United States Commercial Banks Assets and Liabilities, Collapse of United States Dynamism of Income Growth and Employment Creation, Squeeze of Economic Activity by Carry Trades Induced by Zero Interest Rates, Peaking Valuations of Risk Financial Assets, World Economic Slowdown and Global Recession Risk
Carlos M. Pelaez
© Carlos M. Pelaez, 2010, 2011, 2012, 2013
Executive Summary
I United States Commercial Banks Assets and Liabilities
IA1 Transmission of Monetary Policy
IA2 Functions of Banks
IA3 United States Commercial Banks Assets and Liabilities
IA4 Theory and Reality of Economic History and Monetary Policy Based on Fear of Deflation
IB Collapse of United States Dynamism of Income Growth and Employment Creation
II United States Industrial Production
III World Financial Turbulence
IIIA Financial Risks
IIIE Appendix Euro Zone Survival Risk
IIIF Appendix on Sovereign Bond Valuation
IV Global Inflation
V World Economic Slowdown
VA United States
VB Japan
VC China
VD Euro Area
VE Germany
VF France
VG Italy
VH United Kingdom
VI Valuation of Risk Financial Assets
VII Economic Indicators
VIII Interest Rates
IX Conclusion
References
Appendixes
Appendix I The Great Inflation
IIIB Appendix on Safe Haven Currencies
IIIC Appendix on Fiscal Compact
IIID Appendix on European Central Bank Large Scale Lender of Last Resort
IIIG Appendix on Deficit Financing of Growth and the Debt Crisis
IIIGA Monetary Policy with Deficit Financing of Economic Growth
IIIGB Adjustment during the Debt Crisis of the 1980s
III World Financial Turbulence. Financial markets are being shocked by multiple factors including (1) world economic slowdown; (2) slowing growth in China with political development and slowing growth in Japan and world trade; (3) slow growth propelled by savings/investment reduction in the US with high unemployment/underemployment, falling wages, hiring collapse, contraction of real private fixed investment, decline of wealth of households over the business cycle by 8.4 percent adjusted for inflation while growing 617.2 percent adjusted for inflation from IVQ1945 to IVQ2012 and unsustainable fiscal deficit/debt threatening prosperity that can cause risk premium on Treasury debt with Himalayan interest rate hikes; and (3) the outcome of the sovereign debt crisis in Europe. This section provides current data and analysis. Subsection IIIA Financial Risks provides analysis of the evolution of valuations of risk financial assets during the week. There are various appendixes for convenience of reference of material related to the euro area debt crisis. Some of this material is updated in Subsection IIIA when new data are available and then maintained in the appendixes for future reference until updated again in Subsection IIIA. Subsection IIIB Appendix on Safe Haven Currencies discusses arguments and measures of currency intervention and is available in the Appendixes section at the end of the blog comment. Subsection IIIC Appendix on Fiscal Compact provides analysis of the restructuring of the fiscal affairs of the European Union in the agreement of European leaders reached on Dec 9, 2011 and is available in the Appendixes section at the end of the blog comment. Subsection IIID Appendix on European Central Bank Large Scale Lender of Last Resort considers the policies of the European Central Bank and is available in the Appendixes section at the end of the blog comment. Appendix IIIE Euro Zone Survival Risk analyzes the threats to survival of the European Monetary Union and is available following Subsection IIIA. Subsection IIIF Appendix on Sovereign Bond Valuation provides more technical analysis and is available following Subsection IIIA. Subsection IIIG Appendix on Deficit Financing of Growth and the Debt Crisis provides analysis of proposals to finance growth with budget deficits together with experience of the economic history of Brazil and is available in the Appendixes section at the end of the blog comment.
