Sunday, September 14, 2003

Fiscal Endgame

The world bank in it's Global Economic Outlook raised an interesting question last week:

the scope for substantial further macroeconomic stimulus is rapidly dissipating. Fiscal deficits threaten to become part of the problem instead of part of the solution, especially since a quick reversal of the deficit is not anticipated. The U.S. general government budget position (including Social Security), for example, shifted dramatically from a surplus of 2.3 percent of GDP in 2000 to a deficit of 3.2 percent as of the first quarter of 2003. The Congressional Budget Office projects that the budget position is unlikely to return to surplus until 2012. In Europe, several large countries have breached the 3-percent-of-GDP fiscal deficit limits embedded in the Maastricht criteria for the common currency. And Japan has limited fiscal scope, given persistent deficits in the 6–7 percent range.

There has been a good deal of discussion going the rounds about the difficulties of conducting monetary policy as interest rates approach zero, there has been a good deal less about the possibilities of sustaining fiscal deficits ad-infinitum. In fairness, much of the discussion in the US context has focused on the relation between the looming long term deficits, and the expediency of increasing short term deficit spending. The point is that at some stage the short-run becomes the long-run. Most of the debate to date has assumed that around-the-corner growth can put the numbers back in the black. But what if this 'anticipated' growth just doesn't materialise? What if the 'weak' spot means not recession, but extremely low growth. The consequence of this would mean deficits stretching out as far as the horizon. So it is at least worth asking the question: how far is far here?

At what point would we run out of fiscal leverage as well as monetary leverage. And if we did, what is the policy remedy? And why is this question worth asking? Simply because in the ex-US OECD we have a novel factor, serious population ageing. For GDP to grow either (a) more hours have to be worked or (b) the hours worked need to generate more value. Well at least some of the OECD countries are going to have great difficulty with (a), and (b) is going to get more and more difficult if serious 'global rebalancing' takes place. Simply put: if globalised labour markets become increasingly efficient, and if human capital levels in the developing world begin to seriously close the gap with those in the deveoped one, then (b) also becomes problematic. Doing the sums it's not difficult to see that paying down the debt becomes a bigger and bigger problem. Oh, I know. The easy government solution would be to stoke-up inflation: well try telling that to Japan (oops, that's just what they're doing, but look at the success they're having). So when Morgan Stanley's Eric Chaney tells us:

The Stability Pact is not a good law, because we now have full evidence of our old suspicion, that it is pro-cyclical -- in bad times, the Pact forces governments to raise taxes. If the law is not good, it has to be changed. Over the last two years, every single party has expressed views about what should be changed. These views did not always converge, but this is Europe: Nothing can change without negotiations. It is now time for the European Union to start the re-negotiation of the Pact, and the sooner, the better.

we should be aware that this is just fine, but that it is a reform which will come with a sell-by date, one day or another. Now I am not the first person to have had this thought:

The Limits of Credit: Could Aging Nations Lose the Fiscal Policy Lever?

In Moody's Sovereign Risk Unit, we spend a great deal of time studying and debating the very issues that are before us today. What we are really discussing is whether the industrialized countries can afford the pensions already promised by their respective governments? In some ways, you might find my answer somewhat surprising.

We expect almost every industrialized nation to "default" on its pension promises. What do I mean? We have concluded that it is impossible for almost every major developed nation to meet presently promised public sector pensions, including promised health care for seniors, without further changes in future benefits. In others words, future governments will probably renege on future pension and senior health care commitments as embedded in law today..........

We have looked at many of the most important academic studies, which analyze future pension burdens and their potential impact on government debt. For many of the most highly advanced industrialized countries, the conclusion one must almost inevitably come to is that the public sector debt level needed to fund existing promises over the long-term would raise serious solvency issues if these pension systems are not reformed. On balance, many continental European countries and Japan could not sustain the increased debt burdens implied by their existing pension systems when these future obligations are added to already existing public sector debt.

