Archives par catégories : Countries/Regions

Emerging Countries: Putting the Crisis in Perspectives

par

Download the monitor

After months of uncertainty, the situation in emerging countries has grown critical in recent weeks. Downward pressure on currencies has intensified, leading central banks to hastily raise interest rates. Despite the chain reactions of the past couple of days, there is a risk that the turbulence will last for a while.

In addition to the oft-cited prospect of a change in Fed policy, emerging economies are suffering from a serious decline in their economic situation, largely attributable to their export markets drying up. The crux of the problem is sluggish international demand, particularly from China, which has made it much harder for emerging countries to pursue balanced growth. Overcapacity in Asia and undercapacity in the rest of the emerging world threaten to cause prolonged instability.

Scenario 2014–2015 : The Roller Coaster Economy

par

Download the article

2014 is off to a positive start: U.S. growth is trending upward, the euro area is pulling out of recession, Japan is reaping the benefits of its competitive strategy, and world trade is picking up. All these bright spots should be enough to end two years of global deceleration and bring about a return to growth of over 3 percent this year. But while this is certainly good news, it doesn’t tell us much about the key challenges ahead. To understand them, we need to address the much more complex question of whether 2014 will usher in a second leg of the global recovery—one that is sufficiently sturdy to ensure a lasting upswing and leave five years of convalescence well behind us. As things now stand, we feel we still have two good reasons for assuming it won’t:

  1. The deleveraging process is still producing dysfunctional effects around the world.
  2. Five years of crisis have seriously eroded the global economy’s growth potential and its ability to handle the higher interest rates the current upturn will inevitably entail.

This suggests that we are in for a period of economic instability. We are therefore forecasting that after 3.5 percent growth in 2014, global GDP will increase by only 3 percent in 2015.

The upturn, then, is likely to be short-lived, yet it’s still a reality—meaning it will necessarily affect market expectations.

We are sharply raising our long-term interest-rate forecast for the first half of 2014, but we predict backsliding before the year is out. Needless to say, there will be timid attempts at returning to normal monetary policy in the first few months of the year, but because they are unlikely to get very far, our outlook up to mid-2015 does not involve increases in key rates by the leading central banks—the Federal Reserve, the ECB, the BoJ.

Although initially encouraged by the improved economic climate to press ahead with tapering, the Fed may soon find itself overwhelmed by largely uncontrollable jumps in long-term Treasury yields.

All in all, this should be a highly volatile year.

World Trade: Recovering Without the Emerging Markets

par

Download the monitor

World trade has bounced back a bit since the end of summer. The improving European economy is one big reason. For its part, US demand has been trending more favorably since mid-year. And lastly, Japanese imports are ramping up, posting year-on-year volume growth of 5% in recent months despite significant yen weakening. So the improvement is broadly based and starting to have an impact on activity, at least in the developed countries.

Which means that, yes, this rosy picture leaves out the emerging countries, which continue to grapple with unusually soft growth in demand for imports. The reason for the anomaly? China is buying less, which is hurting export activity in the other emerging countries; Japan has reasserted itself; and demand for capital goods is sluggish. As a result, the driving force behind intra-regional Asian trade – and trade among emerging countries in general – has slackened considerably.

These trends take some of the luster off of the enthusiasm sparked by the encouraging signs coming from the developed world.

Strong Buy Latvia!

par

Download the article

6%, the hypothetical differential with EMU 17 nominal interest rates required by Latvia to accompany its economic convergence over the next quarter century

+ 6: That’s how many countries have joined the European Monetary Union since 2007. At the rate we’re going, the EMU could expand from 18 to 25 members within ten years, or even more—unless, of course, it sheds a few and actually shrinks. But who’s to know, and how to know, where such a deeply dysfunctional currency bloc is heading? 

We’d love to share the enthusiasm (however perfunctory) that customarily surrounds the addition of a new eurozone member. We’d rather not be criticizing what looks like a mad scramble to glue together a steadily rising number of countries that stand next to no chance of functioning properly under the same interest rate—the ECB’s. Unfortunately, we can’t help sensing that Latvia will eventually be going the same road as Greece, Ireland, and Spain. If it does, it won’t be due to mismanagement, as some pundits may fear. It will happen because even with the best of intentions, the Latvians will be powerless to offset the impact of a monetary policy that is inherently unsuited to their situation.

