Global Economy
Economic recovery, stagnation, miserablism and miserableness
By Michael Hennigan, Finfacts founder and editor
Dec 22, 2014 - 1:44 PM

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Japan: temporary/ non regular workforce - low pay & no security

Economic miserablism and miserableness have yet to give way to sustained optimism in the United States, Germany and the United Kingdom, the three most significant developed economies that in recent times have achieved some economic growth - this month's German business and consumer surveys have been positive but consumers expect their incomes to decline even though employment has hit a record and real incomes are rising because of falling inflation.

Herbert Hoover, one of America's unlucky and hapless presidents, appreciated the importance of confidence and preferred the word 'depression' to 'panic,' 'crash' or 'bust' but in mid-1930 when a delegation of civic leaders called to the White House to plead for public works projects, the president startled them: "Gentleman, you have come sixty days too late," he said. "The Depression is over."

The current issue of The Economist says that there are significant parallels between 1999 and what is expected in 2015.

In the late 1990s Larry Summers, then the US deputy treasury secretary, warned that the world economy was “flying on one engine”. For 2015 The Economist’s panel of forecasters expects 3% growth in America, compared with 1.1% in Japan and the Eurozone. China’s growth rate may fall to around 7%.

Nomura, the Japanese investment bank, says that the global economy is expected to improve in 2015, with gross domestic product (GDP) rising by a 3.5% rate from 3.2% in 2014. The plunge in oil prices will help but the pre-crisis growth level of 5% remains to be scaled a later year.

Nomura forecasts a 3.1% GDP rise in the US while the Eurozone and Japan will struggle at 0.9% and 0.8% respectively. China will see growth dipping below 7% to 6.8%.

The Conference Board, a private New York based research firm said last month that overall, annual global growth is projected to average of 3.3% from 2015–2019, but could decline to an average of 2.7% in the period 2020–2025 on the basis of the current trend. According to the Outlook, long-term growth around 3% is sufficient to sustain a moderate increase in global living standards, but is too low to meet all the future challenges posed by rising middle classes in emerging markets and ageing populations in mature economies.

“Growth in 2014 met our cautious projections, which were at the low end of analysts’ views,” said Bart van Ark, chief economist of the Conference Board. “Optimists are poised to be similarly disappointed in 2015—and more so as the long-term growth trend dips below 3%. While many in both advanced and emerging economies continue to await a ‘full recovery’ to pre-crisis growth rates, we believe businesses and policymakers would stand better to focus on managing three key macroeconomic certainties that will define the slowdown in the decade ahead: First, a looming labor shortage; second, a drop in productivity growth; and finally, a lack of investment in productive assets.”

Ten-year forecasts maybe as useful as astrology but Exane BNP Paribas, the investment bank of France's biggest bank, has told clients:

Weaker demographics and debt-deleveraging to lower growth prospects across DM (developed markets) and EM emerging markets): We find that global growth will be low in the coming decade (3.5% versus 4.5% from 2000-2007). US GDP growth should average 2.0%, well below the 3.2% average achieved between 1981 and 2007. We think Eurozone potential growth will fall to 0.9%, a level that will be challenging for public debt sustainability and structural reforms. EM trend growth should also decline by 1.5pp from pre- crisis levels to 5.1%, with the sharpest slowdowns probably in Russia and China. By contrast, India should become the fastest growing BRIC over the coming 10 years (6.8% average growth).

Investment implications: Low global bond yields for longer and more volatile equity markets Our model also suggests that global inflation will continue to trend lower, keeping nominal growth at very subdued levels. 10-year US yields should average close to 2.4%, similar to the levels observed in the past 3 years. In the Core Eurozone, 10-year yields should be below 1% on average. Volatility in equity markets should be high. Historically, equity market returns have mainly relied on dividend returns during debt-deflationary environments."

