Friday, January 20, 2017

The world economy at the start of 2017

The world economy in early 2017 Antony P. Mueller…/20…/01/texto_discussão_2017_01.pdf

Monday, January 16, 2017

Financial Market Snapshot January 2017

Financial Market Snapshot January 2017


Presidential transition
The transition in the United States from President Barack Obama to Donald Trump does not run smoothly and adds to the general uncertainty that clouds the beginning of 2017. As the inauguration of the new president gets nearer, the controversies mount. While fierce disputes marked already the electoral campaign, these became even more severe after the election. The quarrels are not confined to the United States. Already during his campaign, the incoming president has provoked severe concerns in Mexico, China, and Europe. Trump has put the role of NATO into doubt and stands for a complete turn-around as to its relation with Russia. Across the globe, concerns are on the rise that the United States will lead the world toward the abyss of protectionism.

New populism
With economic growth relatively weak in most places of the world, protectionism gains popularity. Populism is on the rise also in countries that have seemed immune. The Brexit vote came as a shock. More news that is unpleasant can be expected with the elections that are scheduled in Europe in 2017, particularly in Germany and France. Concerns are on the rise that the European Union will not be sufficiently resilient to weather the storms while at the same time a deep split divides the United States.

The greatest concern for the world economy refers to protectionism. As economic conditions deteriorate and domestic controversies rise, governments tend to resort to protectionism as a way to safeguard domestic jobs. Protectionism is ruinous not only because it invites retaliation but also because in tends to escalate. In the end, each country will be worse off.
Historically, such beggar-thy-neighbor policies have often been the prelude to wars. During the Great Depression, protectionism has massively contributed to the length and depth of the crisis.

While in some countries, such as in the United States, the official unemployment rates have come down, employment has remained weak. Long-term unemployment brings with it, that more and more people leave the labor market and the official statistics does no longer register these persons as unemployed. This has happened in the United States where the unemployment rate has fallen over the past couple years below five percent, relative employment has hardly recovered and the so-called labor participation rate is still below 63 percent.
With the exception of Germany, most countries in the Euro Area suffer from persistently high unemployment rates. In Spain, unemployment has shot up to over 25 % and has only come down to under 20 % in the past year.

Exchange rate and current account
The dollar continues being strong and correspondingly other currencies, particularly the euro and the Chinese yuan have been weak.
In order to stabilize its currency, China sold part of tis dollar assets and thereby diminished considerably its stock of foreign exchange reserves by one trillion US-dollars to three trillion.
The strength of the US-dollar will further deteriorate the persistently high US current account deficit and exert additional pressure that the new US administration my resort to protectionist measures.
China still depends on its exports to keep its economy going while Germany’s export performance is strongly linked to both the US and the Chinese economy.

Prices and Money
There are signs that consumer price inflation is on the rise. Since July 2016, the American inflation rate has risen from below one percent to close to two percent.
In the euro area, the deflationary trough in the first semester of 2016 has ended and inflation rate have now risen to over one percent.
There is a huge monetary overhang in the world just waiting to get rolling. Over the past ten years, the major central banks has flooded the globe with base money.
A large part of these funds has been used to bolster the balance sheets of commercial banks. This way, there has been little transmission to the real economy. This, however, could easily change, once inflation rates pick up more markedly.

Interest rates
Knowing that an increase of interest rate my abort economic recovery, central banks in the industrialized countries have been very reluctant to raise interest rates. Central banks are still behind the curve. While the U.S. central bank has lifted the FED rate to 0.75 %, the European Central Bank still sets its basic rate a zero percent, while Japan has kept its policy rate at -0.1 %.
Historically, a massive monetary overhang has always led to price inflation, which has come upon the countries like an avalanche.

Economic growth
The future course of the world economy depends on economic growth, and economic growth depends on productivity. Over the past couple of years, U.S. productivity growth has been quasi stagnant as has been the case in the Euro Area and has even slightly fallen in Japan.
Public expenditure programs will fail to stimulate the economy, when productivity remains low. Likewise, low interest rate will not stimulate economic activity, when the return on investment remains meagre.


The downward trend of the economic growth rates continues. See GDP quarterly rates below:
Private investment is paralyzed by uncertainties. Many of big Brazilian companies are deeply involved into the corruption scandals. The present government is almost as unpopular as the preceding one. Private consumption is held back by rising unemployment and high interest.
In order to avoid outright government bankruptcy the public sector has frozen expenditures. As of now it is hard to see from where there should come a way out, particularly because Brazil’s major trading partners, such as China and the United States are in trouble and Brazil’s neighbors such as Argentina and Venezuela experience even deeper crises.

Mexico is experiencing a crisis of its development model. The country has relied on an ever-closer relationship with the United States. This strategy is now in doubt. The fallout from the incoming new American president is already severe. Tensions are on the increase. As the Mexican economy deteriorates, domestic conflicts are also on the rise. From around five percent, Mexico’s annual economic growth rate has fallen to around two percent.
In past couple month there has also been a sharp depreciation of the country’s currency.
This has forced monetary authorities to raise interest rate from around three percent in 2015 to almost six percent recently.

