Posts Tagged ‘BRIC’


There is good and bad side to a currency falling in value. A cheaper currency is bad news for importers. It is bad news for consumers who want to pay as little as possible for the goods they buy, and for their holidays abroad. A falling currency can be bad news for inflation. But there is a flipside. It can at least hand exporters a massive terms of trade advantage. A country that needs to see exporters drive growth surely needs a cheaper currency. So why is it that the UK seems to have the bad side, but very little of the good side? A new report seems to provide an answer.

Between Q3 2007 and Q1 2009 the effective exchange rate of the pound fell 25 per cent. Inflation rose. Wage inflation didn’t, which left workers worse off. But the UK’s balance of trade in goods and services was largely unchanged. Why didn’t exports rise?

The Office of National Statistics has come up with four possible explanations.

Number one: Global supply chains. The argument runs like this: global trade has become so integrated, with supply chains being so closely in alignment, that it is very hard for a country that sits in a supply chain to suddenly start selling more goods just because prices have fallen. The ONS put it this way: “If multinational companies have an international supply chain structure, which involves moving goods and services between a number of countries before a final product is produced, it is difficult to change this structure in the short term in response to an exchange rate movement.”

Number two: Financial shock and composition of trade. This is a nice simple argument. The UK relies on financial services. In the aftermath of the 2008 crisis, financial services took the biggest hit, therefore UK imports were adversely affected.

Number three: Price effects. The ONS put it this way: “Domestic exporters – whose goods are relatively less expensive as a result of the depreciation – may choose to increase profit margins on sales to overseas customers, rather than passing on the full benefits of the exchange rate change.” There was another factor: oil. As the pound fell, the price of oil hit UK exporters.

Number four: Effect of downturn on main trading partners. This was surely the main problem for the UK. Sure, the pound was cheap, but our main trading partners – the US and the Eurozone – were in recession or even depression for many of the last few years.

So what can we take from all this, and say about what will happen to the UK next?

It does seem that the main reason why the falling pound did not lead to rising exports was short term in nature. The UK is slowly exporting more outside the Eurozone, but our exports to say the BRICS, were so tiny that it has taken time for the rise in exports to become noticeable. But the fact is that for the last couple of years export growth to China, for example, has exceeded import growth.

Ditto regarding integration within the supply chain. If it is the case that multinationals find it difficult to change their supply chain structure in the short term, this does not mean they cannot change it in the long term. The real hope, however, lies with re-shoring. If it really is the case that companies are beginning to return their manufacturing closer to where their customers are, that will lead to a slow, bit by bit improvement.

In other words, a cheap pound has not benefited UK exporters that much up to now. But that does not mean it won’t do so over the next few years

© Investment & Business News 2013

If UK consumers open their wallets and purses and start spending in any significant way soon something is wrong. But there are reasons to think that exporters and investment may lead the UK forward. This is where we enter a danger period. A recovery built on correcting imbalances will be a good thing. But recovery built on consumer debt, as rising house prices encourage them to go out and buy, would be most worrisome and may even give credence to the prophets of doom.

The truth is that growth in UK wages has been lagging behind inflation since the beginning of 2010. Savings have been much higher too. In the second quarter of 2008, the UK was entering recession, but at that point economic forecasters had not woken up to this, and many were still forecasting a mild slow down. During this quarter the UK savings ratio was just 0.2 per cent.

This was surely evidence we had entered a time of madness. But a year later, the savings ratio had risen to 8.6 per cent. That was a staggering rise. UK households, scared by the prospect of falling house prices, had hit a big red button with the legend danger emblazoned on it. They saved more, and soon after, their wages fell.

So what do you get when consumers spend a lower proportion of their wages, while wages relative to inflation fall? Answer: a very severe dip in spending. No wonder the recession was so severe.

But the solution to this problem is surely not to encourage households to save less and borrow more. It is to try to get wages to rise, and for business and the government to use the money that households are saving to fund investment. At the same time, UK company profits are surging, and corporate cash sitting in deposit accounts at UK banks has hit 25 per cent of GDP, which is a 25 year high.

The UK can go one of two ways. The money that is not being spent, and is instead sloshing around the banking system, could be used to fund mortgages and in turn create a housing boom. Writing in the ‘Telegraph’ recently, Jeremy Warner said: “UK housing was not the cause of the financial crisis; in fact, UK mortgage lending has remained a haven of calm and safety for the banks throughout the storm.” See: Unbalanced and unsustainable – this is the wrong kind of growth

Maybe he is right, but isn’t that the problem. For too long, whatever money that is available has been used to fund mortgages, even buy-to-let mortgages because they are seen as safe, instead of funding entrepreneurs and wider investment because this is seen as risky. Even many would-be entrepreneurs have been seduced by the allure of easy and low risk money from buy-to-let, and have left the path of wealth creation and joined the path of re-shuffling wealth, which is all that buy-to-let achieves.

