Posts Tagged ‘global economy’

Would Clinton or Trump be better for a global economic recovery?

May 31, 2016

After 8 years of an American Democrat administration the recovery from the global financial crisis of 2008 has still not gathered steam. Europe, with its EU chains, is no longer capable of leading a global economic recovery. (I note that the UK or Germany could have played a bigger part in a global recovery if they were each unhampered by EU membership). China and India, together and if their economies were in phase, could also have led a recovery. But the Chinese growth story has stalled and is out of phase with the Indian growth. The US certainly could have, and could still, lead a recovery. But Barack Obama has been too risk averse (read too scared) to take any real leadership role. So while the US is recovering, very slowly, it has not really contributed to being the global economic motor it could be. The primary reason, of course, is that public spending is much too high and, in consequence, taxes are higher than necessary. Obama has elected to print money (quantitative easing) rather than attempting to get the fundamentals right. The EU is still printing money and public spending is little less than profligate. Spain and Portugal are next after Greece and France is not very healthy. They are all pursuing traditional socialist policies of trying to get out of the economic hole by increasing public spending (with newly printed money of reducing value). And with the structure of the EU being what it is, they hold back the countries which have much sounder fundamentals.

The question is, who of Clinton or Trump would contribute more to a global recovery?

Certainly public spending would be higher with Clinton than with Trump. Public infrastructure spending – which is now necessary in the US – would probably be more likely with Clinton. But her choice would be to print money or to increase taxes. Obama took the easy way out and printed money. Whether Clinton would have the nerve to either cut non-infrastructure spending or to raise taxes is uncertain. She may not dither like Obama, but she is not any less risk-averse. Assuming she did increase taxes, she would probably increase corporate rather than personal taxation and that is always a “growth killer”.  Small businesses would be hard hit. As Europe has demonstrated so well, minimum wage legislation only destroys – for ever – the entry-level and low-qualification jobs. Clinton will find minimum wage legislation tempting and may fall into the trap of destroying jobs. There seems little chance that a Clinton administration would contribute any more to a global recovery than Obama has.

What Trump might or might not do is uncertain. It is possible that he might address the fundamentals and really reduce the size of the bureaucracy. Or he may increase defence spending and try to balance the books by cutting welfare spending. He could take the measures to help small businesses and it is here, with small businesses, that real growth and wealth creation is generated. Or he may just help the large corporations which creates fewer jobs and favours the wealthiest.

The Clinton path will be “more of the same”. Not much to gain but probably not much worse than with Obama. The Trump path is unknown. It has a much larger upside than anything Clinton has to offer, but it has a much larger downside as well. A Trump path is full of risks. If the economic downsides with a Trump Presidency could be limited and he helped small businesses more than large corporates, then he could contribute to a global revival which Clinton would be incapable of. But the risk is significant.

I remain of the opinion that The US choice is now high risk with Trump or low gain with Clinton



Oil price drop fuelling a surge in Indian car sales

March 18, 2016

It has taken a while coming, but the drop in oil price since mid-2014 is finally making its way into the Indian economy. Fuel consumption is growing at 10%. India has now passed Japan and is now the third largest oil consumer. Soon India will pass even China for energy consumption growth. Refineries which were intended for the export of oil have shifted to production for domestic consumption. Car sales which grew by 6% in the last year are now expected to be 12% in the next fiscal year (April – March).

Hindustan Times:

Underpinned by annual economic growth of 7-8 per cent, India’s fuel demand is seen as a key oil price support over 2016-2017, eating into a supply overhang that has pulled down global crude as much as 70 percent since mid-2014.

India has already pipped Japan as the world’s third-largest oil consumer. By 2040, India will have more than doubled its current oil use to 10 million barrels per day (bpd), according to the International Energy Agency (IEA), about on par with China’s consumption last year.

This roar of motor – as well as power and household – fuel use means some refineries initially planned for exports, such as the 300,000 bpd Paradip refinery on India’s east coast, have been flipped to serve domestic oil demand. …… Reflecting India’s rising importance as a buyer, Igor Sechin, chief executive of the world’s biggest listed oil company Rosneft, was in New Delhi this week to sign several deals with Indian companies such as IOC, Oil India Ltd and Bharat PetroResources Ltd.

…. Over April-February – the first 11 months of India’s current fiscal year – fuel demand rose 10 per cent to about 170 million tonnes (4 million bpd), according to a report this week by the oil ministry’s Petroleum Planning and Analysis Cell (PPAC).

For the next fiscal year through March 2017, the PPAC has forecast fuel demand growth at 7.3 per cent. …. India plans to spend Rs 97,000 crore ($14 billion) in 2016-2017 on expanding and improving the country’s road network, which at 4.7 million km is already vying with China as the world’s second-longest after the United States, although highways make up less than 2 per cent of that figure.