IIIA Financial Risks. The past half year has been characterized by financial turbulence, attaining unusual magnitude in recent months. Table III-1, updated with every comment in this blog, provides beginning values on Fr Mar 15 and daily values throughout the week ending on Mar 22, 2013 of various financial assets. Section VI Valuation of Risk Financial Assets provides a set of more complete values. All data are for New York time at 5 PM. The first column provides the value on Fri Mar 15 and the percentage change in that prior week below the label of the financial risk asset. For example, the first column “Fri Mar 15, 2013”, first row “USD/EUR 1.3076 -0.6%,” provides the information that the US dollar (USD) depreciated 0.6 percent to USD 1.3076/EUR in the week ending on Fri Mar 15 relative to the exchange rate on Fri Mar 8. The first five asset rows provide five key exchange rates versus the dollar and the percentage cumulative appreciation (positive change or no sign) or depreciation (negative change or negative sign). Positive changes constitute appreciation of the relevant exchange rate and negative changes depreciation. Financial turbulence has been dominated by reactions to the new program for Greece (see section IB in http://cmpassocregulationblog.blogspot.com/2011/07/debt-and-financial-risk-aversion-and.html), modifications and new approach adopted in the Euro Summit of Oct 26 (European Commission 2011Oct26SS, 2011Oct26MRES), doubts on the larger countries in the euro zone with sovereign risks such as Spain and Italy but expanding into possibly France and Germany, the growth standstill recession and long-term unsustainable government debt in the US, worldwide deceleration of economic growth and continuing waves of inflation. The most important current shock is that resulting from the agreement by European leaders at their meeting on Dec 9 (European Council 2911Dec9), which is analyzed in IIIC Appendix on Fiscal Compact. European leaders reached a new agreement on Jan 30 (http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/127631.pdf) and another agreement on Jun 29, 2012 (http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/131388.pdf).
The dollar/euro rate is quoted as number of US dollars USD per one euro EUR, USD 1.3076/EUR in the first row, first column in the block for currencies in Table III-1 for Fri Mar 15, appreciating to USD 1.2956/EUR on Mon Mar 18, 2013, or by 0.9 percent. The dollar appreciated because fewer dollars, $1.2956, were required on Mon Mar 18 to buy one euro than $1.3076 on Mar 15. Table III-1 defines a country’s exchange rate as number of units of domestic currency per unit of foreign currency. USD/EUR would be the definition of the exchange rate of the US and the inverse [1/(USD/EUR)] is the definition in this convention of the rate of exchange of the euro zone, EUR/USD. A convention used throughout this blog is required to maintain consistency in characterizing movements of the exchange rate such as in Table III-1 as appreciation and depreciation. The first row for each of the currencies shows the exchange rate at 5 PM New York time, such as USD 1.3076/EUR on Mar 15; the second row provides the cumulative percentage appreciation or depreciation of the exchange rate from the rate on the last business day of the prior week, in this case Fri Mar 15, to the last business day of the current week, in this case Fri Mar 22, such as appreciation to USD 1.2988/EUR by Mar 22; and the third row provides the percentage change from the prior business day to the current business day. For example, the USD appreciated (denoted by positive sign) by 0.7 percent from the rate of USD 1.3076/EUR on Fri Mar 15 to the rate of USD 1.2988/EUR on Fri Mar 22 {[(1.2988/1.3076) – 1]100 = -0.7%} and depreciated (denoted by negative sign) by 0.7 percent from the rate of USD 1.2899 on Thu Mar 21 to USD 1.2988/EUR on Fri Mar 22 {[(1.2988/1.2899) -1]100 = 0.7%}. Other factors constant, appreciation of the dollar relative to the euro is caused by increasing risk aversion, with rising uncertainty on European sovereign risks increasing dollar-denominated assets with sales of risk financial investments. Funds move away from higher yielding risk financial assets to the safety of dollar investments. When risk aversion declines, funds have been moving away from safe assets in dollars to risk financial assets, depreciating the dollar.
