Research Dept. News
|
|
|
|
Monthly Report, num 344 - March 2011
|
|
|
International review
|
|
|
|
|
United States
|
The United States: how to reduce unemployment without getting into debt
|
|
The United States must grow above 3% to reduce unemployment but debt is a burden.
|
|
The economy's growth will be corseted in 2011 by an upper limit of around 4%, imposed by the need to reduce the high level of household debt, and by another lower limit of 3%, which is the growth threshold as from which unemployment starts to fall. The positioning between these two references will be modulated by fiscal and monetary policy that, as weak growth is perceived to be a greater risk than inflationary tension, is clearly biased towards expansion. The budget proposed for the 2011 tax year by Obama's administration involves a budget deficit that, in 2011, might continue above 9% of gross domestic product (GDP) for the third consecutive year, leaving the necessary fiscal consolidation for the future.
|
|
Consumers should curb the intensity of the upswing to restore their savings.
|
|
GDP grew by 0.7% quarter-on-quarter in the fourth quarter, 2.7% year-on-year, which gives a growth (rate) of 2.8% for the whole of 2010. The national accounts were characterised by strong private consumption, up 1.0% compared with the previous quarter; a strength that is supported by a lower savings rate and government stimuli. With significant quantitative effects but without setting a trend, inventories deducted a substantial part from growth, offset by large reductions in imports due to modifications in the prices paid. In addition to the upswing in consumption, the most noticeable trait of the period was the slowdown in capital goods investment, together with an improvement in residential investment, which is now contributing positively to growth.
|
|
|
|
|
Private consumption has been growing faster than income for the whole of the second half of 2010, but the retail sales of December and January point towards this upswing in consumption easing. Although solid, the 5.7% year-on-year growth, discounting the more volatile cars and petrol, has slowed down compared with previous months, which should be seen as a return to some rationality, considering that gross household debt is still 117.7% of gross disposable income. The required reduction of debt needs savings and growth.
|
|
Entrepreneurs, with less debt and expectations of profit, appear optimistic.
|
|
In December, household savings stood at 5.3% of disposable income, when in June this was 6.3%. The need not to delay too much in sorting out consumer finances and the public treasury, as well as the trends in the latest activity indicators, suggest that growth is unlikely to go much above 3% in 2011, consistent with a savings rate of 5.5%. Even so, if confidence in US assets means that expansionary policies can be maintained, higher growth rates cannot be ruled out. The Fed upped its forecasts for 2011 and 2012, with growth around 3.6% and 4.0%, respectively, implying greater private consumption and a lower savings rate, close to 4% of disposable income.
|
|
|
|
With a marked upward trend, optimism continued to catch on among entrepreneurs. Within this context, we should remember that non-financial firms have a lower debt level than banks, households and the public sector and, moreover, its trend is downwards. If we add to this the expectations of higher profits, boosted by rising demand without too many cost tensions due to low production capacity utilization, we can understand why corporate America sees the situation as more positive than consumers. The business sentiment index of the Institute for Supply Management continued rising in January, climbing to the level of 60.8 points for manufacturing and 64.6 points for services, figures that have not been seen since 2005. The counterpoint to this optimistic view is provided by employment. While, in manufacturing, we can see a certain consolidation of the recovery, the expectations are somewhat less buoyant in services, which account for 80% of private employment.
|
|
|
The larger number of discouraged workers will make it difficult for the unemployment rate to fall, currently at 9.0%.
|
|
Although the unemployment rate fell again in January to 9.0%, this improvement was due to the bad weather, which reduced the number of people actively seeking work. This same bad weather meant that only 36,000 new jobs were created, clearly insufficient to help reduce the 8.5 million lost during the crisis. But more wood has been added to the fire in the labour market. The high proportion of long-term unemployed and the large number of discouraged workers and those working fewer hours than they would like mean that the vicious circle of unemployment is difficult to break, hence the expansionary budgets of Obama's administration.
|
|
|
|
During the crisis, high unemployment has been the main factor behind the rise in bad debt, ending up with mortgage foreclosures that add to the oversupply of housing, pushing prices down and keeping construction at a minimum. The Case-Shiller index for second-hand house prices fell in November for the fifth consecutive month, accumulating in this period a correction of 3.5%, 4.8% discounting inflation, which, if it gets worse, might have negative consequences for consumption and bank balances. For this very reason, construction continues at a level that is a third of what might be considered normal in the United States. However, there are signs that the sector's confidence is starting to improve.
