Sunday, March 4, 2018

Global Macroeconomics Snapshot March 2018

The horror of protectionism
The U.S starts a trade war
On March 1, the President of United States, Donald Trump, fired the starting gun to a wave of protectionism. As soon as he announced to slap an import tariff of 10 % on imported aluminum and of 25 % on imported steel, America’s major trading partner, including the European Union, declared that they would not accept such a policy and were ready to retaliate. Trump, in return, threatened to widen his protectionist policy and expand his tariff policy on the import of cars.
Trump’s intervention comes at a time, when higher interest rate, inflation, and a widening budget deficit are in the making. Protectionism would the fourth horseman to complete the group of the apocalyptic riders. 
The U.S-administration blames ‘unfair’ trade practices as the reason for its policy. President Trump tweeted the day after his announcement to impose tariffs that “(o)ur Steel and Aluminum industries (and many others) have been decimated by decades of unfair trade and bad policy with countries from around the world. We must not let our country, companies and workers be taken advantage of any longer. We want free, fair and SMART TRADE!”
Protectionism would mean the end of a policy that has been in place among the industrialized countries and for a large part of the developing countries since the end of World War II. The spread of protectionism would not only be a shift of policies but a major change. 

Backgrounder on Trade
U.S. deficits
Curing trade deficits through mercantilist policies is recurring error of policies. It is true that the United States suffers from persistent trade deficit which in turn lead to the country’s high foreign debt. The United States has had a trade deficit since the early 1980s. In terms of the broader category of the current account, the balance of the United States has been negative since 1982. In 2006 the current account deficit in percent of America’s gross domestic product reached six percent and stands currently at 2.6 percent.
Current account deficits require corresponding capital imports. This way, the overall foreign debt of the United States to around eight trillion US-dollars in 2017.

Why tariffs don’t work
Economic theory shows that trade deficits reflect domestic imbalances of country between savings and investment. Insufficient domestic savings imply excessive consumption. In order to fill the gap and provide the funds for investment, the country must import capital from abroad.
Different from other countries, the United States has not yet faced a currency problem. In terms of its purchasing power the U.S.-dollar is overvalued against almost all other currencies of the world. A sufficient devaluation of the exchange rate has not taken place in the case of the United States because the U.S.-dollar still serves as the major international reserve currency. This allows the United States to borrow in their own currency. 

Economic Growth
Led by Vietnam with an annual growth rate of its gross domestic product of 7.46 percent in the third quarter of 2017, other high growth emerging market countries comprise Egypt (5.3 %) in the Middle East; Rwanda (4.9 %) and Nigeria (4.3 %) in Africa; and Ireland (4.2 %) and Moldavia (3.6 %) in Europe. Bolivia had a growth rate of 6.6 percent in the third quarter of 2017, yet this came after a contraction of 7.8 percent in the period before.

Price inflation
Venezuela leads the table with an annual inflation rate of 741 percent as of February 2017, followed by South Sudan with an annual rate of 117.7 percent as of December 2017. The Congo suffers from an inflation of almost sixty percent and Syria of over forty percent.
In the industrialized countries, inflation rates are very low. As of January and February 2018, both Japan and Germany register an annual inflation rate of 1.4 percent. The average of the European Union is 1.2 percent, and in the United States, the annual inflation rate in January 2018 was 2.1 percent.

In terms of unemployment, there are dramatic differences among the countries. Congo has an official unemployment rate of close to fifty percent, Namibia has a rate of thirty-four percent, while Gambia has close thirty percent. Low-unemployment comprise Qatar (0.2 %), Thailand (1.2 %), Vietnam (2.2 %) and Uganda (2.3 %).

Current Account
The situation concerning the current account balances is very uneven. Some countries have double digit current account surpluses, such as Singapore (19 %), Taiwan (13.4 %), Thailand (11.5 %), and Switzerland (11 %), while other countries suffer from extreme deficits of their current account balance in percent of gross domestic product such as Mozambique (-37.9 %), Libya (-37.8 %), the Republic of Congo (-24.2 %), and Niger (- 19.4 %).

Interest rates
The phenomenon of nominal negative interest rate persists in several countries, such as in Switzerland (-0.75 %), Denmark (-0.65 %), Sweden (-0.50 %), and Japan (-0.10 %).


China’s economic growth seems to have no end in sight. The Chinese economy expanded 6.8 percent annually in the last quarter of 2017, the same as in the previous three months. It is hard to believe, but the official inflation rate is 1.5 percent as the average over the past year until early 2018. With an unemployment rate of under four percent, China, so it seems, has a perfect macroeconomy. Since early 2017, China’s currency has experienced a slight appreciation from seven yuan per dollar in January 2017 to 6.2 yuan per dollar in March 2018.

China’s export performance is still strong. China’s rose 11.1 percent over the year up to January 2018. After an extreme surplus of 9.3 percent in 2008, China’s current account balance has stabilized around a surplus of two percent since 2011.