Table III-I, Weekly Financial Risk Assets Mar 18 to, 2013
| Fri Mar 15, 2013 | M 18 | Tue 19 | W 20 | Thu 21 | Fr 22 |
| USD/EUR 1.3076 -0.6% | 1.2956 0.9% 0.9% | 1.2883 1.5% 0.6% | 1.2936 1.1% -0.4% | 1.2899 1.4% 0.3% | 1.2988 0.7% -0.7% |
| JPY/ USD 95.29 0.8% | 95.21 0.1% 0.1% | 95.17 0.1% 0.0% | 96.01 -0.8% -0.9% | 94.91 0.4% 1.1% | 94.51 0.8% 0.4% |
| CHF/ USD 0.9386 1.4% | 0.9460 -0.8% -0.8% | 0.9469 -0.9% -0.1% | 0.9452 -0.7% 0.2% | 0.9464 -0.8% -0.1% | 0.9408 -0.2% 0.6% |
| CHF/ EUR 1.2273 0.8% | 1.2240 0.3% 0.3% | 1.2201 0.6% 0.3% | 1.2219 0.4% -0.1% | 1.2213 0.5% 0.0% | 1.2217 0.5% 0.0% |
| USD/ AUD 1.0410 0.9606 | 1.0402 0.9614 -0.1% -0.1% | 1.0370 0.9643 -0.4% -0.3% | 1.0379 0.9635 -0.3% 0.1% | 1.0441 0.9578 0.3% 0.6% | 1.0445 0.9574 0.3% 0.0% |
| 10 Year T Note 1.992 | 1.956 | 1.901 | 1.954 | 1.919 | 1.931 |
| 2 Year T Note 0.246 | 0.244 | 0.236 | 0.252 | 0.248 | 0.242 |
| German Bond 2Y 0.05 10Y 1.46 | 2Y 0.02 10Y 1.41 | 2Y 0.00 10Y 1.35 | 2Y 0.02 10Y 1.39 | 2Y 0.03 10Y 1.37 | 2Y 0.03 10Y 1.38 |
| DJIA 14514.11 0.8% | 14452.06 -0.4% -0.4% | 14455.82 -0.4% 0.0% | 14511.73 0.0% 0.4% | 14421.49 -0.6% -0.6% | 14512.03 0.0% 0.6% |
| DJ Global 2143.58 0.8% | 2117.76 -1.2% -1.2% | 2109.21 -1.6% -0.4% | 2118.27 -1.2% 0.4% | 2110.51 -1.5% -0.4% | 2118.89 -1.2% 0.4% |
| DJ Asia Pacific 1393.74 1.0% | 1369.32 -1.8% -1.8% | 1377.05 -1.2% 0.6% | 1372.79 -1.5% -0.3% | 1381.70 -0.9% 0.6% | 1372.98 -1.5% -0.6% |
| Nikkei 12560.95 2.3% | 12220.63 -2.7% -2.7% | 12468.23 -0.7% 2.0% | 12468.23 -0.7% 0.0% | 12635.69 0.6% 1.3% | 12338.53 -1.8% -2.4% |
| Shanghai 2278.40 -1.7% | 2240.02 -1.7% -1.7% | 2257.43 -0.9% 0.8% | 2317.37 1.7% 2.7% | 2324.24 2.0% 0.3% | 2328.28 2.2% 0.2% |
| DAX 8042.85 0.7% | 8010.70 -0.4% -0.4% | 7947.79 -1.2% -0.8% | 8001.97 -0.5% 0.7% | 7932.51 -1.4% -0.9% | 7911.35 -1.6% -0.3% |
| DJ UBS Comm. 138.37 0.8% | 137.52 -0.6% -0.6% | 137.38 -0.7% -0.1% | 138.14 -0.2% 0.6% | 138.00 -0.3% -0.1% | 138.01 -0.3% 0.0% |
| WTI $ B 93.59 1.9% | 93.74 0.2% 0.2% | 92.16 -1.5% -1.7% | 93.45 -0.1% 1.4% | 92.43 -1.2% -1.1% | 93.89 0.3% 1.6% |
| Brent $/B 110.00 -0.7% | 109.46 -0.5% -0.5% | 107.54 -2.2% -1.8% | 108.57 -1.3% 0.9% | 107.20 -2.5% -1.3% | 107.65 -2.1% 0.4% |
| Gold $/OZ 1590.9 0.8% | 1604.0 0.8% 0.8% | 1611.60 1.3% 0.5% | 1605.0 0.9% -0.4% | 1614.1 1.5% 0.6% | 1607.4 1.0% -0.4% |
Note: USD: US dollar; JPY: Japanese Yen; CHF: Swiss
Franc; AUD: Australian dollar; Comm.: commodities; OZ: ounce
Sources: http://www.bloomberg.com/markets/
http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata
Discussion of current and recent risk-determining events is followed below by analysis of risk-measuring yields of the US and Germany and the USD/EUR rate. The European sovereign debt crisis continues to shake financial markets and the world economy. Debt resolution within the international financial architecture requires that a country be capable of borrowing on its own from the private sector. Mechanisms of debt resolution have included participation of the private sector (PSI), or “bail in,” that has been voluntary, almost coercive, agreed and outright coercive (Pelaez and Pelaez, International