German economists are rebutting accusations from the U.S. Treasury Department and Nobel laureate Paul Krugman that their nation’s current account surplus is too large and poses a threat to global growth.
Stung by a month of criticism from across the Atlantic and also within Europe, Andreas Rees of UniCredit Bank AG and Berenberg Bank’s Holger Schmieding both wrote reports in the past week defending Europe’s largest economy from the charge that its surfeit impedes the economic recovery regionally and abroad. The International Monetary Fund predicts the gap to be 6 percent of gross domestic product this year.
Germany’s “anemic pace of domestic demand and dependence on exports” has helped create a “deflationary bias for the euro area as well as for the world economy,” the Treasury, under Secretary Jack Lew, said in an Oct. 31 report. Krugman wrote in a Nov. 1 article that “by running inappropriate large surpluses, Germany is hurting growth and employment in the world at large.”
“I have two problems with the latest onslaught,” Rees wrote in a Nov. 10 report to clients from Frankfurt. “First, in my opinion, it is flawed economic thinking. Second, to make things worse, critics obviously do not know the facts.”
He argued the trade surplus -- a smaller measure of a country’s external balance -- between Germany and others in the euro region has declined from 5.5 percent of GDP in 2007 to less than 2 percent in the second quarter. Moreover, exports to the euro region were lower than six years ago in the second quarter and imports were more than 10 percent higher than at the end of 2007, relieving Germany of blame for the gap.
The surplus comes instead from diversifying exports away from Europe, as evidenced by a 1.5 percent divide with the U.S. and 1 percent with the Middle East. As for whether Germany should spend more, “there is absolutely no automatism between more public spending and the narrowing of the trade balance,” he said. In addition, raising the minimum wage would hurt German companies to the detriment of expansion globally.
Describing some of the debate as “silly,” London-based Schmieding made similar points on Nov. 11, arguing that the current-account windfall has little to do with protectionist policies or deflating demand.
A surplus is also desirable for Germany given it has an aging population, because it increases the country’s savings. The rise also reflects the impact of the euro crisis rather than austerity or “beggar-thy-neighbor policies,” Schmieding said.
The fiscal turmoil elsewhere in Europe led German companies to slash investment, leading to weaker imports. At the same time, demand elsewhere in the world, untainted by Europe’s woes, supported exports, he said.
“Market forces and the gradual fading of the euro crisis will see to it that the German current account surplus can start to normalize soon,” Schmieding said, noting that imports will climb as German wages rise and investment rebounds.
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The price of housing may help determine the value of currencies in the English-speaking world against the U.S. dollar.
The property markets of Australia, Canada, the U.K. and perhaps New Zealand have shown signs of resilience since recovering from the global financial crisis, according to Alan Ruskin, a macro strategist at Deutsche Bank AG in New York. A year ago the analysis was they would lag the U.S. in recovering.
The revival suggests to him that when the Federal Reserve begins to rein in easy monetary policy other central banks won’t be far behind, he said in a Nov. 5 report.
A concern is that the strength in housing markets may signal other new imbalances, such as excessive leverage and current account deficits, he said. That leaves the countries in an “elite club” that no one wants to be a member of.
Those imbalances may prompt investors to sell currencies against the dollar, as may the potential that housing markets will slide. Australia and the U.K. are most at risk because they have more variable-rate mortgages, said Ruskin.
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The global recovery is proving import-less, at least as far as goods from emerging economies are concerned.
The ratio of growth in trade to output around the world used to run at 2 percent to 2.5 percent and is now just under 1, according to strategists at UBS AG including Bhanu Baweja, global head of emerging-market cross-asset strategy.
One reason is that the sectors rebounding in developed economies don’t require as many emerging-market exports. Examples include heavy machinery and construction equipment in the U.S., which are benefiting from the energy revolution there.
“The U.S. does not import these inputs from emerging markets; it either builds them itself or imports them from other developed countries,” said the UBS team in a Nov. 13 report.
The weakening relationship between trade and growth may have other explanations, the UBS report said. Globalization may have peaked and the gap in production costs between emerging and developed markets may have narrowed. Trade may also be turning more “light,” thanks to technological advances such as 3D printing.
If the trend is confirmed, emerging markets may find their current accounts in deeper deficit, their fiscal balances worsening and their corporate earnings suffering, UBS said.
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Foreign capital flows accounted for as much as a third of the increase in U.S. property prices and household debt that preceded the financial crisis that began in 2007.
That’s the estimate of Alejandro Justiniano of the Federal Reserve Bank of Chicago, Andrea Tambalotti of the Fed Bank of New York and Northwestern University’s Giorgio E. Primiceri, in a study published this week by the London-based Centre for Economic Policy Research.
The flows help explain the “sustained low level of interest rates observed over that period,” they said.
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U.S. exports are more vulnerable to shifts in demand from Europe than they are to changes by other major trading partners, according to the Federal Reserve Bank of Kansas City.
If Europe’s growth rate increased by one percentage point next year, U.S. shipments would rise by the same magnitude, economists Jun Nie and Lisa Taylor wrote in a Nov. 5 report.
A similar rise in Canadian expansion is associated with only a 0.5 point gain in U.S. export growth. The effect is even smaller with gains in Asian and Mexican trade -- 0.4 point and 0.2 point respectively.
The outlook suggests that because U.S. exports account for almost 13.5 percent of total GDP, forecasts from the IMF of weaker-than-expected growth elsewhere next year will reduce the contribution of exports to growth by 0.2 point.
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American women are enjoying the economic recovery, filling 52 percent of new jobs this year even though they represent less than half the labor force.
So calculates Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York. He said in a Nov. 12 report that female employment is accelerating and that women are competing in traditionally male-dominated service industries.
Women, for example, make up 60 percent of payrolls across state and local governments, so will benefit as that sector heals, said Dutta. Unlike for men, employment among women aged 25-34 exceeds pre-recession levels and women are earning an increasing proportion of college and post-graduate degrees.
Dutta noted that professional and technical services, an industry that pays 50 percent more per hour than the average wage, has seen female employment rise 3.2 percent at a year-over-year rate, a percentage point faster than men.
A Nov. 12 blog post from the Washington-based Brookings Institution concurred and raised some caveats. Yes, women are doing better than they were, with 40 percent the primary or sole provider for their families and the gender pay gap for full-time workers narrowing to 82 cents on the dollar today from 62 cents in 1979.
At the same time, women still find it harder to escape the bottom income quartile, meaning women born poor are more likely than men to remain so. Forty-seven percent of women born to parents in the bottom quartile remain there as adults compared to 35 percent of men.
“Looking at mobility patterns by gender shows there is clearly a long way to go before we achieve equality,” said Richard V. Reeves and Joanna Venator of Brookings.
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