|
|
|
The CPI rises 1.6% but inflation is under control with the core CPI up 1.0%.
|
|
In prices, inflation is still under control in spite of rising prices for oil and the rest of commodities. The general consumer price index (CPI) for January continued rising to 1.6% year-on-year, pushed up by oil prices. However, within the current context of surplus production capacity, neither tensions in production prices or energy prices are affecting the core CPI, which excludes energy and food prices and is a more accurate reflection of the fundamental trends, as shown by its moderate 1.0% increase year-on-year, close to October's record low. In this respect, the Fed continues to forecast moderate prices.
|
|
|
|
In December, the foreign sector provided a more than positive note. Although rising oil prices meant that the deficit rose to 40.6 billion dollars, 5.9% higher than the good figures for November, the deficit excluding oil and its derivatives fell to 15.3 billion, the best figure since January 2010, which coincided with the period when the deficit was abnormally low due to the credit crisis interrupting trade flows. These figures are even more positive because this improvement is due to a recovery in exports. As it is the trade balance excluding oil that sets trends, we expect the foreign sector to continue contributing to growth in the fourth quarter. Given the size of the US economy, the weight of the recovery must be supported by domestic demand but, at present, any help is appreciated.
|
Japan
|
Japan: back to reality
|
|
Japan shrinks by 0.7% and, with the end of the boost from exports, is looking at a 2011 with modest progress.
|
|
The Japanese economy deflated in the fourth quarter, down 0.7% compared with the previous quarter which, nonetheless, leaves the total growth rate for 2010 at a solid 4.0%, due mainly to the push from exports in the first half of the year and, to a lesser extent, to the different public stimuli received by private consumption throughout 2010. It is precisely these two sectors that weakened the most in the fourth quarter. Exports dropped by a small 0.6% compared with the third quarter, after having managed to grow more than 10%, while private consumption went from 1.1% growth to losing 0.7%.
|
|
Domestic demand weakens and heavy public borrowing restricts new stimuli.
|
|
Capital goods investment slowed up, while construction was severely hit. The outlook for 2011 is therefore one of growth slightly below 1.5%, more in line with the production possibilities of an economy that is still deflationary and has recently had its sovereign debt downgraded which, in GDP terms, is the largest of all rich countries.
|
|
|
|
Business indicators show a weak domestic demand. In January, car sales fell for the fourth consecutive month after the withdrawal of public incentives, standing 23.8% below the same period a year ago, while retail sales in December fell by 2.2% year-on-year.
|
|
|
Industrial production picks up but deflation continues.
|
|
The positive counterpoint was provided by supply, with industrial production intensifying its upswing in December, albeit starting from a very low point. Machinery orders followed a similar trend, these being an early indicator for investment although, in this case, we will have to wait and see whether the good figures of December continue. Another plus for the Japanese economy was December's slight drop in unemployment to 4.9%, but deflation's shadow is looking long. December's CPI fell again compared with the previous month, recording a zero year-on-year increase, while core inflation, the general index without energy or food, dropped 0.7% year-on-year.
|
China
|
China: new year, old inflation
|
|
Inflation in China stands at 4.9% year-on-year in January and forces new wage increases.
|
|
There's still a great risk of the Chinese economy overheating. The year of the rabbit has started with 4.9% inflation year-on-year in January, higher than December's figure of 4.6% and than the target level of 4% presented by the executive, although below the forecasts of the consensus.
|
|
|
|
Once again, the rise in food prices -10.3% year-on-year in January compared with the 7.2% average in 2010- and the rising trend in housing costs stand out. However, we must point out that the new composition of the price index, with food having less weight, might have contributed to inflation being lower than expected by the consensus.
|
|
|
|
Given these inflationary tensions, several regions in the country have chosen to raise the minimum wage. Shanghai and Guangdong province, in the south, will be the next regions to ride the wave of wage increases. Although some people are warning of rising labour costs as a factor that might encourage inflationary pressures, we mustn't forget that the gains in Chinese worker productivity (in the order of 10% annually in the last decade) largely offset these wage rises.