A 23.55 per cent increase in the salaries, allowances and pensions of millions of government employees later this year is also expected to shore up consumer spending, boosting purchases of cars and motorcycles. Sales of passenger cars and utility vehicles in India are expected to grow by as much as 12 per cent in the next fiscal year, up from an estimated 6 percent this year. That translates to around 230,000 new passenger vehicles hitting the roads each month.

The main impact has been on gasoline demand, which the PPAC expects to grow to 24.2 million tonnes (560,000 bpd) by next year, up more than 12 per cent from 21.5 million tonnes estimated for this fiscal year. “Gasoline demand has been growing in double digits and we expect this to continue as it depends on sales of two-wheelers and cars,” said Indian Oil Corp’s Singh.

Other fuels are seeing growth as well, and for similar reasons. To meet rising demand, state refiners are planning a 1.2 million bpd plant on the country’s west coast, adding to current overall capacity of 4.6 million bpd, although a fixed timeline has not been set.

I expect India and China to be key contributors to the recovery of the global economy and

Historically – though it is a relatively crude generalisation – low oil price has usually given – or coincided with – consumer-led growth and stability.

crude oil price history 1970-2014

crude oil price history 1970-2014


A “dark gray” Monday for emerging market currencies

December 16, 2014

There is a gloom pervading global markets.  The gloom of the oil producers is not being offset by an optimism among the oil consumers. The Russians are feeling the effects of the sanctions. Chinese and Indian industrial growth – by their standards – are stagnant. Europe is stuck with its high energy price models and is not prepared – yet – to understand that price reductions by cost reductions (in real terms) is a good thing. The political leadership of the G8 or even the G20 are not – individually or jointly – communicating any convincing vision of a global economy and its recovery. The Middle East is in chaos and nobody has any clear notion of how order can be restored.

It was a dark grey – if not a completely black – Monday for emerging market currencies yesterday. The Indian Rupee slumped to a 13 month low. The Indonesian Rupiah hit a 16 year low. The Russian Ruble, Turkish Lira, Brazilian Real and South African Rand all hit new lows. There was no obvious single trigger but largely driven by sentiment and general gloom. The emerging markets are overly concerned about potential rate hikes in the US next year. But the real conflict lies in the mismatch between Japan and Europe planning rate cuts while the US plans rate hikes. A soaring Dollar is all very well and is fine for a while but it reduces the possibility of everybody else buying goods priced in Dollars.

One wonders why the G8 or the G20 counties bother with their summit meetings. Either the meetings are a particularly ineffective forum or the people attending are largely incompetent. I tend to think that without one or more showing real leadership, the G8 and G20 are just talking-shops and “whatever will be, will be”.

To get a turn-around and move upwards during a period of decline, it is necessary first to hit bottom. It seems to me that the bottom is near – unless we are again approaching a chasm where the bottom is not even visible.

Wall Street Journal:

Analysts say there was no specific catalyst for the selloff, but a number of factors converged to put downward pressure on emerging markets. Global oil prices continued to tumble, exacerbating problems for oil-exporting countries like Russia and Colombia. The Federal Reserve is also scheduled to issue a statement on Wednesday, which could signal that the central bank is closer to raising interest rates. That would deliver a blow to emerging markets that have benefited from years of easy money from the Fed. 

As investors scrambled to dump their risky assets, the selloff in emerging markets spread beyond oil exporters into countries like India and Indonesia, which had been relatively resilient in recent weeks.

“There’s just a lot going on in emerging markets, and investors are having some difficulty absorbing that information and figuring out what will happen next,” said Lucas Turton, chief investment officer of Windham Capital Management LLC in Boston, which manages $1.8 billion and cut back on its exposure to emerging-market stocks two months ago.

In afternoon trading in New York, the dollar was up 3.1% against the lira, with the Turkish currency trading at 2.3706 to the greenback. The real was off more than 1% at 2.6884 to the dollar, while the ruble plunged by more than 10% to trade recently at 65.615 to the dollar. ……

….. The Fed is expected to raise interest rates next year as the economy improves, while central banks in Europe and Japan are pursuing strategies to stimulate growth and inflation. This divergence has caused the dollar to soar against currencies around the world in recent months. ….

Many investors are bracing for turmoil in emerging markets as the dollar strengthens, making it more expensive for these countries to pay back international debt, and as U.S. growth beats much of the rest of the world. For instance, Indonesian companies have issued $11.4 billion of foreign-currency debt so far this year, according to Dealogic, putting them at risk for what analysts call a “currency mismatch.” This means these companies could struggle to pay off their dollar debts as their local currency, the rupiah, weakens in value against the greenback.

The WSJ ends on a very pessimistic note.

Stephen Jen, founding partner of hedge fund SLJ Macro Partners, said emerging-market currencies could “melt down” as investors accelerate their selling.

