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Michael Baxter

Bull and bear: World’s central bank warns of zombies

Written by: Michael Baxter on June 24th 2013

Category: Bull & Bear, News

Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories include:  World’s central bank warns of zombies. BIS calls for tighter fiscal and monetary policy. Saving for a pension costs you money. Merkel’s  “Neuland” Gaff. German economy picks up. UK public finance improve, by looking worse


Bull and bear: World’s central bank warns of zombies

At the end of last year, this column predicted that by June this year, when the film ‘World War Z’ was on general release, the media would draw parallels between zombies as portrayed in the new film, and the economy. Well, the film is out. So far, the dots have not been connected, but the Bank of International Settlements (BIS) has come the closest of the world’s leading economics organisations to do so.

In a report published today it said: “Productivity gains and employment in the major advanced economies have sagged in recent years, especially where pre-crisis growth was severely unbalanced. Before they can return to sustainable growth, these countries will need to reallocate labour and capital across sectors. Structural rigidities that hamper this process are likely to hold back the economy’s productive potential. Both productivity and employment tend to be weaker in economies with rigid product markets than in ones with more flexible ones. Similarly, employment rates tend to be lower where labour markets are more rigid. Conversely, countries with flexible labour markets recover more quickly from severely imbalanced downturns. They also create more jobs. Reforms that enhance the flexibility of labour and product markets could be swiftly rewarded with improved growth and employment.”

So there you have it. It is time for a bout of creative destruction.

It is just that the creative destruction argument only really makes sense in an economy/sector that is running at full capacity. There may be some truth in this across some sectors; for example, anecdotal evidence suggests that the UK car industry’s resurgence may be being held back by lack of resources, as inefficient companies propped up by low interest rates clog off the supply of labour. Right now, however, across much of the developed world, especially in Europe, unemployment is so massive that the argument that we need to see destruction to create room for new industries seems ridiculous.

In the US we saw an unusual mix of creative destruction and stimulus. Softer laws in the US on bankruptcy saw the likes of GM file Chapter 11 and come out looking stronger than it has looked for years. Likewise, the rules on possession in the US housing market gave the US economy a very different look and feel. In the US, if your home is repossessed, and the home is worth less than your mortgage, then repaying the difference is down to the bank not you. The result of this policy has been much sharper falls in US house prices compared to those in the UK, but then again it has seen a much quicker recovery for the US economy.

But while more of its companies went bust, the US was far more supportive with fiscal and monetary policy.

So in the US we saw both creative destruction and support.

In the Eurozone, and to a lesser extent in the UK, we have seen the opposite.

Part of what the BIS says is right. The Eurozone does need a more UK-like flexible labour market.

But there was another aspect to the BIS report, is that is harder to welcome.


BIS calls for tighter fiscal and monetary policy

While the IMF has been saying that the US has been cutting back too soon, the BIS has had called for governments to start repairing balance sheets. It said: “Governments must redouble their efforts to ensure the sustainability of their finances,” and central banks: “must re-emphasise their stability-oriented framework for monetary policy,” In other words, central banks need to stop QE and start upping interest rates.

Bear:     But the BIS is trying to paint a picture with a paintbrush that is far too broad.

Yes the Eurozone needs more US-style flexibility. But if the ECB does what the BIS is suggesting and goes hawkish on monetary policy at this time, such a policy could send the region into even deeper depression.

The Eurozone needs policies that are a lot closer to those adopted in the US over the last few years. What it does not need, however, is to follow US policies now, while the US is recovering without ever having adopted US expansionary policies in the first place.

Saving for a pension costs you money

It is time that pension schemes came with a new disclaimer: “Warning By HM government: saving for a pension can seriously damage your financial health.”

According to a new report from EuroFinUse: “Over the last 5 years, real returns from private pension funds (after inflation) have been negative in many EU Member States. They have failed to hold their purchasing power, setting a gloomy outlook for tomorrow’s pensioners.”

The report from EuroFinUse referred to data produced by the OECD.