Pre-World War II experience gives some important insights into dimensioning the problem facing the industrialized world as the baby boom generation retires. Either pensions are paid as promised, implying huge future debt burdens, or the promises are decreased and/or contributions raised significantly, thereby implying much lower debt burdens. If the pensions are not reformed in most Western European countries and Japan, then future governments face the prospect of dealing with debt burdens reminiscent of those faced by post World War Germany, the UK and France. If we assume that such debt burdens will occur in the future, then we have to examine how governments might deal with them, once again by examining the historical record. As a rating agency, we are concerned with determining at what point would such affected governments be forced to default on their debt obligations? It is clear that the consequences of such a financial default would be very different from a "default" on a pension promise.

Once a sustainable recovery has begun, the hope is that the government will also be in a better position to readjust the country's pensions to make them more actuarially sound. The risk this approach presents is that if the economy doesn't respond to the fiscal stimulus and doesn't soon start growing on a sustainable basis, then the country runs the risk of having the worst of all worlds -- a massive public sector debt just as its demographics start becoming quite negative.
Source: Vicent Truglia, Moody's Investor Service, 2000

Bulgaria's Difficult Road into Europe

Despite the fact that most Bulgarians look with hope and a sometimes difficult to sustain optimism towards the 2007 horizon, the road is littered with problems. Interesting article from the EU observer today. Just one small quibble, I'm not sure it's still true to say that Bulgaria's population is 8.9 million.

Bulgaria's long bumpy road to EU membership

In the optimistically named Mladost ("Youth") area of Sophia, ugly high-rises and broken-down Ladas balefully remind of the small Eastern Balkan country’s time behind the Iron Curtain. It is here that the ‘Fatherland’ or ‘Rodina’ can be found - one of Bulgaria’s remaining state-owned companies where 15 of its newspapers are printed. In the sweltering heat on the factory floor, Lubteho Kotev (49), who has been working at Rodina for over 16 years, worries that he will be one of the victims of the wave privatisation that is coming to Bulgaria. "We don’t expect very positive changes" says Kotev, who oversees the smooth running of the printing plant. "It's an open secret that the private companies in Bulgaria pay minimum salaries."

He tells of another well-known state-owned company in Bulgaria that was recently bought by an outsider. Most of the workers and machines were replaced. "We are afraid the same things will happen here," says Kotev shaking his head – his cross-shaped earring representing his favourite soccer player, former Bulgarian international Nasko Sirakov, jangles in sympathy. Upstairs, away from the printing machines, the deputy-editor of the Standard newspaper confirms the view on the factory floor. "Jobs will go"

Could the UK Overtake Germany?

Essentially silly article in the British Daily Telegraph (what else would you expect from the DT?). But it is silly in an interesting way, since it is based on an interview with Nigel Griffiths, Tony Blair's Trade and Industry Minister. In the interview Griffiths speculates about whether the UK might overtake Germany during the next decade and become the world's number three economy. Whether this is in any way realistic is impossible to say (only time will tell), but what is interesting is the idea that a UK outside the euro might outperform a Germany that is inside, and this from a member of a government committed to joining!

Nigel Griffiths, the trade and industry minister, appears to be forecasting that Germany will experience a decade-long slump, based on his prediction that the UK economy may be bigger than its Western European rival by 2013. "I think that construction and manufacturing alone as sectors could ensure that within 10 years we overtake the German economy," Griffiths told The Telegraph. "We've got to see whether we cannot become the third biggest economy in the world in terms of gross domestic product. I think that is feasible."

The UK is currently the world's fourth biggest economy behind the US, Japan and Germany. However, Germany's economy is currently 30 per cent larger than the UK's. If the UK continues to grow to trend - at 2.5 per cent, according to the Treasury - it would eclipse Germany's economy only if growth in Germany stagnated for an entire decade. Maurice Fitzpatrick, head of economics at Numerica, the City consultancy said: "No European country has seen zero economic for an entire decade for the last 100 years. Only Japan in the past 10 years has a track record this bad."