The Economist says that "Germany’s growth rate has tumbled to around 1% and there is a deeper malaise caused by years of underinvestment, a disastrous energy policy and a government that is too obsessed by its fiscal targets to spend money and too frightened of its voters to push through the sort of structural reforms that Gerhard Schröder implemented in 2003. Meanwhile Japan has repeated the error it made in 1997—thwarting its escape from stagnation with a premature rise in consumption tax."

A difference between 1999 and 2015 will be in labour compensation and while median American wages rose by 7.7% in real terms in 1995-2000, since 2007, by contrast, they have been flat in America, and have fallen inthe UK and much of the Eurozone. It also adds that all over the rich world voters are already grumpy with their governments, as polling numbers and their willingness to vote for protest parties show. "If they are squeezed next year discontent will turn to anger. The economics of 2015 may look similar to the late 1990s, but the politics will probably be rather worse."

In 2013, the typical American median household income was lower in inflation-adjusted terms than in 1989.

Ryan Avent in an Economist blog  post says in respect of recent US "rapid job growth, there has been no recovery at all in the rate of participation in the labour force [at the lowest since 1978] and only a very slight recovery in the employment-population ratio. To conclude that America is closing in on full employment is to accept as permanent most of the damage done to labour markets by the Great Recession. That strikes me as far too gloomy a view. But adjusting policy on the basis of that assumption is the surest way to make sure it is the right one; the Fed can make this the best of all possible worlds if rules out the possibility of anything better."

Federal Reserve economists estimate that  non-residential private fixed investment rose an annual average rate of only about 4% in 2012 and 2013. Net investment after depreciation as a percentage of the capital stock remains subdued, at about 1.5% a year.

The Fed has a current balance sheet of $4tn compared with an end 2013 US GDP value of $16.8tn.

Typical American household income in 2013 was below the 1989 level - until 1999 overall GDP growth tended to correspond with earnings for middle-income Americans but no longer.

World Economy: Secular stagnation or a new normal - "Between 1991 and 2012 the average annual increase in real wages in Britain was 1.5% and in America 1%, according to the Organisation for Economic Co-operation and Development, a club of mostly rich countries. That was less than the rate of economic growth over the period and far less than in earlier decades. Other countries fared even worse. Real wage growth in Germany from 1992 to 2012 was just 0.6%; Italy and Japan saw hardly any increase at all."

Access Pavlina Tcherneva's paper via link above

Finfacts reported last February that the richest 5% of Americans account for 40% of consumer spending.

Japan

At the end of last October the Bank of Japan (BoJ) surprised financial markets by expanding its programme of quantitative easing (QE) in place since early 2013.

It said it would expand bond-buying, commonly called money printing, by about ¥80tn ($712bn) each year, up from ¥60-70tn through purchasing Japanese government bonds (JGBs). This additional step, said Haruhiko Kuroda, the governor of the BoJ, “shows our unwavering determination to end deflation.”

The bank’s goal is to achieve consumer inflation of 2% a year by around April 2015 but the target is unlikely to be achieved.

The yen has fallen against the US dollar by 37% since January 2013 but despite increasing their cash hoards, firms are miserly with pay rises, ignoring appeals from the prime minister and central bank governor.

Adjusted for the hike in the sales tax rate from 5 to 8% in April, the core consumer-price index rose 0.9% from a year earlier in October, after climbing 1.0% in the previous month, according to Dow Jones Newswires.

The figure was the lowest in 12 months, slowing substantially from a high of 1.5% in April.

While nominal wages have been rising, seasonally-adjusted real wages have been decreasing in 15 of the last 16 months in year-on-year terms. In October 2014, the latest month for which data is available, real wages fell by 1.8% year-on-year.

Meanwhile Japan's non-financial firms are holding a record amount of cash or equivalents amounting to almost half the country’s GDP, Bank of Japan data showed Thursday last.

The currency holdings and deposits of non-financial, private-sector companies jumped to ¥233tn (US$1.96tn) at the end of September, up 4.2% from a year ago, according to the data.

Japan’s GDP in the year to April 2013 – the latest annual figure available – was ¥483.1tn.