|
|
|
|
Within this context, the monetary authorities have continued to take a restrictive stand. At the beginning of this year, the central bank once again raised the official interest rate by 0.25 basis points (up to 6.06%), the third rise since October. The further increase in the cash reserve ratio in mid-February was also a surprise, the second raise in little more than a month and the eighth since the start of 2010, putting the ratio close to 19.5% for large banks.
|
|
Even tougher monetary conditions: interest rates and cash ratios.
|
|
This marked tightening up of monetary policy seems to have had an effect on the indicator for credit which, at a little more than 430 billion renminbi in January, is starting to show the correction so desired by the central bank.
|
|
|
|
The regulations of the last few weeks have once again highlighted the tension existing between monetary policy and exchange rate policy. The recent hikes in the interest rate attract more capital flows towards China, which puts pressure on the country's aim for the renminbi to appreciate gradually. We believe this dilemma will be resolved with a somewhat higher appreciation rate than we are used to, but not much more (around 0.5% per month).
|
|
|
|
Undoubtedly, if the Chinese currency were more flexible, this would help to correct external imbalances. In particular, January's trade figures merely confirm the strength of exports. In spite of the reduction in the trade surplus, a consequence mainly of the festivities to celebrate the Chinese Lunar New Year, both exports and imports grew much more than the consensus expected.
|
Brazil
|
Brazil: Rousseff steps on the brake
|
|
The symptoms of overheating in the Brazilian economy demand a speedy reaction from the new government.
|
|
The solid reactivation of the economy after a fleeting recession, the strong push from credit and the prolonged fiscal aid before the presidential elections of October 2010 ended up increasing inflationary pressures in Brazil. Pressures that, together with the marked rise in agricultural prices and the higher commodity prices being passed on to some industrial components, have pushed inflation up to 6.0% in January. In the short term, such pressures are not expected to die down, so that the scenario facing the Brazilian economic authorities is relatively complicated.
|
|
Adjusting interest rates will not be enough; this must be accompanied by fiscal consolidation and credit limitations for public bodies.
|
|
It's even more complicated if we take into account the fact that Brazil's real interest rates are the highest among emerging economies, making the Amazon giant one of the main destinations for the world's abundant liquidity in search of good returns. The rocketing volume of capital inflows, 50% more in 2010 than in 2009 according to government estimates, is pushing up the real and reducing the competitiveness of Brazilian industry and exports, limiting the monetary authority's arsenal in their fight against inflation since it forces them, to a certain extent, to ration any interest rate hikes so as not to aggravate the situation. They have therefore opted to combine these measures with other instruments, fundamentally by controlling foreign capital inflows and restricting credit.
|
|
|
|
These restrictions can only increase. In the storm of the crisis, the boost given to credit by publicly-owned financial institutions helped to moderate the effects of the recession. However, this vigour has remained in spite of private credit picking up, so that, given the obvious inflationary pressures, there is a great need to adjust public credit. Brazil's central bank has already taken various measures in this direction. To start with, it has reversed the reduction in reserve requirements for term deposits implemented after the crisis; similarly, after six months with no changes, the Selic rate was raised by 50 basis points in January, so that it has now accumulated a rise of 250 basis points since the recovery started, i.e. half of what it lost in the crisis. Lastly, it has been announced that, as from July, the capital requirements will increase for consumer loans with maturities longer than 24 months and for loans backed by salary and with maturities longer than 36 months.
|
|
New adjustment measures should be expected throughout 2011.
|
|
Dilma Rousseff is also reining in on the fiscal side. After announcing, at the beginning of February, her intention to cut the budget for 2011 by 50 billion reales (2.5% of the total), she persuaded Congress to pass a lower minimum wage increase than requested by the trade unions, the opposition and even members of her own coalition government. It has therefore been increased from 510 to 545 reales (around ?238), remaining more or less in line with inflation.
|
|
|
|
Nonetheless, the risk of overheating persists and the investment required in infrastructures for the 2014 World Cup and the 2016 Olympics is only making matters worse. Consequently, if Brazil keeps its commitment to macroeconomic stability, as we expect, there's no doubt that it will employ all the weapons available to anchor inflation expectations again. We can therefore expect further adjustment measures from all sides: via credit, via interest rates and via taxes.
|
Mexico
|
Mexico: on track
|
|
Mexico ends 2010 with a GDP flash estimate of 5.5% and consolidates its recovery.
