting your throat. It’s really scary.” Heartland Fruit chairman and Nelson businessman John McCliskie.

“the high dollar was preventing it making any money from its United States market and shaved about $2 million from its profits during the past financial year.” New Zealand King Salmon chief executive Grant Rosewarne

“It’s great if you want to go away but we can’t all go away on holiday all the time,” Nelson Regional Economic Development agency chief executive Bill Findlater.

Here are some advantages and disadvantages of a strong NZ$

Advantages of a Strong Dollar

• A high NZ$ leads to lower import prices – this boosts the real living standards of consumers at least in the short run – for example an increase in the real purchasing power of NZ residents when traveling overseas
• When the NZ$ is strong, it is cheaper to import raw materials, components and capital inputs – good news for businesses that rely on imported components or who are wishing to increase their investment of new technology from overseas countries. A fall in import prices has the effect of causing an outward shift in the short run aggregate supply curve
• A strong exchange rate helps to control inflation because domestic producers face stiffer international competition from cheaper imports and will look to cut their costs accordingly. Cheaper prices of imported foodstuffs and beverages will also have a negative effect on the rate of consumer price inflation.

Disadvantages of a Strong Dollar

• Cheaper imports leads to rising import penetration and a larger trade deficit e.g. the increasing deficit in goods in the NZ balance of payments in 2001
• Exporters lose price competitiveness and market share – this can damage profits and employment in some sectors. Manufacturing industry suffered a steep recession in 2001 partly because of the continued strength of the NZ$, leading to many job losses and a sharp contraction in real capital investment spending and the lowest profit margins in manufacturing industry for over a decade
• If exports fall, this has a negative impact on economic growth. Some regions of the economy are affected by this more than others. The rural areas are affected by a strong dollar in that our produce becomes more expensive to overseas buyers.

GDP per person – highest and lowest rate of growth

Here is a great chart from The Economist website.

The countries where GDP per head grew fastest between 2001 and 2010—Equatorial Guinea, Azerbaijan and Turkmenistan—are all rich in natural resources, and were beneficiaries of the past decade’s boom in commodity prices.

Haiti and Zimbabwe have both explored how much ruin there is in a nation over the past decade and show little sign of improving. They are two of only 15 countries that have seen negative growth since 2001. Slow population growth also helps: although America’s economy has grown considerably faster than Japan’s since 2001, Japan’s population has shrunk while America’s has risen. This means that income per head in Japan has grown almost as rapidly as in America over this period.

Billion Prices Project – a new way to collect data.

James Surowiecki in this week’s New Yorker magazine wrote an interesting piece on the Billion Price Project which is a way of trying to get current figures in the calculation of economic varibles.

In order to track indicators such as inflation many economies haven’t changed the methodology that they use. For instance in the USA price data is gathered in much the same way as it was in the 1950′s – phone and business surveys, checking out prices in shops. The major issue is the fact that when the inflation figures are published they are already a month out of date and in times of volatility that is too late. Testament to this was in the 1930′s when Herbert Hoover anounced that “The Depression is over” as he said that only 2.5 million Americans were unemployed when in fact the figures were 8 months old. The true figure was 5 million with 100,000 more losing their jobs every week.

Two MIT economists have started a new venture called the Billion Prices Project (BPP) in which they gather price data through the Internet. It collects more than 500,000 prices daily which is 5 times the number that the government looks at. A good example of its usefulness is shown after Lehman Brothers went under in September 2008 – the project’s data showed that businesses started to cut prices almost immediately whilst the government statistics indicated this much later in November – see graph below. Also the BBP tends to keep governments honest as they have been notorious for manipulating inflation and jobless figures to their advantage – this is especially prevalent in developing countries. Currently the BBP suggest that inflation in the US is under control eventhough the government officials are concerned about a huge price spike and are therefore pushing to make interest rates higher which ultimately slows down the economy and forces up unemployment.

When will China catch the USA?

Here is a great presentation by Hans Rosling of Gapminder fame. Gapminder developed software that converts international statistics into moving, interactive graphics. His lectures using Gapminder graphics to visualise world development have won awards. Here he uses bubbles and graphs to show how the rest of the world caught up to the US and predicts by 2040 that China will have overtaken them. It also interesting to note the increase in income in China between 1980 – 2010 and compare it with the US.

Euro strengthens against US$

An interesting report on the Time magazine blog outlining how the US dollar is actually weakening against the Euro and the what are the prospects for some growth in the US economy. Considering the mess the that many of the Euro zone counties are in this is alarming. Consumers have been badly affected by the increasing cost of food and fuel and the rising food and energy prices but they are not part of the core inflation that the US Fed use to monitor inflation. Therefore these commodity price increases have no significance on US monetary policy – i.e. whether interest rates go up or down. However, some Fed officials assertain that food and energy pressures can’t be ignored, because even the expectation of inflation by consumers and businesses can lead to real inflation. Even with the Fed becoming more open in dialogue with the media it seems that people are starting to lose some faith in the organisation.