If the UK goes down the path of creating a housing boom, the causality may be true entrepreneurism and a boom based on debt rather than productivity. Alternatively, if savings were used instead to fund investment, the result would be truly exciting.

Despite George Osborne’s efforts to administer the first of the alternatives – the cheap and easy way to growth, election victory and an unsustainable economy in which falling government debt is paid for by rising household debt – there are signs that the second approach is occurring anyway.

The UK’s export recovery has been held back by the rather unfortunate fact that the Eurozone, our largest trading partner, is in the midst of an economic depression. But since 2002 exports to China have risen sevenfold. According to a report published by the ONS a few days ago: “In the latest three months the value of exports was 17 per cent higher than the average 2012 quarterly level. Import values from China were little changed, so the trade deficit with China, which had averaged £5.2 billion a quarter in 2012 shrank to £4.8 billion in the latest three months.”

Just as is the case in the US, there are also signs of manufacturing led recovery. UK car exports are beginning to outstrip imports. There is also anecdotal evidence of companies returning their manufacturing to the UK. As Capital Economics said: “The decline in offshoring has reflected a variety of factors. For a start, the trend towards more capital intensive production as technology improves means that the savings in labour costs that can be achieved by switching production to Asia have become a smaller component of total costs.

Western manufacturers are also increasingly specialising in high-tech sectors in which production cannot necessarily be replicated elsewhere. The strengthening of Asian currencies has also reduced the savings from offshoring. In addition, fast supply chains are increasingly valued, so that production can respond quickly to consumer tastes and inventory costs can be reduced. “

As for the UK, it said: “According to the manufacturers’ organisation EEF, the proportion of firms repatriating some output rose from 15 per cent in 2009 to 40 per cent last year.” It continued: “Low-value sectors such as textiles have been declining, while high-value markets such as pharmaceuticals and transport have been growing rapidly. The destination of UK manufacturing exports has also evolved. The share of goods exports going to the fast-growing BRIC economies increased from 5 per cent in 2007 to 8 per cent last year and has also persuaded some firms to produce domestically.”

There other reasons to be optimistic. Demographics are looking favourable. Population growth in the UK in this decade is likely to be at its fastest rate since the first decade of the 20th century. The shortage of homes to population is a problem, but there are signs this may be fixed as the government tries to reform planning laws. A house price bubble will do little for the UK in the long term, but a house building boom is different thing altogether, and this may happen.

North Sea oil output is on the rise again, and the shale gas revolution may or may not be a mixed blessing, but it should at least help to promote growth. And don’t forget that in a growing global economy the UK has certain innate advantages: its time zone being one. The UK working day overlaps with working days in both California and East Asia. The fact that English is spoken rather widely in the UK is another advantage. Add to that political stability and a strong legal system.

Yet, for all that optimism, something broken remains. The UK is not well disposed to encouraging risky investment. That may not sound like such a bad thing, but remember that risk is the key to innovation and growth in the long run.

The government can do more to help and it could start by using money created by the Bank of England via QE to directly fund investment into infrastructure and in entrepreneurs.

© Investment & Business News 2013

When the UK economy was recovering in 2010 a lot of people assumed the downturn was over, that the bad economic times were drawing to a close. This column often expressed puzzlement. The markets were buoyant, but the reasons unpinning their enthusiasm seemed as solid as an especially ethereal ghost. This time it is happening again, but are there better reasons for confidence?

Actually you can really put the confidence into categories. There is confidence based on reality; based on very exciting developments. And there is confidence based on the same old ills that got us into trouble in the first place.

Recent surveys and other data have been promising. See: Can this be true: “impressive stuff on UK economy”? 

But dig deeper and there are other reasons for optimism. Take the car industry. UK car exports have soared by 178 per cent since 1998. Over the same time period, car imports have risen by 102 per cent.

The growth in exports has been constant too. In Q1 1998 they were worth £2.2 billion; in 2005 £3.2 billion; they passed £4 billion in 2008 and in Q1 of this year they were worth £6.2 billion. In fact between 1998 and the first quarter of this year, there have only been three quarters in which exports of motor vehicles exceeded imports, but those three quarters all occurred in the last 15 months. And as is the case that US companies are, as it were, re-shoring or bringing their manufacturing back to their home country, much the same thing is happening in the UK, albeit on a smaller scale, and lagging somewhat behind.