|
|
Without doubt, 2010 was a great year for the Mexican economy. With 5.5% growth in GDP, it exceeded all expectations and posted the best annual figures in ten years. Data for the fourth quarter also recorded a rise of 1.3% compared with July-September and thereby confirm the consolidation of the Aztec recovery; a recovery that has been based on strong exports and a gradual rise in domestic spending.
|
|
|
|
In year-on-year terms, the GDP flash estimate in the last quarter of the year was 4.4%. By component, the primary sector grew the most, up 9.9% compared with the same period a year ago, thanks to the higher production of grain and other agricultural products. The secondary sector, for its part, posted growth of 4.7% and continued to be largely boosted by manufacturing industry, up by 6%. With regard to services, these grew by 4.2% compared with the fourth quarter of 2009, although some sectors, such as trade, financial services and insurance, particularly stood out for their rises, up 9.5% year-on-year each one.
|
|
The renewed health of domestic demand is verified by some services picking up.
|
|
Leading indicators of activity and improved economic expectations in the United States, the destination for 83% of Mexico's exports, continue to point towards a relatively favourable economic scenario for the country. In December, the global economic activity index (IGAE), an indicator of how the Mexican economy is performing, grew by 4.1% year-on-year. Mexican consumer confidence also continues to improve and is already above 92 points, thanks to the favourable labour market and the gradual recovery in credit.
|
|
|
|
So, with regard to 2011, we can expect growth of around 4.5%, a level more in line with its potential. We also expect pressure on prices to increase as the output gap closes. Nonetheless, we do not expect any change in the monetary policy of Banxico until domestic confidence has returned to its pre-crisis level and the recovery is completely consolidated, which we expect will happen at the beginning of 2012.
|
Commodities
|
Oil prices break through the reference levels
|
|
The situation in North Africa will determine whether the price of oil falls below 100 dollars.
|
|
The price of oil has started a decisive climb upwards. Between 20 January and 22 February, the price of crude increased by 11.2%, reaching 107.37 dollars per barrel (Brent quality, for one-month deliveries) and leading to an increase of 15.9% since the start of year and 38.0% since the start of 2010.
|
|
|
|
Political instability in the Middle East and North Africa has been added to other upward pressures, such as the expectations of greater world demand and the bottleneck in oil-producing countries that do not belong to OPEC, factors which pointed towards moderate increases throughout 2011. Whether crude returns to more normal prices will depend on how the area's political situation pans out. Within a scenario of falling tension, oil prices might drop below 100.
|
|
|
Gold benefits from being a safe haven, while coffee and tea dominate the rises in food.
|
|
Rises continued to predominate in commodities as a whole, caused by growing demand in the United States, which has come into competition with demand from emerging economies. The Economist index was up 5.2% between 20 January and 22 February; however, there are significant disparities. Gold once again crossed the barrier of 1,400 dollars per ounce, benefiting from it being a safe haven, while the rise in nickel stands out among the base metals. While copper is showing signs of losing steam, aluminium, whose production is energy-intensive, should end up increasing if higher energy prices become consolidated. Among foods, the overall trend is still upwards, dominated by rising tea and coffee prices while, in the last two weeks, sugar lost everything it had gained in the previous two weeks, highlighting just how volatile the commodities markets have become.
|
Why do savings patterns differ over time and between countries?
|
|
|
|
In the last four decades, the household savings rate for advanced countries as a whole has dropped, on average, from 12% to 8% and, as a consequence, the pattern of growth has become more dependent on consumption. Although this figure is strongly influenced by changes in the composition of the population, mostly its ageing, the downward trend in the savings rates suggests that agents may have altered their consumption decisions. On the other hand, there are also significant differences in savings behaviour between countries. So which factors influence these differing savings patterns over time and between countries?
|
|
|
|
Firstly, the pattern of consumption can vary with the savings capacity or potential of each country and generation. We should therefore expect a region with a higher per capita income to find it relatively easier to save, so that richer economies should save proportionally more of their income than poorer countries. Within this context, this Box evaluates to what extent this relationship between income and savings holds true in practice. On the other hand, the savings model also depends on how agents' consumption reacts to changes in a series of economic variables, such as the interest rate, the degree of financial development, fiscal policies and inflation. Cultural factors also play an important part, as they help to construct the preferences that shape this propensity to consume.