South Korea

The South Korean economy experienced negative growth of 0.2 percent on quarter in the quarter to December of 2017 compared to a 1.5 percent expansion in the previous period. It was South Korea’s first contraction of its gross domestic product in nine years. GDP Growth Rate in South Korea averaged 1.80 percent from 1960 until 2017, reaching an all-time high of 7.8 percent in the fourth quarter of 1970.

Argentina is on its way of recovery. The annual growth rate has reached 4.2 percent in the third quarter of 2017 after 2.7 per cent in the quarter before. However, the currency continues to weaken and has reached 20 pesos per dollar in March 2018. The inflation rate is still very high at 25 % and has not yet shown signs of falling more since it had come down from over forty percent in 2016. 

Brazil’ economy continues recovering. The annual growth rate of the gross domestic product in the fourth quarter of 2017 amounted to 2.1 percent, after a still negative growth rate at the end of 2016. The inflation rate is falling again. After having come down from around five percent in early 2017, the rate fell to less than two and a half percent in the middle of the year. As of January 2018, the country’s inflation rate now stands at 2.86 percent. Unemployment is still high. After falling from close to 14 percent in early 2017 to 11.8 percent by the end of the year, Brazil’s unemployment rate is up to 12.2 percent again in January 2018. 

In Venezuela, hyperinflation continuous, and poverty is on the rise. Even official data can no longer hide the disaster. The official inflation rate is 741 percent and the gross domestic product has shrunk by 18.7 percent in 2016. 

Sunday, January 21, 2018

Financial Market Snapshot January 2018

Top Macro Themes
United States in focus
U.S. government shutdown
At the first anniversary of the inauguration of Donald Trump as President of the United States, the U.S. government must confront a partial shutdown because Congress failed to lift the ceiling of public debt. Only so-called ‘essential services’ will be maintained, while about twenty percent of regular government spending is without funding. The dispute between the Democrats and the President’s Republican Party concerns immigration policy and the status of the children of illegal immigrants. For both parties, this is a high-stakes issue along with building a wall between the United States and Mexico.
Stock market boom
While the news coverage highlights the issue of immigration and a non-ending series of real and made-up scandals of the Trump government, it gets largely unnoticed how well the American economy is doing. Most impressive is the rise of the U.S. stock market since the election and since Trump’s inauguration. Since the election of Donald Trump, the stock market value of the American economy has grown by almost seven trillion U.S.-dollars to slightly over thirty trillion U.S.-dollars. On the one hand, this rise lifts the retirements accounts of many Americans, on the other hand, the wealth discrepancy augments because the superrich typically have their wealth in stocks.
European Union in doubt
While the political relations between Europe and the United States have deteriorated, the impulses from the American economy have also accelerated growth in Europe and here, too, stock markets have risen. In some places like Germany, stocks have reached new highs. As of now, no concrete protectionist measures have been taken. While Brexit negotiations move ahead very slowly, the United Kingdom and the rest of the countries of the European Union do not yet face concrete trade barriers. Expectations, however, that the separation cannot be stopped, lead to strategic re-orientation among businesses as it seems certain that the United Kingdom will no longer enjoy trade privileges when it leaves the European Union.
Global uncertainties
The positive mood can change anytime because of unforeseen events in the international arena. All institutions that characterize the post-World War II era are under fire, beginning with NATO and UNO to the role of the World Bank and the International Monetary Fund. China flexes it muscles and challenges the role of the United States, while the U.S. under Trump moves to a more isolationist position. This way, contradictions emerge because the U.S. government continues an active military involvement in many parts of the world and is in confrontations with Russia, Iran, and North Korea besides its numerous regional military engagements.

Global Scenario
Economic growth
Economic growth is strong in all major industrialized countries. From the third quarter of 2016 to the third quarter of 2017, the annual growth rate of the gross domestic product increased from 1.9 to 2.2 percent in the United States; from 2.0 to 2.3 in the Euro Area; and from 1.0 to 1.7 in Japan, while the gross rate in the United Kingdom continued to grow at a rate of 2.1 in this period as before. This economic expansion comes along with fixed capital investments. The rate of growth of gross fixed capital formation in the United States rose from 1.6 percent to 2.2 percent; from 2.0 to 3.0 percent in Japan; and from 1.6 to 3.3 percent in the United Kingdom.
Low and falling unemployment accompanies the strong economic growth in the industrialized countries. In the United States, the unemployment rate fell from 4.9 to 4.3 percent; in Japan from 3.0 to 2.8 percent; and in the United Kingdom from 4.8 percent to 4.2 percent. Except for Germany’s unemployment rate of 3.6 percent, the overall rate of unemployment in the Euro Area remains high although here, too, it has come down. 
Current Account
Not much changes have been taking place recently as to the external sector of the economies of the industrialized countries. The United States continues having current account deficits, although at a lower level of 2.1 percent of GDP by the third quarter of 2017. Japan increased its surplus from 3.6 percent to 4.3 percent in the third quarter of 2017 compared to the year before, while the current account surplus in the Euro Area rose from 3.6 percent to 4.3 percent. Exchange rates have been largely steady with the exception of the euro, whose exchange rate of against the U.S. dollar has been on the rise since the end of 2016.
Prices and Money
Apart from the United Kingdom, where the price inflation rate rose from 1.1 percent in November 2016 to 2.65 percent per year after, the price levels in the other industrialized countries have been relatively stable with a rise from 2.14 to 2.35 percent in the United States; from 0.02 to 0.03 percent in Japan, and a fall from 1.23 to 0.95 percent in the Euro Area. Except for the United Kingdom, where the growth rate of narrow money shrank drastically from 9.5 percent to 4.8 percent, the M1 growth rate declined moderately in the United States from 8.2 percent to 6.6 percent, and in Japan from 8.4 percent to 5.7 percent. In the Euro Area there was a slight expansion from 6.7 percent to 6.9 percent from November 2016 to November 2017.