Recent Purchasing Managers’ Indices (PMIs) and a survey from the British Chamber of Commerce both point to rising exports, while data from the ONS shows that exports to China have increased seven-fold since 2002. Growth in exports to the rest of the BRICS has not been so fast, but has nonetheless been impressive. In December 2012 the BRICS collectively represented the UK’s third largest export market, behind the US and Germany. Okay imports have risen too, but in recent years the pace of export growth to the BRICS has been greater than import growth.

For years the UK relied on exporting its wares to the Eurozone. It was generally agreed that the UK needs to re-balance from consumer to export led growth, but that is not an easy thing to do when your main trading partner is in economic depression. It has taken time to reduce our reliance on this region, but at last this appears to be happening.

Looking further forward, 3D printing may provide a new opportunity. Retailers may start making clothes on demand, and shop assistants could become experts in computer aided design. We may even see the return of craftsman on the high street, making products for niche markets or on demand, using 3D printing to make products as cheaply as was once only possible with assembly line production.

Although there are reasons to be cautious about a buoyant housing market, it does appear that construction is set to take off, quite significantly.

Recently, Capital Economics said: “While some economists fear that the economy’s underlying growth rate is now as low as 1 per cent, we think that it will revert to its pre-crisis average of about 2.5per cent. Demographic developments should remain favourable. The rate of technological progress should remain strong. And the reduction in the role of the public sector in the economy will create opportunities for more efficient firms.”

But, and this is the really promising bit, Capital Economics reckons growth will be around 4 per cent a year in the UK during the second half of this decade as the economy catches up with potential after years of operating below potential.

So far so good. But what are the catches?

Well there are several. For one thing, wages are still not growing as fast as prices. This means that workers are finding that month on month they are worse off than they were a year previously.

Here are two more catches and they go like this: UK house prices are too high, and UK households are in too much debt. See: Is that a sword of Damocles hanging over the UK housing market? 

© Investment & Business News 2013


As we slowly move towards a post QE world, or at least post US QE world, things start to look very different. Countries that seemed unstoppable a few years ago look vulnerable. Perhaps the three countries to suffer the biggest knocks in recent days have been Brazil, Turkey and South Africa – all have seen their currencies fall sharply. In two of these countries we have also seen street protests.

Yesterday it was Brazil’s turn to be seen in an unpleasant limelight, as Brazilians took to the street to protest over a multitude of woes – among them the cost of hosting the forthcoming World Cup and the Olympics. Meanwhile credit ratings agency S&P has downgraded Brazil’s sovereign debt outlook – it is still rated as BBB, but now it is under a negative outlook.

Look beneath the surface and the threats to Brazil look worrying indeed.
For one thing, Brazil’s current account has fallen from a small surplus in 2007 to a deficit worth around 2.3 per cent of GDP in 2012. What Brazil needs is more investment, higher domestic savings to partly fund the investment, and a cheaper currency to give exporters an advantage. Alas it also needs much lower inflation. The IMF has forecast Brazilian inflation at 6.1 per cent this year. Interest rates are currently at 8 per cent. To fight off inflation, Brazil needs a strong currency. Do you see the dilemma?

The savings ratio in Brazil is the lowest amongst both the BRICS and in Latin America. Part of the problem is a very generous state pension scheme. This needs to be reduced, but street protestors may not be too happy with that idea.

At face value, government debt in Brazil does not seem so bad. In fact net debt is 35 per cent of GDP. Wouldn’t the US and the UK love it if their equivalent measure was so low? It is just that net debt is made up of gross debt minus assets, and many of the assets that count towards Brazil’s net debt are highly illiquid and risky. Capital Economics reckons a better measure of net debt would be around 50 per cent of GDP.

Brazil is posting a primary budget surplus, meaning government receipts are greater than expenses before interest on debt – but, thank to high interest rates, Brazilian public debt is rising.

And there is a much deeper woe. Commodity prices have been falling of late, and many, including the World Bank for example, are now forecasting a new phase in what’s called the commodity super cycle, as the massive levels of investment into commodities during the up phase of the super cycle leads to greater supply.

The last few years have been characterised by high commodity prices, poor economic performance in the developed world, and cheap money. As we enter a post QE world, it appears we may also enter a phase of lower commodity prices. For Brazil this may be a perfect storm.

This does not mean that the Brazilian growth story is over, but remember markets tend to overreact and Brazil may be one of the big victims of post QE over-reaction.

© Investment & Business News 2013

The US household is cutting debt.

In fact it has cut debt so much, there is even talk that the good old boys (and girls) who constitute the US consumer will soon be well placed to hit the plastic, open up their wallets and purses and spend like they used to. In short, the US consumer may be close to once again becoming the lynch pin of the global economy. That’s good news right?