But Griffiths added that he was lobbying to make overtaking the Germans official Government policy. "It is an aspiration which I am pressing to be part of our Governmental drive." He said he doubted it would become a manifesto pledge in "these specific terms", but that boosting competitiveness would be. The implication of Griffith's remarks may embarrass the Government, which is committed to adopting the euro when economic conditions are right. Selling that to voters would be difficult if the UK's prospects outside the single currency are so much better than Germany's. The UK's GDP is growing by 1.8 per cent, while the latest figures for Germany show a decline of 0.2 per cent. Industrial production in Germany fell by 2.1 per cent in June while in the UK it grew by 2.2 per cent.
Source: Daily Telegraph

Only Japan has performed this badly. Sounds ominous.
The World Bank and Replacement Migration

Back to yesterday and the World Bank economic forecast. Here is another extract on 'replacement' migration for Europe and Japan which makes it plain that they are coming round to the UN view. Bush is not the only one these days finding out he needs the UN! As they say, this alone will not solve the problem, but it will help. As they also note the objections are political not economic: so much for de-regulation.

The combined demographic effects of the baby boom that marked the immediate post-war period, the fall in fertility rates that began in OECD countries in the late 1960s, and longer life expectancy have led to a striking acceleration in population aging in virtually all advanced industrial societies. Population aging is much more marked in Europe and Japan than in North America, but all three regions will be affected. According to demographic projections by the United Nations, the populations of the European Union and Japan are expected to fall by 10 percent and 14 percent, respectively, between 2000 and 2050, representing a decline of some 55 million in all. In both Japan and the European Union, the dependency ratio (defined as the ratio of pensioners to workers) is expected to decline from five to one today to three to one in 2015.

For the United States, projections still point to an increased total population over the same period, but the dependency ratio also rises. Recent research has considered the economic and fiscal impact of these demographic trends in the OECD area (OECD 2000, 2001c, 2002; Visco 2000). Without offsetting measures, the growing dependency could place enormous strains on social security, Medicare, and pensions systems. Far-reaching decisions are required over the medium and long term to meet shifting labor demands and to safe-guard balance and equity in the systems of social protection—decisions related to the length of working life, levels of contributions and benefits, and productivity advances. One solution receiving increased consideration in several countries is to increase levels of permanent immigration to modify population structures and mitigate the social and economic costs of aging. Immigration has advantages. It can quickly increase the economically active population because new immigrants tend to be younger and more mobile. Also, fertility rates among immigrant women are often relatively high, which can help boost population growth. This has only a limited impact in the short run, however. Immigration alone cannot provide the answer to population aging, as demonstrated by simulations produced by the United Nations (2000). The simulations show that maintaining steady dependency ratios until 2050 would require an enormous increase in migration flows—for the United States and the European Union, migration balances would have to be at least 10 times the annual averages of the 1990s. Such scenarios seem implausible by historical standards, and in light of the likely political reactions.
Source: World Bank

Chirac's Tax Cut

So the French have finally decided to go the whole hog. It's cut and be damned. Of course Chirac's cut is very different from the Bush one. This is short term expediency, in the French context it may even help. But it sure puts the stability pact in a tight corner. And if the growth doesn't materialise as anticipated next year? It would also have been nice if the euro-group ministers could have reached some agreement about it first, instead of France simply going it alone. This could be short term effective and long term damaging in another sense, that of euro-cohesion. It will be interesting to see whether this has any impact on the Swedish vote.

France confirmed its status as the rogue nation of the eurozone's public finances on Thursday after prime minister Jean-Pierre Raffarin decreed a 3 per cent cut in income taxes that will put further pressure on the country's budget deficit. The decision reflects the fact that French president Jacques Chirac, who promised to slash income tax by 30 per cent over five years in his 2002 election campaign, has been lobbying his government for the largest possible cut in order to "return some oxygen" to the economy. Despite the fact that a further clash with Brussels is now inevitable and that even his own finance ministry officials had warned that a one per cent cut in income tax was the most the public purse could afford, Mr Raffarin has rallied to the position of the French president.
Source: Financial Times

On the Advantages of International Labour Migration

Today I don't feel so alone. This is not because the girl in the flat above me is playing Spanish pop music at full blast. No, the World Bank has seen fit to dedicate a full chapter to labour migration. Even if they are far more tentative than I would be, and even though they place a lot more emphasis on temporary migration than I would, what they say is largely sound sense. Incidentally, what is clear is that what they call TMNP (temporary movement of natural persons) seems to be becoming the next big thing in connection with Mode 4 and GATS (all of this in a subsequent post). What it boils down to is 'services are on the move'. You know, try as I might, I just can't think of a single economic argument against international labour mobility, but few economists seem to recognise this. Surprising, isn't it.