It said that, according to a OECD study, for the products and countries covered there has been “on average, nearly flat real returns (+0.1 per cent) over the last 10 years… and negative returns (-1.6 per cent) over the last five years.” EuroFinUse said: “Despite such concerning results, the OECD still strongly recommends that citizens should make a greater contribution to personal pension provision.”

This is where it gets damning. EuroFinUse said: “When advising people to save more, public authorities should bear in mind that pension saving products are in many cases destroying real value of citizens’ savings. This is why providers and public authorities should seek to protect the long-term purchasing power of savings, before advising citizens to increase those.”

This is all disturbing stuff, but then if you are reading this article, by definition you may already hold similar thoughts of your own. During the last few years, a time when equities have enjoyed a strong rally, many pension funds have piled money into so called risk-free assets, and as a result, have been “destroying real value of citizens’ savings.”

There are two related lessons from this. If you want to reduce risk in the long term, you may need to take more short term risk. And don’t rely on pension funds as your only means of saving for the future.

Merkel’s “Neuland” Gaff.

Did you hear the one about Angela Merkel? Last week she had a friend around for tea, a bloke called Barack Obama. And as you may have heard, at the moment Mr Obama has a few issues with the internet and spying: namely should he try to have Ecuadorian authorities release a former US agent – seen by many freedom loving westerners as a hero – so that he can be carted off to Guantanamo Bay? As an aside, does anyone else think that Edward Snowdon looks like a caricature of a ‘Guardian’ reader?

But at one of those press conferences, in which Mr Obama and, in this case, Mrs Merkel answered press questions, someone asked for the German leader’s views on the latest spying rows. She replied that the internet is “uncharted territory… for all of us.” Or to quote the German, she used the word “Neuland.”

And for some reason, in Germany the media/twitter sphere has pounced.

The press inference is that the Germany leader has only just realised there is this thing called the internet. A little harsh perhaps, but that’s the latest view in Germany.

German economy picks up

Talking of the view on Germany, the latest economic surveys have been encouraging.

In fact, it has been something of a hat trick for Germany in the last few days.

The latest flash composite PMI tracking Germany manufacturing and services was better in June – hitting a four month high and pointing to mild growth. The latest ZEW Index – a measure of investors’ sentiments on Germany – has risen for two months in a row, and is now consistent with Germany’s growth rising from an annual rate of minus 0.3 per cent in Q1 to 2 per cent expansion in Q2. And this morning the latest IFO Index was out, and that too pointed to a growth rate of around 2 per cent per year.

The bearish comment relates to German retail spending, with the Germany retail index recently falling to its lowest level since last October.

UK public finances improve, by looking worse

The latest news on the UK’s public finances was mildly encouraging, but the headlines tell a different story. Last month public sector net borrowing – excluding temporary effects of financial interventions – was £8.8 billion. This is £6.9 billion lower than in May 2012 when it was £15.6 billion. So that is good.

However, £3.9 billion worth of transfers from the Bank of England Asset Purchase Facility Fund and £3.2 billion from retrospective tax payments by Swiss banks boosted the figures. Ignore these one-offs, and actually May 2013 was not much different to May 2012.

For the year to April however, borrowing was up on the year before, admittedly only by the smallest of margins. Underlying public sector borrowing was £118.8bn in the year to April compared to £118.5bn in 2011-12.

That’s not so good.

Other than that the comparison is not really that meaningful. The ONS did in fact revise its estimate for borrowing in the year 2011/12 downwards, which is a good thing. It is just that it has not yet got around to revising its estimates for 2012/13, and indeed won’t do so for some time.

In other words, the first estimate of government borrowing in 2012/13 was lower than the first estimate of government borrowing in 2011/12, but the first estimate of government borrowing in 2012/13 was higher than the latest estimate of government borrowing in 2011/12.

In other words, we don’t really know how things compare with last year, yet, but we do know it is a pretty close thing.


These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: austerity economics, Bank of International Settlements, creative destruction, German economy, Neuland, pension returns negative, public debt, Saving for a pension

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