And Americans aren’t the only ones. The disappointing first quarter U.S. growth numbers Thursday were followed by a sell-off of U.S. dollars. So even as all hell broke loose in the eurozone over a potential Greek default, the euro made gains against the dollar.

Is this the start of the US$ becoming out of favour as the world’s reserve currency.

World Recovery – Moped or V8 turbo

It seems that we currently have a recovery in the global economy that is either like that of a moped or a turbo charged V8. China and India are racing ahead of the more traditional developed countries as they avoided the credit crisis and the exposure to sub-prime mortgages.

Moped – USA, UK, EU
Turbo charged V8 – China, India, Brazil

Even through the turmoil of 2008 and 2009 the developing economies avoided the housing crisis and never had to bailout their banks or withstand the high unemployment and stagnant growth that plagued their developed counterparts. Some interesting facts from the World bank:

Developing economies share of world GDP – 1980 = 18% 2010 = 26%
Developing economies accounted for 45% of world GDP in 2010
Internal demand in China accounted for 80% of its GDP

India and China have a huge middle class which is now wishing to acquire all those western products. However, as investors look to emerging markets to deposit their money there is the risk of asset and property bubbles. Brazil has already increased its RRR Reserve Requirement Ratio – see previous post – QE or QT 1st April 2011. In order to soften the impact of inflation these countries could let their currency rise rapidly which would reduce the cost of their imports but this does affect the competitiveness of their exports.

30% of China’s GDP is generated from the export market.

Between 1999 and 2008, US multinationals slashed 1.1 million jobs in the US and added 2.4 million jobs overseas with more than 520,000 in China. In 2010 GM sold more cars in China than at home in the US. However what is more poignant is that of the 2.35 million cars sold in China 99% of them were made locally. It seems that the Brazil, India, and China are the new turbo economies to bring us out of recession.

Below are some useful indicators to show the Mopeds and the V8s of the world economy.

China’s Capitalist Revolution

Currently doing economic systems with my AS Level class and came across a DVD entitled “China’s Capitlist Revolution” (BBC) which is also on YouTube. It covers the radical movement in China from a economic communist system to that of the free market. China has maintained the political system of communism but embraced the economic system of capitalism – often alluded to as Market Socialism. Some very interesting facts including a factory that would complete their yearly quota in 3 days.

When will China overtake the US?

A few days have past since my last post – I’ve been on holiday where there was no Internet access. Here is an interesting gaphic from The Economist where you can input data into their interactive chart to predict when China will overtake the USA as the world’s major economy. Click here to go to the page on The Economist site.

Our best guess for the next decade is that annual real GDP growth averages 7.75% in China and 2.5% in America, inflation rates average 4% and 1.5%, and the yuan appreciates by 3% a year. Plug in these numbers and China will overtake America in 2019. But if China’s real growth rate slows to an annual average of only 5%, then (leaving the other assumptions unchanged) China would become number one in 2022. Please place your own bets.

Problems of the long-term unemployed

The New York Times recently ran a very interesting article on the long-term unemployed. Economists and politicians have been debating whether the problems in the job market are primarily cyclical – influenced by the business cycle or structural – the decline of a certain occupations. What they seem to miss is the fact that cyclical can be structural as workers become less employable the longer they are out of work

It is acknowledged that the likelihood of finding a job falls considerably the longe the person has been out of work. Research by Robert Shimer from the University of Chicago averaged job-finding data from the Bureau of Labour Statistics from January 1976 to October 2007, looking at only people who either lost or left jobs before becoming unemployed (that is, excluding people who were new entrants or re-entrants to the labor force).

The horizontal axis shows how long someone has been unemployed, and the vertical axis shows the likelihood that the person will find a job in the next month. Shimer found that 51 percent of workers who had been unemployed for one week obtained work in the following month, but the share declined sharply after that.

Over recent decades, a person out of work for a week was nearly four times as likely to find a job the next month as a counterpart who’d been out of work for a year.

Furthermore, the re-employment data by week shows the same trend in that the longer you are unemployed the less likely you are to get back into the labour force – see graph below:

But the experience of unemployment itself also seems to damage workers’ prospects.

1. Employers will look at a yawning gap in a worker’s resume and wonder why no one else would take this applicant. It’s the “lemon” issue that also applies to housing and used cars: The fact that a person has been unemployed for so long (or that, say, a house has been on the market so long) is a signal that something is defective, even if the defect is not obvious to the naked eye.
2. Employers may also worry that jobless people have gotten out of the habit of working, which appears to be a valid concern.

But the other effects of long-term unemployment may be more permanently scarring. This is a phenomenon Europe appeared to go through starting in the 1980s, as an entire class of workers became very difficult to put back to gainful employment.