With globalization—the dramatic expansion of cross-border trade and investment—has come an upsurge in international labor mobility. Falling costs of transportation and communication have reduced the distances between peoples, and the drive for better lives has motivated workers to move to areas where jobs are more plentiful and pay is better. Foreign-born persons now account for 10 percent of the total population in the United States, 5 percent in Europe, and 1 percent in Japan. In Canada and Australia, foreign-born persons represent 17 and 24 percent of the total population, respectively. Even so, today’s movement of people is still well below levels experienced in the late nineteenth century, and migration rates, now hampered by restrictive policies, are well below cross-border flow of goods and investment. By 2000, according to the United Nations, 175 million persons were living outside their country of birth—about 3 percent of the world’s population. By contrast, global exports of goods reached almost a third of GDP, and financial flows were well above 10 percent. While long term and settlement migration are still predominant in most developed countries, migrant flows are now more diverse and complex, with migrants moving back and forth more readily and rapidly. Temporary movement, in particular by highly skilled workers, has seen the largest growth in the past decade.

Both developed and developing countries have much to gain from an increased flow of workers. Rich countries benefit because they gain workers whose skills are in short supply. Also, as demographics drive up the average age in rich countries, migration allows an influx of younger workers who contribute to pension systems that would otherwise be actuarially unviable. Poor countries gain from higher wages as well as from the remittances that accrue from migration. In 2001, worker remittances alone provided some $70 billion to developing countries, nearly 40 percent more than all development assistance and significantly more than net debt flows to developing countries. Returning workers also often bring new skills back to the sending country. To be sure, there are costs to both receiving and sending countries: labor markets and social services may be strained in the rich countries, and developing countries may lose skilled workers who have been educated with public resources. Nonetheless, if a temporary visa system were introduced in rich countries permitting movement of labor up to 3 percent of the total labor force, world incomes would rise by nearly $160 billion (Walmsley and Winters 2002).

The shrinking share of young adults in the developed countries, particularly in Japan and Western Europe, and the rising share of young people in South Asia, Africa, and other parts of the world are complementary drivers of labor movement. Growing numbers of young people in the developing world have acquired the education and training needed to assume skilled positions in developed economies. And as the numbers of the foreign-born grow in developed countries, their presence makes it easier and more attractive for newcomers to join them (Hutton and Williamson 2002).

Newer factors are compounding the more familiar drivers of migration. The developing world’s rising share of educated workers—those who have completed secondary education— has jumped from one-third to nearly one-half over the past three decades. Increasingly, the growing pool of skilled developing-country labor is meeting industrial-country shortages, as the marketplace for skills widens to encompass the entire globe. Meanwhile, continued declines in transportation and communication costs and thus greater access to information on migration opportunities via global media, the Internet, and diaspora networks in receiving countries are breaking down barriers to migration(Nielson 2002).

Remittances from foreign workers, both permanent and temporary, are the second-largest source of external funding for developing countries, after foreign direct investment (FDI). In 2001, workers’ remittances to developing countries stood at $72.3 billion, considerably higher than total official development assistance and private non-FDI flows, and 42 percent of total FDI flows to developing countries that year (table 4.2). For most of the 1990s, remittance receipts exceeded official development assistance (World Bank 2003).

While the temporary movement of workers is not likely to unduly disrupt the sending country’s labor market, the potential effects of such mobility on segments of the receiving country’s labor market may at times be more significant. There, the concern arises that mobile foreign workers may be in direct competition with nationals of the host country working permanently in the same occupations. Even if the migrant’s stay is temporary, the growing number of foreign workers and the continuous influx of workers over different time horizons under contract-based flows could increase competition in the labor market (OECD 2002d). From this angle it is easy to see why immigration can be controversial in receiving countries. There is evidence that unskilled migration reduces the relative wages of unskilled workers in industrial countries (Borjas, Freeman, and Katz 1997).