Russia suffers from the severe sanctions imposed on it by the Western countries. Additionally, NATO has increased its presence in Eastern Europe and Baltic states. Russia’s annual economic growth rates has turned negative since the beginning of 2015.
Yet the unemployment is still low and the inflation rate has come down from 17 percent in 2015 to 5.4 percent by the end of last year.
The rate of government debt to gross domestic product has risen drastically over the past years, yet by the end of 2016, this rate is still under 18 percent.
A new chapter in U.S.-Russian relations will most likely begin when Donald Trump will assume his presidency after his inauguration in January 2017. When Western sanctions will be lifted and oil prices will recover, the Russian economy could experience a period of excellent performance.

China’s annual economic growth rates have come and seem to stabilize around six percent.
The official inflation rate has been relatively stable and stands currently at 2.1 percent.
The same holds for the official unemployment rate, which has been steady over the past decades at around four percent. In order to stabilize its currency and counteract the outflow of money, Chinese monetary authorities sold US dollar assets to the amount of one trillion over the past year.

Antony P. Mueller 
January 16, 2017

For an analysis with more data, check:

Wednesday, January 4, 2017

Financial market snapshot Dezember 2016

Economic growth
GDP numbers for the industrial countries show that economic performance is actually not as dismal as often complaint. Taking into account that these countries show moderate or no population growth at all, economic growth rates above one per cent are not bad at all.  In the third quarter of 2016, the US economy grew 1.6 % down from 2.8 % the year before, while the economic growth remained steady in the Euro Area at 1.6 %. Japan is still struggling as its growth rate fell from 1.9 % to 0.8 %. Britain is doing fairly well with an economic growth rate of 2 % in the third quarter of 2016, only slightly down from the third quarter of 2015 when the economic growth was 2.2 %. While there is much lamentation about low growth, the numbers are actually better as the public mood and media discussion seem to suggest.

The growth rate so-called fixed capital formation fell in the United States from 4.7 % to 1.4 % and in the United Kingdom from 5.1 % to 1.2 from the third quarter of 2015 to the third quarter of 2016. In the Euro Are, investment growth was relatively strong as it rose from 2.2 % in the third quarter of 2015 to 3.2 % in the same period of 2016. Japan, which experienced still a strong growth of investment in 2015, suffered a setback in 2016 when investment growth slowed down to 0.5 % in the third quarter of 2016
Private consumption continued to grow strongly outside of Japan. In the United States, after rising 3.3 % in 2015 (3Q), private final consumption receded to 2.6 % in 2016, while the rate for the Euro Area remained steady at 1.8 % and accelerated in the United Kingdom from 1.3 % to 2.8 %. In Japan, the growth of consumption has not yet recovered at a rate of -1.1 in the third quarter of 2015 and 0.1 in the third quarter of 2016.  Austerity, as it is often claimed, happens  neither in the US nor in Europe.
Official unemployment nearly disappeared in the United States as the unemployment rate fell to under five percent in the third quarter of 2016, well below the rate of over ten per cent, as it is still the case in the Euro Area. Even lower than in the United States is the unemployment in Japan, where in currently stands at three per cent. Putting these figures in perspective, however, requires taking into account the peculiarities of the individual labor markets. While in the United States, for example, the unemployment rate has fallen, the labor participation rate has fallen as well, while labor participation has been increasing in Europe over the past couple of years.

Global Scenario
Exchange rate and current account
There has been a steady trend of appreciation of the U.S. dollar that as lowered the euro exchange rate almost to parity. The Chinese yuan continues to depreciate together with the British pound, which is still suffering from the Brexit blues. Not least because of the depreciating euro, the Euro Area enjoy a huge current account surplus that rose from 3.8 % of GDP in the second quarter of 2015 to 4.3 % in the same period of this year. Even worse than for the U.S., which has a current account deficit of 2.5 %, is the balance for the United Kingdom that rose from 4.7 % of GDP to 5.9 %.
Consumer price inflation is still extremely low in all of the industrialized countries. However, with the exception of Japan, price inflation has been rising since 2015. While in October 2015 the rate of consumer price inflation in the United States was still as low as 0.7 %, this variable rose to 1.9 % in October 2016. A major rise, albeit at very low levels, occurred also in the Euro Area and in Great Britain, where prices rose from a rate of 0.3 % to a rate of 0.7 % in the Euro Area and from a rate of 0.2 % to 0.9 % in the United Kingdom over the same period. Only in Japan did the rate fall from 0.30 % in October 2015 to a rate of -0.06 % in October 2016.
Interest rates
Before long-term interest rates rose in November of 2016, they have fallen until October 2016 to 1.76 % in the United States, to 0.78 % in the Euro Area, to 1.08 % in the United Kingdom and to a negative rate of -0.06 % in Japan. The decline of long-term interest rates happened in the United States although short-term interest rates rose from 0.25 % to 0.72 %. Deflationary expectation were still well in place and have changed only recently. Until October 2016, the Euro Area experienced negative short-term interest of -.05 % in October 2015 and -0.31 in October 2016. Both in the United Kingdom and Japan, short-term interest rates also declines over this period to 0.37 in the United Kingdom and to 0.06 in Japan.