Emerging Markets
Nobody seems to care as Venezuela runs to the bottom. Devastated by hyperinflation, the country has defaulted on some of its foreign debt. As foreign exchange reserves have fallen below ten billion US-dollar, the country faces the risk of no longer being able to import vital goods. The country’s balance of trade is negative, foreign funding has dried up, and reserves have dwindled. Since 2010, the Venezuelan currency has devalued from two bolivars to ten bolivars. Yet even at this rate, the Venezuelan bolivar is still overvalued.
Argentina has a new government, and the economy is slowly recovering. While the official inflation rate is still 25 percent annually, economic growth has picked up from the negative rates in 2016 and has reached an annual rate of 4.2 percent in the second half of 2017. Unemployment is still high but has come down from 9.3 percent in 2016 to 8.3 percent in July 2017. The Argentinean currency continues to weaken and has fallen from around 15 pesos in 2016 to close to 19 pesos per dollar.
Brazil is slowly recovering from its deep crisis. From a negative annual growth rate of 5.6 percent at the beginning of 2016, economic growth became positive in early 2017 but has recently fallen back again.  A series of severe political uncertainties weigh heavily on the economy. While real investment has remained weak, the stock market has risen drastically from a temporary low of 60 000 BOVESPA points in 2017 to 81 000 points in early 2018. From a high of close to 14 percent in March 2017, the unemployment rate has fallen to 12 percent by the end of the past year.
China’s economic growth goes on. Only slightly lower than in the past, the annual growth rate stands currently at 6.8 percent. From around seven yuan to the dollar in January 2017, the Chinese currency has slightly appreciated to 6.4 yuan to the dollar in January 2018. Chinese export performance remains strong. In December 2017, China’s trade surplus widened sharply to 55 billion US-dollars. China’s current account has stabilized around a surplus of about two percent of its gross domestic product. 
Russia suffers from severe sanctions imposed by the Western countries. Nevertheless, economic growth has somewhat recovered from a prolonged recession and reached positive territory in 2017. Since the beginning of last year, the unemployment rate has come down from 5.6 to 5.1 percent, while the inflation rate fell from five percent in January 2017 to 2.5 percent at the end of the year.

Sunday, October 15, 2017

Financial Market Snapshot October 2017

United States
In the United States, the standing of President Donald Trump is getting even more precarious. He has obvious difficulties in learning that a country is not a business and that leading the government as President is not the same as being the boss of a company. His erratic behavior irritates the political establishment and the pundits of the media. Nevertheless, the U.S. economy is doing remarkably well with low inflation, low unemployment, low interest rates a good economic growth. The U.S. stock market is moving from one record to the next.  Since the election of Donald Trump in November 2016, the Dow Jones stock market index has risen from around 18,000 points to 22,872 points on October 13, 2017.
United Kingdom
The United Kingdom is on its way of becoming the sick man of Europe. After the Conservative’s Party’s disastrous losses at the parliamentary election in June 2017, its national congress at the beginning of October did not bring the desired recovery of the reputation of the party and its leadership. The majority of the government supporters the House of Commons is minimal, and the position of the Prime Minister Theresa May is under assault. The British Labour Party, under the leadership of the outspoken Socialist Jeremy Corbyn is on the rise. The economy suffers from the manifold uncertainties surrounding the conditions of the exit of the United Kingdom from the European Union (Brexit). 
In Europe, the centripetal forces are on the rise. While the history of Europe since the end of World War II was one of integration and unification, segregationist movement gain momentum. The latest point is case in the independence movement of Catalonia that wants to separate from Spain. Brexit, the decision of the United Kingdom to leave the European Union faces the domestic dilemma of an independent Scotland. In Eastern Europe, several governments of member countries of the European Union challenge the authority of Brussels. The massive immigration into Europe from the Middle East and Africa threatens the Union’s cohesion.
Africa is the underreported growth story. Several African countries register economic growth rates of more than five percent. The African population is growing strongly and modern technology spread rapidly among the young people.
World Economy
The shift of the center of world economic growth to Asia keeps going on. India is trying to catch up with China, and Pakistan is joining in. These three countries together with Indonesia comprise a population of 3.1 billion people and represents 41 percent of the world’s current population of 7.6 billion people. In as much as these countries pursue free market reforms, their economic growth will go on. Only politics can stop this trend. In this respect, however, the list of potential catastrophic conflicts is large.