An inflow of unskilled workers from the South will benefit highly skilled workers in the North. Their jobs are not threatened by the latter, and the presence of immigrants will lower prices for many goods and services consumed by the skilled workers. But the same inflow will reduce real wages of unskilled northern workers (World Bank 2001), and over time contribute to a deterioration in income distribution. Against this latter trend, however, demographic and educational trends in affluent countries will combine in the coming decades to raise the relative wages of unskilled labor in the absence of migration. As these demographic effects will likely be large, scope may therefore exist for increased flows of unskilled labor in an environment of relative wage stability. Despite the acknowledged benefits of temporary migration, the norm in receiving countries is to continue to impede the movement of low-skilled or unskilled workers through various restrictions. Such restrictions can contribute to the recent sharp rise observed in undocumented low-skilled workers throughout the OECD area.

Deficits: Part of the Problem or Part of the Solution?

The World Bank Global Economic Prospects 2004 is now available. Of particular note is the spotlight put on China and India, who are significanty out-performing the rest of the world in economic growth this year, their economies are expected to grow at up to 8 percent and 6 percent respectively this year. Today I will post a few extracts. Here's one on the deficit situation:

But the scope for substantial further macroeconomic stimulus is rapidly dissipating. Fiscal deficits threaten to become part of the problem instead of part of the solution, especially since a quick reversal of the deficit is not anticipated. The U.S. general government budget position (including Social Security), for example, shifted dramatically from a surplus of 2.3 percent of GDP in 2000 to a deficit of 3.2 percent as of the first quarter of 2003. The Congressional Budget Office projects that the budget position is unlikely to return to surplus until 2012. In Europe, several large countries have breached the 3-percent-of-GDP fiscal deficit limits embedded in the Maastricht criteria for the common currency. And Japan has limited fiscal scope, given persistent deficits in the 6–7 percent range. Interest rates have been brought down sharply in the United States as well as in Japan, where they stand at an effective rate of zero. Following the recent 50-basis point cut in rates, Europe still has modest headroom for monetary easing should the European Central Bank choose to relax its inflation target. In fact, downward price trends in the United States and Europe have triggered concerns of possible deflation.

Tuesday, September 02, 2003

Swedish PM Hits Out at Euro 'Big Three'

I said things were hotting-up in Sweden:

Göran Persson, the Swedish prime minister, on Monday attacked Germany, France and Italy - the eurozone's three biggest countries - for failing to prepare for euro membership and undermining the eurozone economy. With less than two weeks to go before Sweden's referendum on joining the euro, Mr Persson said Germany, France and Italy - which make up about 60 per cent of the eurozone economy - should have done more to put their public finances in order and build up budget surpluses before the euro was launched. "If they had behaved as Sweden, Finland, the UK and others during the 1990s, preparing their economies for the downturn, we should not have had this situation today," he said.
Source: Finacial Times

On the High-euro Fallacy

Those whose principal problem is not one of shortness of memory may like to recall that not so long ago we were being told of the 'inevitability of the dollar correction', and even encouraged to believe that a high euro might be beneficial as it could force Europe to accept reforms. Now the folly of the high euro seems to be becoming widely accepted, so the attention should turn to the fact that the dollar is once more rising, and what this may signify in terms of the US potential deflation problem. Here, it seems, there are no free lunches: Now for MS's Eric Chaney:

With the benefit of hindsight, the sharp appreciation of the euro against all currencies that started in June 2002 appears to be the main factor behind Euroland's shallow recession in the first half of 2003. Conversely, the recent weakening of the single currency against the dollar and the yen, a currency wrongly overlooked by European analysts, should foster a recovery in Europe by the end of this year. I think this is one of the main reasons why German manufacturers now look more confident about the future (see “Have Surveys Fallen to Summer Madness?” by Elga Bartsch and Eric Chaney, Global Economic Forum, August 27, 2003).
Source: Morgan Stanley Global Economic Forum

I think we would also do well to wait a little before deciding that what we have on our hands in Europe is a 'shallow recession'