Financial Architecture: G7, IMF, BIS, Creditors and Debtors (2005), Chapter 4, 187-202). Private sector involvement requires losses by the private sector in bailouts of highly indebted countries. The essence of successful private sector involvement is to recover private-sector credit of the highly indebted country. Mary Watkins, writing on “Bank bailouts reshuffle risk hierarchy,” published on Mar 19, 2013, in the Financial Times (http://www.ft.com/intl/cms/s/0/7666546a-9095-11e2-a456-00144feabdc0.html#axzz2OSpbvCn8) analyzes the impact of the bailout or resolution of Cyprus banks on the hierarchy of risks of bank liabilities. Cyprus banks depend mostly on deposits with less reliance on debt, raising concerns in creditors of fixed-income debt and equity holders in banks in the euro area. Uncertainty remains as to the dimensions and structure of losses in private sector involvement or “bail in” in other rescue programs in the euro area. Joshua Chaffin, writing on “Cyprus leader in last-ditch bailout talks,” published on Mar 24, 2013 in the Financial Times (http://www.ft.com/intl/cms/s/0/6f68aee4-946c-11e2-b822-00144feabdc0.html#axzz2OSpbvCn8), analyzes the urgency of negotiations between Cyprus and the troika of European Union, International Monetary Fund (IMF) and European Central Bank (ECB) to reach a bailout agreement before the deadlines imposed by the European Central Bank to interrupt financing to the financial system of Cyprus by Mon Mar 25, 2013. The overwhelming risk factor is the unsustainable Treasury deficit/debt of the United States (http://cmpassocregulationblog.blogspot.com/2013/02/united-states-unsustainable-fiscal.html). Another rising risk is division within the Federal Open Market Committee (FOMC) on risks and benefits of current policies as expressed in the minutes of the meeting held on Jan 29-30, 2013 (http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20130130.pdf 13):
“However, many participants also expressed some concerns about potential costs and risks arising from further asset purchases. Several participants discussed the possible complications that additional purchases could cause for the eventual withdrawal of policy accommodation, a few mentioned the prospect of inflationary risks, and some noted that further asset purchases could foster market behavior that could undermine financial stability. Several participants noted that a very large portfolio of long-duration assets would, under certain circumstances, expose the Federal Reserve to significant capital losses when these holdings were unwound, but others pointed to offsetting factors and one noted that losses would not impede the effective operation of monetary policy.
Jon Hilsenrath and Victoria McGrane, writing on “Fed slip over how long to keep cash spigot open,” published on Feb 20, 2013 in the Wall street Journal (http://professional.wsj.com/article/SB10001424127887323511804578298121033876536.html), analyze the minutes of the Fed, comments by members of the FOMC and data showing increase in holdings of riskier debt by investors, record issuance of junk bonds, mortgage securities and corporate loans.