John Plender, FT columnist, wrote in October:

At root, the deflationary threat in Japan results from under consumption. The corporate sector’s savings surplus – cash flow far exceeds investment – is part of that. Business is simply hogging too much of national income. Yet the effect of yen devaluation has been to transfer income to the corporate sector from the household sector. To prevent increased consumption tax weakening domestic demand, the government has also reduced corporation tax and dished out investment incentives to business, while raising public spending. Once again the flows are the wrong way round."

While stimulus programs since 1990 have kept the official unemployment rate at a maximum of 5.5%, almost 40% of the workforce are temporary/ non-regular workers, mainly young, on low pay and little security - it is toxic in an ageing society. Even companies like Toyota take advantage of these workers and firms want more flexibility.

Japan's population began declining in 2004 and is ageing faster than any other country while over 22% of Japanese are already 65 or older.

It has been estimated that by 2060 the number of Japanese will have plunged from 127m to about 87m, of whom almost 40% will be 65 or older. However, allowing for about 200,000 immigrants each year could help stabilise Japan’s population—at about 100m.

The IMF said in 2011 [pdf] that Japan was one of the world’s fastest-growing economies for three decades but has averaged only 1.1% real GDP growth since 1990, while prices have steadily declined. Consequently, the size of Japan’s economy today is about the same as in the early 1990s.

The Fund said [pdf] separately that ample evidence shows that a surge of exports in the 2000s helped Japan get out of the so-called lost decade of the 1990s. The Japanese GDP growth rate averaged 1.8% during 2002 to 2007 before it turned negative in the 2008-09 global financial crisis. Almost two thirds of this growth were due to growth in exports. This is a distinct contrast from the period between 1992 and 2001, where the GDP growth rate averaged 0.9% and only one third of this growth was due to growth in exports.

The rise in exports to China and the rest of Asia was boosted by increased productivity.

Total net public debt has risen from 13% of GDP in 1990 to 145% this year while the gross debt ratio is about 227%.

The annual budget deficit since 2008 has ranged from 7 to 11%.

Japan's GDP per hour worked adjusted for purchasing price parity was at $36.1 at end 2013, which was lower than Italy's. The latter's has been static at over $38.00 (in 2005 US dollars calculated by the OECD) since 2000.

Japan's GDP per hour worked has grown by 5.2% since 2007 or 0.9% per year. Both German and French GDP per capita have grown at 0.5% and 0.4% respectively in 6 years.

Using the Actual Individual Consumption per capita metric, which is a proxy for standard of living, OECD data for 2011 [pdf] show that Japan and Italy were at a similar level below the average of mainly developed countries, while Ireland and Spain were lower - 2013 data for Eurozone here.

Japanese were among the world’s biggest savers, putting away 15% of after-tax incomes in the 1980s. The household savings ratio stood at 1.0% at the end of March 2013, down from 11.8% two decades ago, because of the growing number of people aged 65 and over.

Japan's Labour Market: Lifers, temps and banishment rooms

Nokia, Europe and Japan's old companies versus US young champions

Eurozone

Early in the New Year the European Central Bank is expected to launch a QE program.

Jacques Cailloux, chief European economist at Nomura, says he is concerned that the European Central Bank's likely QE measures of  €300bn to €500bn won't meet the investment needed by the Eurozone economy.

Stefan Schneider of Deutsche Bank says on Euro Area growth that one reason for the poor outlook is disappointing global trade performance:

Despite a further softening of the euro during 2015 Eurozone exports are expected to rise by just 3½% in 2015 and net exports are not expected to contribute to the modest GDP growth of 1.0%. This is also because the catching-up process for the emerging markets triggered by their integration in the global economy – a major driver of global trade in the last two decades – has slowed markedly of late. The establishment of global value chains also seems to have slowed down significantly. Moreover, since the economic and financial crisis the global integration of financial markets has more or less come to a standstill. It therefore does not look as if global trade will again grow at nearly twice the speed of global GDP in the next few years, as was the case in the past. Considerable adjustment burdens thus lie ahead for Germany because of its strong export focus. Therefore, German economic growth at 1.0% is likely to match the Eurozone average and Germany is set to lose its preeminent position. So positive wishes for the New Year are likely to be most appropriate."