“Nothing the [emerging market] economies can do will stop these potential outflows, as long as the U.S. economy recovers,” Mr. Jen said.

My simplistic view is that market sentiment – gloom or optimism – is the most critical factor. And, I believe, that sentiment is a direct consequence of perceived vision and leadership. Obama has demonstrated that he is something of an analyst but he is no leader. Europe has no leader (apart from a reluctant Merkel) who communicates any clear vision of Europe or the world. In the absence of political leadership I am looking to industry and industry leaders – who I know exist – to provide the resilience to hold the fort and keep going till political leadership appears again.

The political leadership I am looking for is that person or persons who can provide vision and some real leadership for the G8 or the G20 groupings. No doubt it will come, but it could take some time. It has to, I think, come from the US or Europe. It is possible but unlikely to come from China or India or S. America for some time. Jeb Bush or Hilary Clinton or Elizabeth Warren are unlikely to provide such leadership. It could come from an unlikely source in Europe.

“Cometh the hour, cometh the person”, one hopes.

Saudi attack on shale oil could backfire

November 12, 2014

If the recent drop in oil price has been engineered (even in part) by Saudi Arabia as an attempt to put some of the burgeoning shale oil production sites out of business they will need to go much further. A break-even for shale oil production is probably at less than $50 per barrel. In any event the drop so far (25%+ in 6 months) is just the fillip the world economy needs. Saudi Arabia is probably not as vulnerable as other oil producing countries but increasing production to drive down the oil price is a dangerous game which could be self-defeating. Whether the current glut is just due to reduced world (read Chinese) demand and increased shale oil (US) production or has also been exacerbated by increased Saudi production, the oil consumer wins. Consumption will increase – and that will automatically reduce the glut and further increase the production of oil from shale.

If the global economy is to come out of the doldrums it needs the Asian economies – the tigers, the dragon and the elephant – to start prowling in earnest. Increasing consumption in the developing world seems to be one of the most effective ways of stimulating the world economy. It inevitably leads to increased production of consumer goods in the developed countries. And this current step-reduction of oil price could be just the trigger that is needed.

Yesterday the price of crude (WTI) was at about $77 per barrel and that price is sufficient to keep even the small shale oil wells in operation.

crude oil price Nov 2014

crude oil price Nov 2014


Global Big Maconomics

February 11, 2014

Norway is a lot more expensive than Sweden. This is not lost on McDonald’s advertising agency DDB in Stockholm and they have installed this billboard straddling the border to persuade Norwegians to cross over for their burgers. Many Norwegians cross the border in any case to shop and most road borders have retail outlets and supermarkets on the Swedish side to cash in on this. Food alcohol and, it seems, Big Macs offer significant savings.

Norway - Sweden Big Mac

Norway – Sweden Big Mac

Eighty nine Norwegian kronor is about 93 Swedish kronor and so the Big Mac meal (including a drink and fries) is about 30% cheaper in Sweden. McDonalds have not revealed how effective this has been in attracting Norwegians.

TheLocalNorway once again boasts the world’s most expensive Big Mac, the UK’s Economist magazine has reported, with the ubiquitous double-decker burger now costing 48 kroner, or $7.80. 

Venezuela slips into second place with a $7.15 burger. Switzerland, which briefly stole the top spot last year on the back of a burgeoning Swiss franc, is now in third place with its $7.14 burger, followed by Sweden ($6.29) in fourth. 
The burger in Norway is on average 68.8 percent more expensive than it would be in a McDonald’s in the US. 

The cheapest Big Mac in the world is in India at $1.54. China at $2.74 and Japan at $2.97 are surprisingly close. Of course the current currency exchange rates also have an impact.

The Economist invented the global Big Mac Index in 1986. The 2014 Big Mac index was released a few days ago with January 2014 exchange rates.

THE Big Mac index was invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their “correct” level. It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services (in this case, a burger) in any two countries. For example, the average price of a Big Mac in America in January 2014 was $4.62; in China it was only $2.74 at market exchange rates. So the “raw” Big Mac index says that the yuan was undervalued by 41% at that time. 
Burgernomics was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible. Yet the Big Mac index has become a global standard, included in several economic textbooks and the subject of at least 20 academic studies. For those who take their fast food more seriously, we have also calculated a gourmet version of the index.

This adjusted index addresses the criticism that you would expect average burger prices to be cheaper in poor countries than in rich ones because labour costs are lower. PPP signals where exchange rates should be heading in the long run, as a country like China gets richer, but it says little about today’s equilibrium rate. The relationship between prices and GDP per person may be a better guide to the current fair value of a currency. The adjusted index uses the “line of best fit” between Big Mac prices and GDP per person for 48 countries (plus the euro area). The difference between the price predicted by the red line for each country, given its income per person, and its actual price gives a supersized measure of currency under- and over-valuation.

Click here for the interactive map.

big mac index - the economist

big mac index – the economist

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