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Daily Economic Briefing: March 17, 2010
Daily Economic Briefing: March 17, 2010>
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disclosures.
Page 1 of 2: Global data summary
• If we are correct, one important takeaway
from this week’s reports will be that core inflation is
sliding in the advanced economies. This development
represents more of a challenge to central banks than is
commonly appreciated. The further inflation deviates from
accepted norms, the greater the possibility that it will
dislodge inflation expectations, reinforcing the downward
pressure on inflation already coming from the output gap
•
• Japan is the poster child for this process.
Its core inflation rate has drifted progressively lower
versus the US and Europe, to the point where we estimate
inflation expectations fell below zero in the 2000s. Despite
this experience, the BoJ’s foray into unconventional
easing has been very limited compared to the Fed and the
Bank of England, and more on a par with the ECB (see chart).
Today’s announcement, in which the BoJ bowed to political
pressure and raised the magnitude of the short-term lending
program it launched in December from 10 trillion yen to 20
trillion yen, does not change that picture.
•
• The FOMC’s latest statement showed the Fed
is in no hurry to pull back from its unprecedented policy
stance. Policy rates will be maintained at the current,
near-zero level for an extended period, while the balance
sheet is leveling off north of $2 trillion as the Fed wraps
up its asset-purchase program. The FOMC is leaving open the
option to renew unconventional easing if conditions are
warranted.
•
• Minutes of the Bank of
England’s March meeting report a 9-0 vote to continue to
wait and see on rates and the scale of asset purchases.
While some MPC members felt the dataflow and drop in
sterling had raised upside risks to the inflation outlook
"slightly", the majority felt the balance of risks had not
changed materially. On the activity side, the UK claimant
count (equivalent to US continuing jobless claims) tumbled
by over 32,000 in February, consistent with speculation that
January’s rise was weather-related. Our colleague Malcolm
Barr says that the average decline in claimant count over
the last four months of almost 12,000/mo historically has
been consistent with stable or modest growth in employment.
•
• While the major developed market central
banks are comfortably on hold, EM central banks are slowly
starting to tighten policy. Now that the external backdrop
has improved, the EM’s currently very accommodative stance
no longer accords with their domestic macroeconomic
fundamentals. Brazil’s COPOM is expected to initiate today
a tightening cycle that is already overdue, with rising
utilization rates and increasing inflation expectations
raising the likelihood that inflation will soon exceed the
central bank’s target. We look for a 50bp hike but
political opposition might result in a compromise 25bp
move.
Page 2 of 2: Germany’s impressive cost
containment and Euro area imbalances
While
Greece’s fiscal progress report dominated European
politics again this week, comments by French finance
minister Lagarde to the Financial Times newspaper about the
need to rebalance demand within the Euro area also grabbed
attention. “Clearly Germany has done an awfully good job
in the last 10 years or so, improving competitiveness,
putting very high pressure on its labor costs...I’m not
sure it is a sustainable model for the long term and for the
whole of the group. Clearly we need better
convergence.”
Most often, discussions of global rebalancing pertain to the relative value of currencies, as exchange rates play an obvious role in determining the relative price of domestic versus foreign goods and services. However, given Europe’s monetary union, Germany’s trade advantage stems not from its weak currency relative to other Euro area countries, but rather its recent success in controlling labor costs per unit of output. Indeed, unit labor costs in Germany have remained fairly stable over the past decade, having risen just 5% since 2000. In comparison, unit labor costs are 20% higher in France and 30-40% higher in Italy, Spain, and Greece.
Weak compensation growth, rather than robust productivity, explains most of Germany’s ability to hold costs down relative to other Euro area countries. Productivity gains during the 2000s were quite weak across the major countries in the region, with German productivity growth lower than in France or Spain. However, Germany’s labor reforms seem to have been effective in controlling compensation growth. The OECD estimates that the average compensation rate rose just 8% in Germany from 2000 to 2009, compared to more than 20% in France and Italy, almost 40% in Spain, and 60% in Greece.
One byproduct of this labor cost disparity should be that Germany has gained competitiveness vs many Euro area neighbors in the international marketplace. One proxy for this effect is to compare their export price growth. A country with low ULC growth (Germany) should see their export prices decline relative to a country with high ULC growth (Spain). Fittingly, we see that this scenario has played out in the Euro area. Export prices rose considerably faster in Spain than in Germany during the 2000s expansion, though the recession seems to have forced a correction more recently. Admittedly, comparing export prices is an imperfect gauge of competitiveness, since we cannot control for a common export basket across countries. Indeed, German export prices actually rose relative to French export prices over the period, despite ULC dynamics.
ENDS
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