Macroeconomic Data in Comparison
Economic growth
Both, the United States and the Euro Area continue on their growth path. The gross domestic product (GDP) of the United State rose from 1.9 percent in the second quarter of 2016 to 2.1 percent in the second quarter 2017. In the Euro Area, GDP rose from 1.9 percent to 2.0 percent in the same period. Over the past couple of years, the German economy works like a locomotive that pulls many of the other European countries to higher economic growth rates. While in the rest of Europe, the unemployment is still very high, Germany registers very low unemployment at the level of the United States, where the rate fell from 4.9 percent to 4.7 percent from the second quarter of 2016 to the second quarter of 2017.
Current account
As has been the case over the past decades, the United States continues to suffer from a persistent current account deficit of two to three percent. Recently, the current account deficit in percent of the gross domestic product fell slightly from 2.6 to 2.5 percent over the year to the first quarter of 2017. The Euro Area continues having strong current account surpluses although these fell slightly from 4.2 percent in the first quarter of 2016 to 3.9 percent in the first quarter of 2017.  Japan, likewise, has a strong current surplus. It rose from 3.9 percent to 4.0 percent over the year before the first quarter of 2017. The United Kingdom, which still suffers from the Brexit shock, reduced its current account deficit from 5.4 percent in the first quarter of 2016 to 3.4 percent in 2017, mainly due to its weakening economy.
After all the efforts by the central banks to ‘reflate’ the economies, the official inflation rates in the industrialized countries finally seems to take off. The rate for the United States almost doubled from 0.97 to 1.63 percent from July 2016 to July 2017. In the Euro Area, the inflation rate rose quite remarkably from 0.62 percent in July 2016 to 1.21 percent in 2017. Even Japan saw its price level to move out from a deflationary inflation rate of -0.18 to a slight inflation of 0.08 percent.
Interest rates
As of now, the policy of the United States Federal Reserve System (FED) of raising its interest rates has not yet have a discernible effect on the economy. Up to now, even the stock market seems unimpressed by the fact that the FED has doubled its policy rate of interest from 0.62 percent in July 2016 to 1.22 percent in July 2017 with the consequent effect that long-term interest in the U.S. rose from 1.50 percent to 2.32 percent from July 2016 to July 2017.
In the Euro Area, the policy interest rate is still negative at -0.33 percent in July 2017.

Economic Growth
Despite many predictions of doom and gloom for the Chinese economy, China’s economic growth goes with a current rate of 6.9 percent. Now, among the Asian countries, India is catching up with high economic growth rates after a long slow growth period. The reforms of the recent Indian governments pay off. With 5.7 percent, India is approaching the growth rates of China. Several other Asian countries remain in the league of economic growth rates above six percent and even seven percent such as Nepal (7.5 %), Laos (6.9 %), Bangladesh (6.9 %), the Philippines (6.8 %), Iran (6.5 %), Vietnam (6.4 %). The economic recovery from the war is fully under way in Iraq, which registers an economic growth rate of over ten percent.
Some African countries are doing remarkably well with economic growth rates such as of close to eight percent for Ethiopia, seven percent for the Ivory Coast and over six percent for Senegal, Tanzania, and Kenia. African countries that have growth rates of over five percent include the Central African Republic, Eritrea, Guinea-Bissau, Mali, Rwanda, Malawi, Gambia, and Togo.
Latin America
Economic growth in Latin America is lagging Asia and some leading countries in Africa along with the emerging economies in Eastern Europe. Venezuela is a complete basket case. In January 2017, Venezuela’s annual economic rate was – 18.6 %, which amounts to a veritable depression. At the same time, the country suffers from an annual inflation rate of 741 %. Both indicators are probably even worse in reality given the tendency of the Venezuelan government to manipulate and outright falsify its economic data. Brazil is slowly recovering from its deep recession. In July 2017, the annual economic growth rates rose to 0.3 percent, after having hit a low of – 5.8 % in January 2016.

Argentina’s economic growth is extremely volatile. After a deep recession with an annual economic growth rate of – 4.2 percent in July 2014, the Argentinean economy recovered with a rate of 3.8 in 2015 only to fall back again into a slump 2016, when negative economic growth rates were registered in the range of close to four percent. In July 2017, a new recovery is under way when the Argentinean economy achieved an annual growth rate of 2.7 percent. In Mexico, after a swift recovery from the 2008 international financial crises, economic growth has been relatively weak and has slowed down over the past couple of years from a rate of around four to two percent and as of July 2017 to an annual economic growth rate of 1.8 percent. 
Antony P. Mueller
October 15, 2017

Sunday, September 10, 2017

Financial Market Snapshot September 10, 2017

Financial Market Snapshot September 10, 2017
Storm Warnings
Dollar weakness
Hurricane Irma that is devastating parts of Florida shortly after the weather disaster that inundated Houston is only one of the many calamities that have hit the United States since early 2017. With a President under fire from all sides, the dollar sliding and geopolitical conflicts on the rise, the situation has continuously deteriorated since the beginning of the year. 