Swedish Euro Campaign Hots-up Some More

The weather may be cooling, but up in Sweden - with only two weeks to go to D day - things seem to be getting a bit hotter. The statement by Prime Minister Persson that there could be no 'second' vote before 2010 in the event of a 'no' victory, seems extraordinarily silly. There is no good reason for such rigidity in an 'uncertain age', and anyway this argument would be more proper coming from the 'no' camp. Going back to Greenspan and recursive processes for a moment, such an argument may well backfire in being interpreted by voters as a crude attempt to influence them, ie it may not have its intended consequences. The Swedes have been given the right to choose, and should choose as they see fit. Personally, as a strong Euro skeptic, I think they would do well to wait. But if they do wait, and my worst fears prove ill-founded, viz if against all my better judgement, euro-zone monetary and fiscal policy should start to prove its efficacy, then I don't see why the Swedes shouldn't have the right to think again. We can all make mistakes, the assymetry here is that one mistake would be a lot harder to correct than the other: placing artificial constrictions on one of the sides does not reverse this assymetry.

Swedes will not be able to join the euro until 2013 at the earliest if they reject the single currency in a referendum in two weeks, Göran Persson, the prime minister, warned on Sunday.

Mr Persson's statement that a No vote would apply for two parliamentary terms was attacked by No campaigners. They said it was a desperate attempt to turn the tide of public opinion in favour of the Yes camp, which is trailing heavily in the polls. Mr Persson said a new referendum would not be held until after Sweden's 2010 general election (the next election takes place in 2006). Three years would then be needed to prepare for entry.

"If we wait until 2013 we risk Sweden joining the euro project after all the other countries who want to join. The building of Europe's future would continue - without Sweden playing an important role," Mr Persson, the Social Democratic party leader, stated.
Source: Financial Times

Turkey's Rapidly Growing Economy

Much as we try, we can't always sparkle. Today Stephen Roach has a pretty boring piece about globalisation. I say pretty boring because I think right now he's run out of things to say. The reason is obvious: as he says he's a card carrying skeptic, so he has now to wait and see. The piece on globalisation is only a re-run of things he has said before, and not all of them are 'state of the art'. This is where being a blogger is a definite advantage, as while you are waiting you can entertain yourself - and others - with something completely different. Anyway I'm not a card carrying anything, let alone a skeptic! I just want to understand what is happening. If things are going in a direction I don't expect, then this isn't a problem, it is interesting. It just means you have to change the theory a bit, that's all. Meantime Morgan Stanley do have an interesting piece on Turkey. Turkey, as the article says "seems to us en route to becoming one of the fastest-growing economies in the world" just what my demographic thesis would predict. No need to make too many changes yet!

The Turkish economy is on a rebound, we believe, but without creating any jobs. Real gross domestic product expanded by 8.0% year on year in the first quarter of this year, which implies a seasonally adjusted annualised growth rate of 12.2%, according to our computations. Turkey seems to us en route to becoming one of the fastest-growing economies in the world. Nevertheless, a recovery in general economic activity does not necessarily mean an immediate healing in the labour market. In fact, the current business cycle has turned into a jobless recovery. The unemployment rate climbed to a peak of 12.3% of the civilian labour force in the first quarter, from 5.6% in 2000. Since the beginning of economic troubles in the fourth quarter of 2000, over 2.5 million jobs have been lost in Turkey, and the output recovery has so far failed to bring new opportunities to the labour market.

The divergence between output and jobs is bad news for income growth and public finances. Demographic shifts and the state of the labour market were critical factors in determining the outcome in the November 2002 elections, and improving the outlook for millions of job seekers is still a daunting task for the ruling government. The unemployment rate may have dropped over two percentage points to 10% in the second quarter, but mostly because more people quit looking for work and dropped out of the labour force, in our view. The participation rate declined to an average of 48.5% in the first half of this year, from 51.4% in the second half of 2002. In fact, the jobless rate excluding the agriculture sector rose from 8.2% before the crisis to 15.1% in 2002 and improved marginally to 14.6% this year.