Latvia’s EMU membership offers a good opportunity to step back and focus on a crucial underlying issue often overlooked by economists: fast-tracking insufficiently developed economies into the currency bloc is irresponsible policy (for a slightly different treatment, see our article of July 2012, “From High Hopes to Despair: The Missing Metric in the European Monetary Union”).

Why such a harsh judgment? Because the record shows that economies can’t converge after joining the EMU; they have to do it beforehand.

Is the U.S. Economy Really Out of the Woods?

par

Download the article

The Federal Reserve has finally yielded to a combination of market pressure and the macroeconomic data of the past few months. From January onward, the U.S. central bank will be cutting the pace of its monthly asset purchases by $10 billion—from $85 billion at present to $75 billion. While that still qualifies as significant life support, the overriding message is that monetary policy will soon be on its way back to normal. So a previously dreaded change of course is now being greeted as good news by the markets. The Dow Jones responded positively to the Fed’s announcement, as did the dollar.

But the tapering process in the cards will necessarily affect expectations about the target interest rate. And since the Fed has maintained its goal of a more extensive policy shift as soon as the unemployment rate drops below 6.5 percent, long-term yields are even more likely to continue upward. This leads to the big question of whether the U.S. economy can cope with a further increase in those yields.

Germany’s Minimum Wage: A New Deal, But What Kind of New Deal?

par

Download the article

It isn’t easy to get a clear sense of how the introduction of a statutory minimum wage in Germany will play out. From one angle of vision, it should raise household disposable income and at the same time contribute to a much-needed rebalancing in the euro area. From another perspective, such a guaranteed minimum is likely to trigger an upward wage trend that couldn’t happen at a worse time for German manufacturers who are increasingly struggling to keep exports up. Assuming the Social Democratic Party (SPD) membership approves the deal between the coalition partners on December 17, two basic trends should help us determine the relative weights of these factors and grasp the implications of such a move:

  • The extent to which wage increases spread to export industries, which already pay considerably higher wages than the agreed-upon minimum,
  • Whether or not international demand for capital goods will recover. If it doesn’t, Germany will inevitably slip from its position as a leading exporter and will be unable to power the euro area economy.

On both scores, the introduction of a minimum wage will mean radical change in relation to the pre-euro era—not only for Germany, but for the entire currency bloc.

Commodity prices: what we would like to see, what hints they are giving

par

Commodity prices: what we would like to see, what hints they are giving

We got off on a good foot this week, with some reassuring news for once: the likely decline in oil prices stemming from progress on negotiations to halt the development of nuclear weapons in Iran. As we are reasonably confident that this week’s agreement will have an impact of at least $10 per barrel, we decided to take a closer look at what is, at first glance, good news for the world economy.

So, why don’t we just take the news at face value?

Is France doing as poorly as everyone says?

Coming on the heels of last week’s dispiriting PMI data, the results of the latest INSEE survey are reassuring. Not only do the results debunk the scenario of a slide back into recession that some were quick to assert after the PMI release, but a detailed analysis even shows that there is reason for hope.

 

The three reasons we do not see QE ending

par

The three reasons we do not see QE ending

Statements by Ben Bernanke and the release of minutes from the most recent FOMC meeting have erased any doubt sparked by the Fed’s September 18 change in communication, reinforcing expectations that asset purchases will be tapered. Most observers now think the tapering will come in March. We remain wary of the consensus for three main reasons. The first is our view of current U.S. economic trends, which we do not see improving enough to meet the Fed’s stated targets for growth or inflation in the coming months. The second is the inevitable effect that QE tapering would have on long-term interest rates, which the economy is still too weak to withstand.

How long will the last of Frankfurt’s safeguards hold?

The writing was on the wall: the ECB would have to do more as the hour of the Fed’s QE tapering approached. Here we are. Whether or not the Fed goes through with it – our previous article showed that we do not think it will – expectations of a reduction in asset purchases are already having a huge effect on markets and capital allocation around the world. By drying up the market for Treasury bonds, the Fed has been diverting capital flows from U.S. markets into numerous other assets for more than a year now, most notably into emerging and euro zone sovereign bonds. By tapering its QE, the Fed would restore the U.S. market to its rightful place, thus creating the conditions for investments to flow back into the U.S. Emerging markets and euro zone sovereign markets are thus particularly vulnerable to any change in the direction of Fed monetary policy.