A competing event is the high level of valuations of risk financial assets (http://cmpassocregulationblog.blogspot.com/2013/01/peaking-valuation-of-risk-financial.html). Matt Jarzemsky, writing on Dow industrials set record,” on Mar 5, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324156204578275560657416332.html), analyzes that the DJIA broke the closing high of 14164.53 set on Oct 9, 2007, and subsequently also broke the intraday high of 14198.10 reached on Oct 11, 2007. The DJIA closed at 14512.03 on Fri Mar 22, 2013, which is higher by 2.5 percent than the value of 14,164.52 reached on Oct 9, 2007 and higher by 2.2 percent than the value of 14,198.10 reached on Oct 11, 2007. Values of risk financial are approaching or exceeding historical highs. Jon Hilsenrath, writing on “Jobs upturn isn’t enough to satisfy Fed,” on Mar 8, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324582804578348293647760204.html), finds that much stronger labor market conditions are required for the Fed to end quantitative easing. Unconventional monetary policy with zero interest rates and quantitative easing is quite difficult to unwind because of the adverse effects of raising interest rates on valuations of risk financial assets and home prices, including the very own valuation of the securities held outright in the Fed balance sheet. Gradual unwinding of 1 percent fed funds rates from Jun 2003 to Jun 2004 by seventeen consecutive increases of 25 percentage points from Jun 2004 to Jun 2006 to reach 5.25 percent caused default of subprime mortgages and adjustable-rate mortgages linked to the overnight fed funds rate. The zero interest rate has penalized liquidity and increased risks by inducing carry trades from zero interest rates to speculative positions in risk financial assets. There is no exit from zero interest rates without provoking another financial crash.
An important risk event is the reduction of growth prospects in the euro zone discussed by European Central Bank President Mario Draghi in “Introductory statement to the press conference,” on Dec 6, 2012 (http://www.ecb.int/press/pressconf/2012/html/is121206.en.html):
“This assessment is reflected in the December 2012 Eurosystem staff macroeconomic projections for the euro area, which foresee annual real GDP growth in a range between -0.6% and -0.4% for 2012, between -0.9% and 0.3% for 2013 and between 0.2% and 2.2% for 2014. Compared with the September 2012 ECB staff macroeconomic projections, the ranges for 2012 and 2013 have been revised downwards.
The Governing Council continues to see downside risks to the economic outlook for the euro area. These are mainly related to uncertainties about the resolution of sovereign debt and governance issues in the euro area, geopolitical issues and fiscal policy decisions in the United States possibly dampening sentiment for longer than currently assumed and delaying further the recovery of private investment, employment and consumption.”
Reuters, writing on “Bundesbank cuts German growth forecast,” on Dec 7, 2012, published in the Financial Times (http://www.ft.com/intl/cms/s/0/8e845114-4045-11e2-8f90-00144feabdc0.html#axzz2EMQxzs3u), informs that the central bank of Germany, Deutsche Bundesbank reduced its forecast of growth for the economy of Germany to 0.7 percent in 2012 from an earlier forecast of 1.0 percent in Jun and to 0.4 percent in 2012 from an earlier forecast of 1.6 percent while the forecast for 2014 is at 1.9 percent.
The major risk event during earlier weeks was sharp decline of sovereign yields with the yield on the ten-year bond of Spain falling to 5.309 percent and that of the ten-year bond of Italy falling to 4.473 percent on Fri Nov 30, 2012 and 5.366 percent for the ten-year of Spain and 4.527 percent for the ten-year of Italy on Fri Nov 14, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). Vanessa Mock and Frances Robinson, writing on “EU approves Spanish bank’s restructuring plans,” on Nov 28, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887323751104578146520774638316.html?mod=WSJ_hp_LEFTWhatsNewsCollection), inform that the European Union regulators approved restructuring of four Spanish banks (Bankia, NCG Banco, Catalunya Banc and Banco de Valencia), which helped to calm sovereign debt markets. Harriet Torry and James Angelo, writing on “Germany approves Greek aid,” on Nov 30, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887323751104578150532603095790.html?mod=WSJ_hp_LEFTWhatsNewsCollection), inform that the German parliament approved the plan to provide Greece a tranche of €44 billion in promised financial support, which is subject to sustainability analysis of the bond repurchase program later in Dec 2012. A hurdle for sustainability of repurchasing debt is that Greece’s sovereign bonds have appreciated significantly from around 24 percent for the bond maturing in 21 years and 20 percent for the bond maturing in 31 years in Aug 2012 to around 17 percent for the 21-year maturity and 15 percent for the 31-year maturing in Nov 2012. Declining years are equivalent to increasing prices, making the repurchase more expensive. Debt repurchase is intended to reduce bonds in circulation, turning Greek debt more manageable. Ben McLannahan, writing on “Japan unveils $11bn stimulus package,” on Nov 30, 2012, published in the Financial Times (http://www.ft.com/intl/cms/s/0/adc0569a-3aa5-11e2-baac-00144feabdc0.html#axzz2DibFFquN
), informs that the cabinet in Japan approved another stimulus program of $11 billion, which is twice larger than another stimulus plan in late Oct and close to elections in Dec. Henry Sender, writing on “Tokyo faces weak yen and high bond yields,” published on Nov 29, 2012 in the Financial Times (http://www.ft.com/intl/cms/s/0/9a7178d0-393d-11e2-afa8-00144feabdc0.html#axzz2DibFFquN), analyzes concerns of regulators on duration of bond holdings in an environment of likelihood of increasing yields and yen depreciation.