Dreams of European Growth: Euro began with Germany, France and Italy in sick ward

Anemic growth in worker compensation since the start of the decade has substantially strengthened the cost advantages of US manufacturing against other mature economies

German manufacturing wages are the highest of big industrial nations

German employment at record high

Stagnation in the Eurozone as German aversion to inflation to continue

UK

The UK Office for National Statistics (ONS) said Tuesday that gross domestic product (GDP) increased by 2.6% between the third quarter of 2013 and the same period this year, down from a previous estimate of 3%.

Growth for the first quarter of 2014 was revised down from 0.7% to 0.6% and for the second quarter it was 0.8%, down from 0.9% while third-quarter growth was unchanged at 0.7% as it saw the best growth in household spending for four years but business investment fell at the steepest pace in five years.

The ONS also reported that the UK's current account deficit - which measures the difference between the country's exports and imports of goods and services - rose in the third quarter of the year to £27bn. That was a record 6% of GDP.

In Q3 2014 real household income (RHDI) per head decreased 0.2% on the quarter, but remains broadly in line with its pre-recession levels. Compared to Q3 2013, real household income per head increased by 0.4%.

In Q3 2014 Gross Domestic Product (GDP) per head, which adjusts GDP for the size of the population, increased 0.6% compared to Q2 2014. This was a slightly slower growth rate than the 0.7% quarterly increase seen in GDP, which recovered to its pre-economic downturn peak level in Q3 2013. Despite the quarterly growth, GDP per head remains 1.8% below its pre-economic downturn peak level.

Rising angst

Edward Luce, a US-based FT columnist writes today on boom and gloom:

Among the many surveys of global attitudes, it is striking how consistently more optimistic Asians, Latin Americans and Africans feel than people in the west. It makes sense that people in China, India and elsewhere feel rosier about their children’s future.

The less we grow, the more we squabble over budgets. From Spain to Canada, the old keep getting the better of the fiscal wars. France has a higher birth rate than most other European countries. But it devotes more than average of its resources to the old. One of the reasons François Hollande was elected president was that he pledged to restore the French retirement age to 60 from 62. In the UK George Osborne, chancellor of the exchequer, has exempted state pensions altogether from the spending cap on welfare. In the US, Medicare and Social Security gobble up a larger share of the federal budget each year. No party dares touch the retirement age — which is set to rise only at a glacial rate from the current level of 65."

Last October Janan Ganesh, the FT's political commentator, wrote that the "ambient noise in Britain today is a drone of complaint: about migration, unspecified “elites”, politics itself"

Britain cannot allow the terms of political trade to be set by the miserabilists, and not just because they are wrong. They also have the capacity to do grievous harm. The real threat to this country is nothing these people complain of – Europe, migrants, markets, London’s encapsulation of all these things – but a political overreaction to the complaints themselves. It is easy to imagine the next government doing something seriously stupid in a futile effort to meet the national mood. Mr Miliband talks not just of tax rises but of unpicking the liberal economic model with the kind of price interventions that worked so marvellously in the 1970s.

As for Mr Cameron, he appears to be two-thirds of the way to engineering a withdrawal from the EU that he has at no point actually desired. The pattern is this: malcontents hound him, he takes a step towards the exit, they cheer for a while, they hound him for more, he takes another step. The process works with the metronomic predictability of one of those executive desk toys."

Globalization's new normal needs permanent underclass - Part 1

Globalization, the underclass and the need for a new model - Part 2

Globalization, technological change and GDP's disconnect - Part 3

The idiot/ eejit's guide to distorted Irish national economic data

George Orwell, bullshit and 2015 New Year resolution for Irish Government

In defence of dissent and Ireland's nattering nabobs of negativism


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