While the stock markets are still holding ground, the U.S. dollar, however, sends a strong signal. Since January 1, 2017, the dollar has been down by over ten per cent. Since the beginning of 2017, the official currency index fell from 101 to 91 reaching its lowest level since January 2015. Financial markets wake up to the possibility that the American currency may no longer be a safe haven. Only the lack of an attractive alternative has held the dollar relatively steady over the past decade.
Euro strength

The Euro had been under pressure over the past couple years due to the Greek debt crisis. Additional pressures came from uncertainties about the effects of the United Kingdom to leave the European Union and fears that an openly anti-European candidate could win the French presidential election. Over the past couple of months, however, currency markets have seen a strong recovery of the euro. From a rate of 1.05 against the U.S. dollar in January 2017, the common European currency has risen to 1.2035 on Friday, September 8, 2017. 
General elections in Germany
On September 24, Germans will go to the polls to elect their federal parliament. It is very unlikely that the parties that officially support the incumbent Chancellor Angela Merkel win an absolute majority. Therefore, Merkel must find additional coalition partners beyond the CDU (Christian Democratic Union) and the CSU (Christian Social Union) in order to gain her third chancellorship. Merkel’s opponent from the SPD (Social-democratic Party of Germany) has campaigned poorly and instead of the expected gains in votes, the SPD will most likely lose public support. The big winner could actually be the right-wing AfD (Action for Germany). All other parties have ruled out a collation with this anti-immigration party. Thus all comes down to the point whether the liberal FDP (Free Democratic Party) can cross the five-percent clause in order to gain seats in the parliament. Depending on the strength of FDP various coalition models will emerge either with the Green Party or the left-wing “Linke” party.
Booming German economy
Although Chancellor Merkel is under pressure because of her very generous immigration policy, the extremely good performance of the German economy is her main asset. The German unemployment rate is currently at 3.7 per cent and the inflation rate down to 1.8 per cent. Germany’s annual gdp growth rate is 2.1 per cent. The employment rate has never been higher with a rate of 75 per cent while the current account surplus beats one record after the next and is currently above eight per cent. 
Macroeconomic Data in Comparison
Economic growth
Despite a series of detrimental factors and the precarious position of the American President, the U.S. economy is powering ahead. After a gdp growth rate of 1.6 percent in the second quarter of 2016, the growth rate has risen to 2.1 per cent in the second quarter of 2017. This good growth performance is accompanied by a growth rate of two per cent in Euro Area and 1.5 per cent in Japan. Even the United Kingdom, which is afflicted by the fallout from Brexit, obtained a growth rate of close to two per cent in the second quarter of 2017.
Despite the continued policy of quasi-zero interest rate in the industrialized countries and the massive expansion of central bank money over the past couple of years, price inflation does not yet show up. For the Euro Area the figure is 1.2 per cent, while consumer prices in Japan increased by 0.4 percent. Only the United Kingdom is an exception, where, largely due to the Brexit, consumer prices are on the rise and the annual inflation rate reached 5.1 percent in July 2017.
Interest rates
Central banks in the industrialized countries continue with their zero-rate interest rate policies. Despite various announcements that the time has come to end “quantitative easing” and to raise rate finally, central bankers are still too scared to provoke an unwanted sharp economic downturn when rates rise. As a very problematic result of this policy, the global stock markets have obtained extreme valuations and show signs of a mega bubble.
In combination with the strong performance of the US economy, the unemployment rate in the United States is at a low of 4.7 percent. This rate is well below the level in the European Union, where the unemployment still stands at 9.1 per cent, particularly because of the ongoing economic weakness at the Area’s Southern fringes where unemployment rates are as high as 17.2 per cent (Spain) and 21.2 percent (Greece). Japan’s unemployment rate has been remarkably low despite relatively low growth over the past decades and currently stands at 2.9 percent.
Current Account
In the United States, the current account deficit amounted to 2.5 percent of the country's gross domestic product while Japan registered a current account surplus of four per cent and the Euro Area of 3.9 per cent in the first quarter of 2017. Due to recessionary tendencies after its Brexit vote, the British current account deficit fell from 5.4 percent in the first quarter of 2016 to 3.4 percent in the first quarter of 2017.
 Korea in the spotlight
Nuclear threats darken the outlook
Kim Jong-un, the leader of North Korea, is threating the world with his nuclear bombs. His foremost enemies are the United States and particularly the country’s neighbors, South Korea and Japan. Jong-un has an ally in the Peoples Republic of China and maybe even in Russia. The conflict over North Korea thus entails the potentials of new world war should the crisis go out of hand. China has made it clear that it does not want a unified democratic Korea at its Southern border.
Civil War (1950-1953)
The war broke out in 1950 with a communist invasion from the north that devastated large parts of the country and cost about three million deaths. In 1953, the Korean civil war had led to the separation of Korea at the 38th parallel with the establishment of a Communist North and a capitalist South.
Military dictatorship in North Korea
Since their separation, the economic performance of South Korea in comparison to the North has been extreme. While South Korea has transformed into an economic showcase with high income, the North has succumbed to a military dictatorship with a population suffering from hunger. Under the dictatorship of Kim Jon-un, North Korea has concentrated all available funds into a military program that now threatens its neighbors and the world.
Outstanding economic performance of South Korea
Since the separation of the country, South Korea has grown steadily. From a low of a per capita income of 944 US-dollars in 1960, South Korean gross domestic product per capita has crossed 25 500 US-dollars in 2016.
The South Korean economy ranks at the top of the world’s most innovative economies and counts with many world-renowned global companies.
Macroeconomic performance
The current economic growth rate of South Korea is 2.7 percent. The unemployment rate stands at 3.6 percent, while the inflation rate is 2.6 percent. Despite a heavy defense burden, South Korea’s debt ratio amounts to only 38.6 percent. In 2016, South Korea recorded a current account surplus of seven percent of its gross domestic product. While up to 2007, South Korea registered an amazing rise of its productivity, productivity has been stagnant since then – not different from what happened in Europe and the United States and in other industrialized countries.
Antony P. Mueller
September 10, 2017