First, Risk-Determining Events. The European Council statement on Nov 23, 2012 asked the President of the European Commission “to continue the work and pursue consultations in the coming weeks to find a consensus among the 27 over the Union’s Multiannual Financial Framework for the period 2014-2020” (http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/133723.pdf) Discussions will continue in the effort to reach agreement on a budget: “A European budget is important for the cohesion of the Union and for jobs and growth in all our countries” (http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/133723.pdf). There is disagreement between the group of countries requiring financial assistance and those providing bailout funds. Gabrielle Steinhauser and Costas Paris, writing on “Greek bond rally puts buyback in doubt,” on Nov 23, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324352004578136362599130992.html?mg=reno64-wsj) find a new hurdle in rising prices of Greek sovereign debt that may make more difficult buybacks of debt held by investors. European finance ministers continue their efforts to reach an agreement for Greece that meets with approval of the European Central Bank and the IMF. The European Council (2012Oct19 http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/133004.pdf ) reached conclusions on strengthening the euro area and providing unified financial supervision:
“The European Council called for work to proceed on the proposals on the Single Supervisory Mechanism as a matter of priority with the objective of agreeing on the legislative framework by 1st January 2013 and agreed on a number of orientations to that end. It also took note of issues relating to the integrated budgetary and economic policy frameworks and democratic legitimacy and accountability which should be further explored. It agreed that the process towards deeper economic and monetary union should build on the EU's institutional and legal framework and be characterised by openness and transparency towards non-euro area Member States and respect for the integrity of the Single Market. It looked forward to a specific and time-bound roadmap to be presented at its December 2012 meeting, so that it can move ahead on all essential building blocks on which a genuine EMU should be based.”
Buiter (2012Oct15) finds that resolution of the euro crisis requires full banking union together with restructuring the sovereign debt of at least four and possibly total seven European countries. The Bank of Spain released new data on doubtful debtors in Spain’s credit institutions (http://www.bde.es/bde/en/secciones/prensa/Agenda/Datos_de_credit_a6cd708c59cf931.html). In 2006, the value of doubtful credits reached €10,859 million or 0.7 percent of total credit of €1,508,626 million. In Aug 2012, doubtful credit reached €178,579 million or 10.5 percent of total credit of €1,698,714 million.