Oddly, the markets are panicking. There is talk of a bond bubble. Across the developed world many countries are heavily exposed. But is it is the emerging markets, and the BRICS in particular, who seem to be most in danger?

Today’s series of articles delves deeper. Here is the really good news, however; opportunity knocks for those who keep their nerve and can rise above market fashion.

© Investment & Business News 2013


There seems to be as many reasons for the protests in Turkey as there are protestors. Protestors appear to have quite different ideologies, quite different beliefs, although a desire for more secular politics seems to be a common thread.

But what about the economy?

The Turkish economy has been seen by many as one of the most exciting economies in the world. Indeed, it is one of the TIMPs – Turkey, Indonesia, Mexico and Philippines, the economies that may take over from the BRICS as the countries for investors to plough their money into.

Turkey’s main stock market index, the Borsa Istanbul 100, surged some 50 per cent over the 12 months to 22 May – an all-time high. In fact, the index more than trebled between September 2009 and the peak price two weeks ago.

Not surprisingly, the index has since fallen sharply, down some 10 per cent over the last fortnight

But then again, there might be explanations other than protests for the fall.

Turkey’s problem is its trade deficit and overseas debt. The IMF predicts that its trade deficit will be around 7.3 per cent of GDP next year. Unemployment, by the way, is currently 9.4 per cent, that’s low by, say, Spanish standards, but too high for comfort. Maybe this was a contributing factor to the protests.

According to Capital Economics, Turkey’s gross external financing requirement, that is to say its current account deficit plus debts maturing over the next 12 months, is 200bn, which is roughly 25 per cent of GDP. In fact, its external financing requirement has doubled since 2008.

Many people believe QE has created a bubble in bond prices, that by buying government bonds, central banks have artificially inflated prices, meaning the market for bonds is set for one mighty fall. This may or may not be right, but it is clear that emerging market bonds carry greater exposure than bonds pertaining to, say, the US, UK or Germany.

When it comes to emerging market bonds and the risk of a crash, Turkey is near the top of the pile – unlike, for example, much of South East Asia that this time around, unlike in 1997, has managed to fund much of its debt internally and in any case has not run the kind of debt levels seen in the past.

© Investment & Business News 2013


The BRICS are not what they were. Maybe it is time to look elsewhere.

Take news out this morning. According to Capital Economics, growth in GDP across emerging markets may have fallen to a three year low. Other data revealed that the Brazilian economy grew by just 0.6 per cent in Q1. But despite the lacklustre growth, fears over inflation have forced Brazil’s central bank to up interest rates by half a per cent. Looking at other data out today revealed that the economy of the Philippines grew by 7.8 per cent.

The BRICS have problems. China is struggling to adjust from a growth model that relies on exports and investment to one that grows off the back of consumer spending. In short China needs more internal impetus for growth. Brazil’s problem is the opposite: too much reliance on consumers and not enough investment.

News on the Indian economy has been a disappointment, as the country fails to make the reforms necessary to compete on the international markets. As for Russia, it remains over-reliant on oil and gas and Capital Economics forecasts it will grow by just 2.3 per cent this year.

In contrast, the TIMPs – that’s Turkey, Indonesia Mexico and the Philippines – look a lot more interesting. As indeed does Malaysia, Thailand, Vietnam, Chile, Columbia and parts of Central America – such as Panama.

The stock markets of the Philippines and Thailand have been the second and third best performing in the world during the last two years. (Venezuela was first, but this market is small and very illiquid.)

Stock market growth does, of course, bring with it the risk of stocks rising too high. The Philippines’ stock market is trading on a valuation of around 20 times 2013 earnings, but less than the p/e ratio seen before the Asian crisis in 1997.

The Asian crisis of 1997 rocked the South East Asian region hard. Are we in danger of seeing a repeat of this episode? This time around there is a difference. The savings ratio in Singapore last year was 49 per cent of GDP, and 39 per cent of GDP in Malaysia.

The biggest economy in the region is Indonesia. Some reports have suggested a credit bubble may be forming in the country. It may be worth pointing out that in Indonesia the ratio of credit to GDP is 30 per cent, against an average of nearer 100 per cent for the region. More interestingly, in Indonesia a smaller proportion of credit has funded projects in the property sector, relative to Hong Kong and Vietnam, for example.

As a result there is little hint of a property bubble in the making. Instead, much of the credit has funded infrastructure and manufacturing. In 1997 around 50 per cent of Indonesia’s credit was funded by foreign currencies. Today that level is nearer 15 per cent.

© Investment & Business News 2013