Sunday, July 2, 2017

Financial Market Snapshot July 2, 2017

Global Economic Overview
New Impulses for Europe
Elections and Trump change European landscape
The past couple of months brought significant changes in Western Europe and in its relation with the United States.  Before the French presidential election on April 23 and May 7, there were still many concerns prevalent that the European project could suffer a serious setback even more so that a British general election was to be held on June 9 at the initiative of the British prime minister who wanted a clear vote in favor of a “hard Brexit”. By end of May, at the NATO summit in Brussels, there were also apparent tentatives by the American president to drive a wedge into the ranks of the members of the European Union.
Pro-European candidate wins
Different from the expectations in some corners, things turned out quite differently. First, in France, Emmanuel Macron won the presidential election. He is an outspoken supporter of the European Union. Macron’s victory against Marine Le Pen gives him a clear mandate to move ahead with a deepening of the European Union. Secondly, the US-American president has inadvertently strengthened European unity and induced the German Chancellor Angela Merkel to call for deeper European cooperation because the United States could no longer be seen as a “reliable partner”. Thirdly, the UK general election has not led to a larger majority of Prime Minister May’s Conservative Party, but to a loss of seats.
Britain’s Conservative Party suffers losses in general election
The big winner of the UK’s general election was the Labour Party, which gained 32 new seats while the Conservatives lost 13 seats. Instead of having a strong majority, as it was expected, the Conservative Party must now line up with the Democratic Unionist Party in order to hold a slight parliamentary majority. Instead of a “hard Brexit”, which Theresa May had promised, the negotiations about the conditions of Britain’s departure from the European Union will now have to settle for a “soft Brexit” which means that the residential rights of EU citizens will remain intact. As to the economic consequences of Brexit, recessions and higher inflation loom in the UK, while the rest of the European Union reported rising business confidence, low inflation and higher growth prospects.
Improving  economic conditions in Europe
In June, the Economic Sentiment Indicator (ESI) increased strongly in the euro zone by almost two points to 111.1 and for the whole of the European Union by 1.6 points to 111.3. These numbers reached the highest levels since August 2007 before the global financial crisis.
By early 2017, economic growth rates of the Euro zone reached 1.9 percent on annual basis. With 1.3 percent, the inflation rate is getting closer to the target rate of the European Central Bank (ECB), which still sets its policy interest rate at zero percent as the ECB also continues with its expansion of its balance sheet.