There are three critical factors influencing world financial markets. (1) Spain could request formal bailout from the European Stability Mechanism (ESM) that may also affect Italy’s international borrowing. David Roman and Jonathan House, writing on “Spain risks backlash with budget plan,” on Sep 27, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390443916104578021692765950384.html?mod=WSJ_hp_LEFTWhatsNewsCollection) analyze Spain’s proposal of reducing government expenditures by €13 billion, or around $16.7 billion, increasing taxes in 2013, establishing limits on early retirement and cutting the deficit by €65 billion through 2014. Banco de España, Bank of Spain, contracted consulting company Oliver Wyman to conduct rigorous stress tests of the resilience of its banking system. (Stress tests and their use are analyzed by Pelaez and Pelaez Globalization and the State Vol. I (2008b), 95-100, International Financial Architecture (2005) 112-6, 123-4, 130-3).) The results are available from Banco de España (http://www.bde.es/bde/en/secciones/prensa/infointeres/reestructuracion/ http://www.bde.es/f/webbde/SSICOM/20120928/informe_ow280912e.pdf). The assumptions of the adverse scenario used by Oliver Wyman are quite tough for the three-year period from 2012 to 2014: “6.5 percent cumulative decline of GDP, unemployment rising to 27.2 percent and further declines of 25 percent of house prices and 60 percent of land prices (http://www.bde.es/f/webbde/SSICOM/20120928/informe_ow280912e.pdf). Fourteen banks were stress tested with capital needs estimates of seven banks totaling €59.3 billion. The three largest banks of Spain, Banco Santander (http://www.santander.com/csgs/Satellite/CFWCSancomQP01/es_ES/Corporativo.html), BBVA (http://www.bbva.com/TLBB/tlbb/jsp/ing/home/index.jsp) and Caixabank (http://www.caixabank.com/index_en.html), with 43 percent of exposure under analysis, have excess capital of €37 billion in the adverse scenario in contradiction with theories that large, international banks are necessarily riskier. Jonathan House, writing on “Spain expects wider deficit on bank aid,” on Sep 30, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444138104578028484168511130.html?mod=WSJPRO_hpp_LEFTTopStories), analyzes the 2013 budget plan of Spain that will increase the deficit of 7.4 percent of GDP in 2012, which is above the target of 6.3 percent under commitment with the European Union. The ratio of debt to GDP will increase to 85.3 percent in 2012 and 90.5 percent in 2013 while the 27 members of the European Union have an average debt/GDP ratio of 83 percent at the end of IIQ2012. (2) Symmetric inflation targets appear to have been abandoned in favor of a self-imposed single jobs mandate of easing monetary policy even after the economy grows again at or close to potential output. Monetary easing by unconventional measures is now apparently open ended in perpetuity as provided in the statement of the meeting of the Federal Open Market Committee (FOMC) on Sep 13, 2012 (http://www.federalreserve.gov/newsevents/press/monetary/20120913a.htm):
“To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.”
In fact, it is evident to the public that this policy will be abandoned if inflation costs rise. There is the concern of the production and employment costs of controlling future inflation.
(2) The European Central Bank (ECB) approved a new program of bond purchases under the name “Outright Monetary Transactions” (OMT). The ECB will purchase sovereign bonds of euro zone member countries that have a program of conditionality under the European Financial Stability Facility (EFSF) that is converting into the European Stability Mechanism (ESM). These programs provide enhancing the solvency of member countries in a transition period of structural reforms and fiscal adjustment. The purchase of bonds by the ECB would maintain debt costs of sovereigns at sufficiently low levels to permit adjustment under the EFSF/ESM programs. Purchases of bonds are not limited quantitatively with discretion by the ECB as to how much is necessary to support countries with adjustment programs. Another feature of the OMT of the ECB is sterilization of bond purchases: funds injected to pay for the bonds would be withdrawn or sterilized by ECB transactions. The statement by the European Central Bank on the program of OTM is as follows (http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html):
“6 September 2012 - Technical features of Outright Monetary Transactions
As announced on 2 August 2012, the Governing Council of the European Central Bank (ECB) has today taken decisions on a number of technical features regarding the Eurosystem’s outright transactions in secondary sovereign bond markets that aim at safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy. These will be known as Outright Monetary Transactions (OMTs) and will be conducted within the following framework:
Conditionality
A necessary condition for Outright Monetary Transactions is strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) programme. Such programmes can take the form of a full EFSF/ESM macroeconomic adjustment programme or a precautionary programme (Enhanced Conditions Credit Line), provided that they include the possibility of EFSF/ESM primary market purchases. The involvement of the IMF shall also be sought for the design of the country-specific conditionality and the monitoring of such a programme.
The Governing Council will consider Outright Monetary Transactions to the extent that they are warranted from a monetary policy perspective as long as programme conditionality is fully respected, and terminate them once their objectives are achieved or when there is non-compliance with the macroeconomic adjustment or precautionary programme.