The current state of the labour market is especially devastating for the young and educated. The unemployment rate has risen across the board, but those aged 15-24 with above-high-school education endured the sharpest rise in unemployment over the last two years. The unemployment rate for the young and educated increased from 20.3% before the crisis to a peak of 31.1% in the third quarter of 2002. Although it decelerated to 25.6% in the second quarter of this year, Turkey’s young population continues to suffer more than other segments of the labour market. For example, the jobless rate for urban youths with qualifications stands at a disturbing rate of 28.1% -- almost three times the average unemployment rate.............

Sustainable economic revival and job creation need a further drop in real interest rates. With an average age of 26, the Turkish economy needs to become a dynamic job machine. Contrary to conventional political opinion, we think the economic stabilisation programme is not contractionary at all. Supported by structural reforms, fiscal tightening would reduce the public-sector borrowing requirement on a sustainable basis. In return, the declining real interest rate reduces the crowding-out effect and encourages private investment. In fact, the most important reason for disappointing job creation has been the lack of private investment, which contracted by 34.9% in 2001 and 7.2% last year. Though we project an annual growth rate of 15.2% in private fixed investment this year, gross fixed investment (including the public sector) would still be lagging behind the real GDP growth rate, which has so far been driven mainly by an unusual inventory accumulation...........

The excess supply in the labour market eradicates the risk of overheating of the economy, in our opinion. Every cloud has a silver lining, and the excess supply in the labour market has made a significant contribution to the disinflation process. The consumer price index posted an annual increase of 27.4% in July, down from a peak of 73.2% at the beginning of 2002. According to our calculations, the seasonally adjusted annualised inflation rate declined to 17.0% in July, from 30.8% in May. We observed an even more marked deceleration in the annualised “core” inflation, which plunged to 13.8% in July from a peak of 28.8% in April. In our opinion, besides real currency appreciation and tight monetary conditions, a limited recovery in the cumulative output gap eliminates “pipeline” inflation pressures in the short run. This is why we project a year-end inflation rate of 19.2%, along with an accelerating growth prognosis.
Source: Morgan Stanley Global Economic Forum

Eurostat Population Data

Something I forgot to link to last week, the latest Eurostat data on European population. Most notable here are the figures for the 'acceding' or 'transition' countries:

On 1st January 2003 the population of the EU was 379.0 million and that of the euro zone 305.6 million, far behind China (1 283 million) and India (1 042 million) but in front of the US (289.0 million). The EU population increased by 1 290 000 in 2002, an annual rate of 0.3%1. The rise in the EU population was around 2% of the 74 million increase in the world's population in 2002. The main contributors to world population growth were India (with an increase of 15.6 million, or 21% of the total world increase), China (+7.9 million or 11%) and other developing countries (+47.3 million or 63%).

Net migration accounted for almost a million, or three-quarters, of the EU population increase in 2002, with natural increase accounting for the rest. Natural increase has been below net migration since 1989. The United States recorded a population increase of 0.9%, three times higher than in the EU, with natural growth accounting for nearly two-thirds of the increase. Japan, with 127.1 million people, recorded an increase of 0.1%, due solely to natural growth.

The population increased in all the EU Member States in 2002. Largest increases were recorded in Ireland (15.2 per 1000) and Luxembourg (9.5‰) and lowest in Germany (1.2‰) and Italy (1.4‰). On the other hand, the Acceding countries4 recorded a drop in population of 0.1%. Six out of 10 recorded a fall with the biggest declines in Latvia (-6.1‰) and Hungary (-2.2‰). The population increased in Cyprus (+14.5‰), Malta (+6.7‰) and Slovenia (+0.5‰), and remained stable in the Slovak Republic.

Within the EU, the highest natural increase rates (difference between the number of births and deaths per thousand inhabitants) were observed in Ireland (+7.9 per 1000), France and the Netherlands (+3.7‰ each) whereas the rate was negative in Germany (-1.5‰), Italy (-0.5‰) and Greece (-0.2‰). The population would have fallen in these three Member States without positive net migration. Net migration was higher than natural increase in every Member State in 2002, apart from France, Ireland, the Netherlands and Finland. Positive net migration was recorded in 7 out of 10 Acceding countries. The exceptions were Latvia, Lithuania and Poland.