Money growth accelerated in the United States, Japan and the United Kingdom, but slowed down in the Euro Area. In the U.S., the rate of growth of narrow money (M1) rose from an annual rate 3.8 % in October 2015 to a rate of 8.2 % in October 2016, and slowed in the Euro Area from a rate of 10.3 % in October 2015 to 6.1 % in October 2016. In Japan the annual rate of the growth of narrow money accelerated from 4.1 % in October 2015 to 7.8 % in October 2016, and in the United Kingdom during the same period from 6.5 % to 10.6 %.

Emerging Markets
Political uncertainty continues under the new government. The legal procedures in connection with the corruption scandal involving the Brazilian oil company Petrobras affect the heart of the Brazilian political system. All political parties, so it seems, are involved in widespread corruption. Hardly a day goes by without some news about another prominent politician who is involved in a corruption scandal. In the meantime, new areas of corruption are under investigation that affect also local politicians. Consequently, there is not yet green light for a solid economic recovery.
Over the past two decades, Mexico has experienced a period of strong growth with low inflation. There has been a massive inflow of foreign direct investment. Employment has grown steadily. Yet now dark clouds appear on the horizon. It still must be seen whether the threats of the new U.S. president-elect can be taken seriously or not, but nevertheless, growth outlook is already dimmed and there are growing inflationary pressures. The first signal that riskier times are ahead will come from the currency market when the Mexican peso begins to weaken.
South Korea
South Korea, one of the economic star performers of the past couple of decades, enters troubled waters. Korea’s first female president who has been in office for nearly four years faces impeachment on ground of her influence paddling. When the Constitutional Court confirms the impeachment, there will be a new elections in 60 days. There should be little concern, however, as to the economic performance of the South Korean economy. The one thing South Korean has to fear are incalculable threats by North Korea that could go so far as to escalate into a military confrontation.
Russian president Putin tries hard to define his country’s global role. Russia has increased its military presence in the Middle East and is actively involved in the Syrian war theater. At the same time, NATO is moving eastwards in an attempt to protect the states that have gained independence with the fall of the Soviet Union.US-Russian relations have deteriorated during Obama’s presidency. A new chapter in U.S.-Russian relations will begin when Donald Trump will assume his presidency after his inauguration in January 2017. When Western sanctions will be lifted and oil prices will recover, the Russian economy could experience a period of excellent  performance for long period of time. 

Tuesday, January 3, 2017

Venezuela's march towards default

Venezuela’s march towards default

It is only a matter of time until Venezuela will default on its foreign debt. After a short peak in 2009, when the country’s foreign exchange reserves stood at over 40 billion US-dollars, Venezuela has been steadily hemorrhaging its reserves down to 10 billion US-dollars. In 2016, Venezuela started to sell gold in order to compensate for the loss of its monetary reserves. As its consequence, Venezuela’s gold reserves plunged from over 360 tons down to less than 190 tons. Other than in the case that some foreign power, such as China for example, would jump in as a lender, Venezuela’s default seems unavoidable.
Venezuela is not only the victim of falling oil prices although these have the strongest immediate effect on the country’s finances. Oil revenue finances more than half of Venezuela’s government budget and accounts for almost all export income. Venezuela’s deeper problem comes from the fact that almost all of the government’s so-called social benefits in the wake of the “Bolivarian revolution” under presidents Hugo Chavez and Nicolás Maduro have been financed by monetary expansion.
In 1998, before Hugo Chavez became president, the extended broad money supply (M3) stood at 10.6 billion Bolivars.  In 2010, the Venezuelan money supply had already risen to an estimated 292.0 billion Bolivars, and as of October 2016, money supply M3 stood at 7513.9 billion Venezuelan Bolivars.  As its consequence, annual price inflation shot up from around 25 per cent in the years before 2012 to over 180 per cent by the end of 2015 until the government practically stopped publishing the official figure. The International Monetary Fund estimates an inflation rate of 480 per cent for 2016 and of 1640 per cent for 2017. 
In February 2016, the Venezuelan government officially devalued its currency by 37 per cent against the US-dollar from 6.3 to 10 Bolivars all the while when the black market rate stood at over 1000 Bolivars for one dollar.
Since 2012, the price of Venezuelan oil has dropped from 100 US-dollar per barrel to less than 50 US-dollars. Due to political turmoil and socialization of the industry, the overall oil production of the country has fallen to a 13-year low in 2016. Venezuela’s exports that consist almost completely of oil have plummeted from a peak of 30.7 billion US-dollars in the third quarter of 2008, to currently less than 10 billion US-dollars per quarter.
The Bolivarian Revolution, which Hugo Chávez started in 1999, is coming to its end. Severe shortage of basic goods, food lines, exorbitant black market prices, the collapse of the currency and hyperinflation now afflict a country that claims to possess the highest proven oil reserves of the world.
It is only a matter of time until Venezuela can no longer finance its imports and social and political chaos of unprecedented proportions will afflict the country. The fallout will also affect Venezuela’s neighboring countries.
Antony P. Mueller, January 3, 2017