U.S. and Japan - Macroeconomic Data in Comparison
Economic growth
The US economy expanded at an annualized rate of 1.4 percent in the first three months of 2017, while non-residential investment was revised lower and the drag from inventories was higher than expected. The Japanese economy grew only by one percent on an annualized basis following a 1.2 percent growth in the last quarter of 2016.
In the United States, consumer prices in the United States increased by 1.9 percent year-on-year in May of 2017, which is lower than the rate of 2.2 percent rise that was reached in April.  It is the lowest inflation rate since November last year.  Core inflation slowed to a 2-year low of 1.7 percent. In Japan, consumer prices in Japan increased by 0.4 percent year-on-year in May of 2017. Core inflation increased to 0.4 percent, which is the highest rate since March of 2015.
The US unemployment rate fell further to the rate of 4.3 percent in May 2017. This is the lowest jobless rate since May 2001. However, the US labor force participation rate, which is already quite low, fell further and stands now at 62.7 percent. In Japan, the unemployment rate rose to 3.1 percent in May of 2017, up from 2.8 percent in the previous 3 months. The figure marks the highest jobless rate since December 2016.
Since the beginning of 2017, the US dollar is weakening. On Friday, June 30, the US dollar index stood at 95.9900 points compared to 103 by the end of 2016. On Friday, June 30, the rate of Japanese Yen to the US-Dollar was 111.9350 Japanese Yen per US-Dollar compared to about 115 by the end of 2015.
Current Account
In the United States, the current account deficit amounted to 2.6 percent of the country's Gross Domestic Product in 2016 compared to 3,2 percent in 2010. Japan registered a current account surplus of 3.70 percent of the country's gross domestic product in 2016 compared to 3.9 percent in 2010
Public Debt
The United States registered a government debt of 106.10 percent of the country's gross domestic product in 2016 up from 101.2 percent in 2015. Japan recorded a government debt of 250.40 percent of its gross domestic product in 2016 up from 248 percent in 2015.
Emerging Markets Scenario
Latin America: Argentina, Brazil, Mexico - Macroeconomic Performance Scenario
Economic Growth
In Argentina, the economy expanded at an annual rate of 0.3 percent in the first quarter of 2017 after a decline of 1.9 percent in the previous period. In Brazil, the economy contracted 0.4 percent year-on-year in the first three months of 2017, following a 2.5 percent drop in the previous period. Mexico experienced a good growth performance with a rate of 2.8 percent in the first quarter of 2017 well in line with the average since 2010.
In May 2017, the annual inflation rate in Argentina amounted to 24 percent. In Brazil, the inflation rate continues to fall and stands now at 3.6 percent after over 10 percent at the end 2016. Mexico’s inflation rate rose to over six percent annually in May of 2017, following a 5.8 percent rise in April
Argentina’s official unemployment rate rose to 9.2 percent in the first quarter of 2017 from 7.6 percent in the previous quarter. In Brazil, the unemployment fell to 13.3 percent in May 2017 after a high of 13.7 percent in the first quarter of the year. The unemployment rate in Mexico decreased to 3.6 percent in May of 2017 from 4 percent a year ago.  Mexico’s unemployment rate averaged 3.8 percent from 1994 until 2017. The all-time high was 6.4 percent in September of 2009. 
The Argentinean Peso continues to devalue. Argentina’s currency reached an official rate of over 16 Pesos to the US-Dollar by the end of June. The Brazilian Real stood at 3.3082 on Friday, June 30, after having reached a rate of over 4 Real to the US-Dollar in January 2016. The Mexican Peso reached 18.1228 Pesos for the US-Dollar after having hit 22 at the beginning of the year.
Public Debt

In 2016, Argentina registered a government debt of 54.20 percent of the country's Gross Domestic Product. Brazil registered a new height of its government debt at 69.49 percent of the country's gdp in 2016, while Mexico’s public debt in percent of its gross domestic product rose to almost 48 percent in 2016 after 43.2 percent in 2015 and 30 percent in 2010. 

Antony P. Mueller
July 2, 2017

Thursday, May 18, 2017

Market Snapshot May 18, 2017

New impulses for the European Union
With the election of Emmanuel Macro as the President of the French Republic, the European project is gaining new impulses. In stark contrast to his challenger, Madame Marine Le Pen who threatened to lead France out of the Euro and even out of the European Union in case she would gain the election, Macron is a staunch European. In his acceptance speech right after the election, Macron demonstrated his full support of a political European Union by having the European hymn being played before the French national anthem. The cabinet he put together includes many members with a pro-European stance.
More turmoil in the United States
Quite different from Europe, where things seem to calm down, the United States moves from one scandal to the next. The presidency of Donald Trump is under fire from all sides. Even members of his own party have turned skeptical about Trump’s capacity to lead the nation. The latest outrage that excited the media all over the United States was the leak that President Trump has shared sensitive national security material with the Russians at a recent meeting in the White House. This comes on top of claims from the opposition party of the Democrats that Trump’s had received support during the election campaign by the Russian government.
Stock market plunges
Partly as a reaction to the political turmoil at the US Presidency, the U.S. stock market has begun to give up some of the gains that the market had won after Trump’s election when rumors were mounting that Congress was trying to initiate am impeachment process against the President. Yet beyond the immediate political concerns, the stock market has also many structural reasons to fall given that valuation are overextended and the real growth prospect much less than the stock market seems to anticipate. Given the important role of the U.S. financial market, a fall of U.S. stocks will also affect the rest of the world irrespective of the specific situation in these regions.
Comeback of the Euro
The widening divergence between the United States and Europe in terms of political stability will most likely lead to a stronger Euro in the coming months. The spread could even get more pronounced when indeed the U.S. president should be confronted with an impeachment procedure. Beyond that, however, there are also fundamental reasons why the Euro should strengthen. France is surely coming out of its long stagnation along with Spain and Portugal and join the strong growth countries like Germany, the Netherlands, and Ireland. This would leave only Italy as a major country that still is in stagnation. Yet should cylinders fire in France, Italy would probably get the required impulses in order to higher economic growth.   
Economic growth
As of now, the improved outlook for economic growth seems to hold. Even is the United States should disappoint in the coming months, economic growth will get stronger in Europe. The result of the French election has given new confidence to European business. Together with the strong growth in Germany, accelerated economic growth in France will most likely spill over to Italy, the third-largest Euro economy. Even more so, there are signs the Japanese economy has finally come around the corner and move out of its decade-long period of low growth.