The total fertility rate5 in the EU in 2002 remained virtually unchanged at 1.47 children per woman compared with 2001 and 2000. However there were some notable increases in Germany from 1.35 in 2001 to 1.40 in 2002, and in Sweden, up from 1.57 to 1.65, with the highest value recorded by Ireland (2.01) and the lowest by Greece, Spain (1.25 each) and Italy (1.26). Among the Acceding countries fertility rates only ranged between 1.17 in Czech Republic and 1.57 in Cyprus (2001 data). In the US the fertility rate in 2002 was 2.06, in Japan 1.37 and in India 2.98.

European Pension Ages on the Rise

Interesting piece from the Guardian about how the German and Italian governments seem set to raise the retirement age. Obviously I find no fault with this, it is both necessary and inevitable, in fact I imagine it is only the begining. The problem could be a motivational one, and hence a productivity problem. In addition, it is one thing taking a decision at government level, and another implementing the same decision at firm level.

The Italian and German governments risked a public outcry yesterday by proposing that people should work, and make pension contributions, for up to five years longer to help pay for their ever-growing number of pensioners.
The proposals come as countries across Europe struggle to defuse the "demographic timebomb" of falling birthrates and rising life expectancy. The Italian prime minister, Silvio Berlusconi, said Italians should retire at 62, five years later than the average. Under the current system, he said, Italy began each year with a €36bn (£25bn) pension deficit. "In Italy people retire on average at 57. It means unsustainable costs and an annoying loss of talent, which could end up sinking us," he told the rightwing newspaper Libero. He proposed that the retirement age should be gradually raised to 60 by 2010, and after that to 62..............

In Germany a government commission has recommended raising the average retirement age to 67 and increasing pension contributions by 2.5%. It also suggested that no one should be allowed to retire before the age of 64. Italy and Germany are under growing pressure to overhaul their pensions systems in an effort to meet EU budget deficit regulations. Both had more deaths than births in 2002, and their national workforces are unable to pay for the growing numbers of pensioners. Italy has one of the oldest populations in the world, together with Greece and Japan, and one of the lowest birthrates, second only to Spain's. Pensions cost Italy about 15% of its GDP and have been a growing strain on the struggling economy for the past decade. But when Mr Berlusconi last tried to talk Italians into working longer - during his fleeting first government in 1994 - it was met by a million protesters on the streets, and it contributed to the collapse of his coalition government after less than eight months. The German recommendations put further pressure on the government, implying that its attempt to reform the pension scheme in 2001 has been a flop.
Source: The Guardian

French Deficit Could Hit 3.9% This Year

France's anticipated budget deficit for this year continues to grow, as do the expectations for next year. This breach of the rules, together with the similar difficulties being experienced in Germany, continues to pile on the pressure in the debate about the eurozone growth and stability pact.

Jean-Pierre Raffarin, the French prime minister, will on Wednesday tell Romano Prodi, president of the European Commission, that France's budget deficit for this year is worse than expected. Internal government estimates, to be made public next month, indicate that it will also exceed eurozone limits in 2004. The disclosure in Wednesday's Les Echos, the French business paper, means that France is set to become the first country of the eurozone to admit it will breach the rules of the stability and growth pact, by exceeding budget limits in three consecutive years.

Mr Raffarin will on Wednesday explain how France's deficit will hit at least 3.7 per cent of gross domestic product in 2003, a notch above the latest estimate of 3.6 per cent announced in June. Government sources now fear a deficit of as much as 3.9 per cent. France's own projections for 2004 will be published on September 24 in the 2004 draft budget. Next year's deficit depends on adjustments on the budgets of the state and the social security but as things stand, it should reach between 3.7 and 3.8 per cent. By failing to rein back its deficit under the stability pact's 3 per cent ceiling in 2004, France risks a penalty, under which it may have to pledge a €4bn deposit. According to the Maastricht Treaty, a country has one year to come back within the 3 per cent limit after it has breached the ceiling.
Source: Financial Times