|
|
|
|
|
A comparison between countries reveals that the positive association between per capita income and the savings rate of households is not very solid, as shown in the previous graph. This suggests that the level of savings might be influenced by other factors. The same conclusion is also reached if we concentrate on the most advanced economies. The graph below shows that the fall in the savings rate has been widespread and independent of the rise in wealth of each country. One determining factor could be the fact that younger generations probably economize less, although their per capita income is substantially higher than that of their predecessors. Other variables are therefore very likely to shape the propensity to consume and preferences, key factors in the savings pattern. If, on average, a country's households are relatively keener on consuming due to these factors or their tastes, then the national savings rate will be lower.
|
|
|
|
In fact, looking at those aspects that influence the desire to consume, of note is the role played by interest rates, perceived by agents as the price of spending now. The higher the interest rate, the more expensive it is to buy in the present, as depositing money in a bank will provide a better return and this will encourage people to save more. However, there may be an income effect (you need to keep less for the same gain in the future) that dominates this mechanism of substituting consuming today with consuming tomorrow, breaking this positive association between the interest rate and savings. The following graph shows that the downward trend in interest rates might certainly have had a negative effect on the savings rate over time, at least in advanced countries.
|
|
|
|
|
The degree of sophistication of financial instruments may have also contributed to the fall in the savings rate, particularly in more developed countries. On the one hand, the range of financial instruments for consumer credit has increased significantly and, in addition, the interest rate for these products has fallen over the last few decades. As a result, the year-on-year growth rate for consumer credit in the euro area between 1992 and 2010 was 5.1%, higher than the average growth rate for household consumption, which stood at 3.8%.
|
|
|
|
Other aspects of a demographic nature may have also led to differences in savings behaviour. In this respect, most studies agree that those countries with a higher ratio of dependent people, those aged under 16 and over 64, tend to save less. Insofar as the current population trend is leading, precisely, towards more ageing, this factor is expected to push savings down further, at least in the richer regions. According to data from the United Nations Organization, the dependency rate of older people in developed regions rose from 15% in 1970 to 24% in 2010 and is expected to reach 45% by 2050.
|
|
|
|
From the perspective of fiscal policy (see the Box «Tax incentives for saving: do they work?»), this also alters incentives to save, as it can modify agents' disposable income. An example of how fiscal policy can alter savings decisions can be seen in Germany. According to an OECD study, fiscal stimuli to take out a private pension (Riesterrente) in the last decade have had a positive effect on this country's savings rate.(1) Certainly, this kind of aid can increase (or reduce) the cost of consuming today compared with tomorrow and this can result in individuals spending less (or more) in the present.
|
|
|
|
Lastly, agents' preferences influence how consumption reacts to different variables and thereby establish the different combinations of spending today versus tomorrow. Insofar as culture has a strong effect on shaping tastes, when this alters between generations, preferences change and consequently the consumption pattern. A society that was originally more adverse to risk and therefore more inclined to accumulate wealth might therefore no longer be so, and this would lead to a reduction in its savings rate. An example of this can be found in the case of Japan, where several studies have pointed out that the rise over time in the desire to consume today instead of tomorrow might have been a key factor in this country's falling savings rate.(2)
|
|
|
|
In short, although there are many different factors that lead to discrepancies in the savings pattern of different generations and countries, an analysis of the data shows that income level does not seem to be so decisive, whereas changes in interest rates, in financial development and in preferences, among others, are probably more crucial in explaining differing consumption patterns.
|
|
|
|
(1) Hüfner, F. and Koske, I. «Explaining household saving rates in G7 countries: implications for Germany», OECD, Economic Department, Working Papers, No. 754 (2010).
|
|
|
|
(2) Katayama, K. «Why Does Japan's Saving Rate Decline So Rapidly?», Policy Research Institute, Ministry of Finance, Japan (2006).
|
|
|
|
This box was prepared by Maria Gutiérrez-Domènech
|
|
|
|
European Unit, Research Department, "la Caixa"
|
|
|
You can susbcribe now to be nofified by email every time the Monthly Report is updated in the internet.
|
All documents are in Adobe Acrobat format (PDF).
To view a document in PDF format you need the Adobe Acrobat Reader. If you don’t have it already loaded on your computer, you can donwload it now.
|
|
Direct link to the Research Dept. in your mobile
We'll send you a free SMS with the link
|