Prices and interest rates
The fact that price inflation has remained low even in the face of strongly fallen unemployment rates points to the expectation that and the outbreak of inflation is not imminent. There is, however, the possibility that the U.S. central bank could act proactively and go ahead before prices begin to rise significantly. As of now, given the political certainties in the U.S., the chances for a preemptive strike have diminished. Likewise, the European Central Bank will most likely wait at least as the economic situation in Italy becomes clearer. In Japan, the central bank is quite glad that the economy is moving ahead that a decision to raise interest rates is surely not a high priority
The strong labor market performance In the United States, Japan, and Germany will most likely continue.  It remains to be seen how a stronger French economy could reduce the unemployment rate of France, which is still very high. Across Europe, the employment situation is very uneven. This may contribute to a constellation where overall wage demands have remained subdued even in areas with very low unemployment rates. Some of the wage gains have come to the workers through deflation in the form of higher real wages.
Current account and exchange rates
The exchange rate between the U.S. dollar and the euro that has remained very stable over the past years will probably change in favor of a strengthening of the Euro. In terms of the purchasing power, the U.S. dollar is highly valued at its present level. The political uncertainty should come in as an additional factor to correct the overvaluation of the U.S. dollar that has been in place for quite some time and has contributed to a certain degree to the deindustrialization of some parts of the U.S. economy. It remains to be seen, however, whether the exchange rate realignment would be massive enough to correct its impact on U.S. competitiveness and do away with the persistent current account deficits of the United States.
North Korea
Slowly but surely, Venezuela is falling apart. Almost daily, there are deadly protests in the street. The government is helpless and other that to increase suppression has no way out. Foreign help from apparent allied has not shown up. No foreign power from abroad will risk a major geopolitical conflict with the United States by giving full support to the Venezuelan government. As bad as the situation is right now, as fast it could change when the present Socialist government resigns, allows open elections and makes room for a new government that promises to pursue solid free market reforms.
North Korea
Despite all warning, the leader of North Korea, Kim Jon-un, continues to push forward his nuclear program. With strong support from the United States, neither South Korea nor Japan will tolerate this North Korean policy. Yet being aware of the consequence of military conflict, the major efforts concentrate on a peaceful solution. Yet given that even the Chines ally of Kim Jon-un has no control over the North Korean leadership, the conflict is far from a solution and can turn any moment into a dramatic showdown.  
The fears of an economic collapse of China have not materialized. It seems the China has succeeded in settling down on a lower growth project, an adaptation that was highly necessary given the fierce growth of the Chinese economy over the past decades. In as much as the current U.S. administration is stuck in internal turmoil so that China may feel of having a free hand to continue its expansionary moves into the South China Sea. In going ahead with this project, the Chinese leadership may actually have a high interest in reigning in any adventurous movement by North Korea.

Turkey, a country with very close ties to the West – it is a NATO member and has been a candidate for membership in the European Union – is on its way of moving from an authoritarian regime to an outright dictatorship. These links, together with its exposed strategic location in the Middle East make it a pivotal country in the region. Over the past decades, Turkey had made great economic progress. The change towards outright dictatorship means a harsh setback for the economy. It remains to be seen whether from here on Turkey enters the spiral of political unrest and economic decline or whether the country can get out in time from this trap. 
Antony P. Mueller
May 18, 2017

Saturday, May 6, 2017

Market Snapshot May 5, 2017

Is the U.S. stock market ready to pop?

After a sharp fall during the recession in the wake of the financial market crisis of 2008 (see shaded area in the graph below), the U.S. stock market has made a turn-around in 2009. Since then equities have performed a rally that lifted the Standard & Poor’s index of 500 stocks quoted on the New York Stock Exchange from below 800 up to 2399 index points on May 5, 2017. Yet while the stock market’s valuation has tripled over the past couple of years, the U.S. economy in terms of its real gross domestic product has risen by less than 20 percent and in nominal terms about 25 percent in the past seven years.
Standard & Poor’s 500 Index, 2007-2017

Over the long run, stocks correlate with economic growth. There are, however, occasionally stretches of time when stocks outperform or underperform the real economy by considerable margins. Currently, so it seems, stock market valuation are well ahead of the real economy. Empirical evidence shows that market correction take place neither smoothly nor moderately, but the excess to the upside is followed by an excess to the downside and vice versa. 
Are there reasons to believe that a stock market correction is imminent and that such a correction would bring down valuations considerably? Such a question asks for the determinants that have brought about the current high valuations.
One indisputable reason for the elevated valuations of the stocks in the United States is the policy of the so-called “quantitative easing” that made the U.S. central bank (FED) to increase the monetary base from below one trillion to almost four and a half trillion U.S. dollars. Concurrently, the FED has brought down the policy interest rate (Federal Funds Rate) from five percent in 2007 to 0.5 percent in 2009. It was not until towards the end of 2016 that the central bank began to raise the rate in a couple of small steps to the present level of one percent, which is still extremely low.

Interest rates at such a low level have not only led to a frenzy “search for yield”. These low rates have also provoked companies to use their excess liquidity for stock buy-backs. Both policies are about to end and thus a correction of the stock market seems inevitable.
Antony P. Mueller
May 6, 2017