Following a thorough assessment, the Governing Council will decide on the start, continuation and suspension of Outright Monetary Transactions in full discretion and acting in accordance with its monetary policy mandate.
Coverage
Outright Monetary Transactions will be considered for future cases of EFSF/ESM macroeconomic adjustment programmes or precautionary programmes as specified above. They may also be considered for Member States currently under a macroeconomic adjustment programme when they will be regaining bond market access.
Transactions will be focused on the shorter part of the yield curve, and in particular on sovereign bonds with a maturity of between one and three years.
No ex ante quantitative limits are set on the size of Outright Monetary Transactions.
Creditor treatment
The Eurosystem intends to clarify in the legal act concerning Outright Monetary Transactions that it accepts the same (pari passu) treatment as private or other creditors with respect to bonds issued by euro area countries and purchased by the Eurosystem through Outright Monetary Transactions, in accordance with the terms of such bonds.
Sterilisation
The liquidity created through Outright Monetary Transactions will be fully sterilised.
Transparency
Aggregate Outright Monetary Transaction holdings and their market values will be published on a weekly basis. Publication of the average duration of Outright Monetary Transaction holdings and the breakdown by country will take place on a monthly basis.
Securities Markets Programme
Following today’s decision on Outright Monetary Transactions, the Securities Markets Programme (SMP) is herewith terminated. The liquidity injected through the SMP will continue to be absorbed as in the past, and the existing securities in the SMP portfolio will be held to maturity.”
Jon Hilsenrath, writing on “Fed sets stage for stimulus,” on Aug 31, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390443864204577623220212805132.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes the essay presented by Chairman Bernanke at the Jackson Hole meeting of central bankers, as defending past stimulus with unconventional measures of monetary policy that could be used to reduce extremely high unemployment. Chairman Bernanke (2012JHAug31, 18-9) does support further unconventional monetary policy impulses if required by economic conditions (http://www.federalreserve.gov/newsevents/speech/bernanke20120831a.htm):
“Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”
Professor John H Cochrane (2012Aug31), at the University of Chicago Booth School of Business, writing on “The Federal Reserve: from central bank to central planner,” on Aug 31, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444812704577609384030304936.html?mod=WSJ_hps_sections_opinion), analyzes that the departure of central banks from open market operations into purchase of assets with risks to taxpayers and direct allocation of credit subject to political influence has caused them to abandon their political independence and accountability. Cochrane (2012Aug31) finds a return to the proposition of Milton Friedman in the 1960s that central banks can cause inflation and macroeconomic instability.
Mario Draghi (2012Aug29), President of the European Central Bank, also reiterated the need of exceptional and unconventional central bank policies (http://www.ecb.int/press/key/date/2012/html/sp120829.en.html):
“Yet it should be understood that fulfilling our mandate sometimes requires us to go beyond standard monetary policy tools. When markets are fragmented or influenced by irrational fears, our monetary policy signals do not reach citizens evenly across the euro area. We have to fix such blockages to ensure a single monetary policy and therefore price stability for all euro area citizens. This may at times require exceptional measures. But this is our responsibility as the central bank of the euro area as a whole.
The ECB is not a political institution. But it is committed to its responsibilities as an institution of the European Union. As such, we never lose sight of our mission to guarantee a strong and stable currency. The banknotes that we issue bear the European flag and are a powerful symbol of European identity.”
Buiter (2011Oct31) analyzes that the European Financial Stability Fund (EFSF) would need a “bigger bazooka” to bail out euro members in difficulties that could possibly be provided by the ECB. Buiter (2012Oct15) finds that resolution of the euro crisis requires full banking union together with restructuring the sovereign debt of at least four and possibly total seven European countries. Table III-7 in IIIE Appendix Euro Zone Survival Risk below provides the combined GDP in 2012 of the highly indebted euro zone members estimated in the latest World Economic Outlook of the IMF at $4167 billion or 33.1 percent of total euro zone GDP of $12,586 billion. Using the WEO of the IMF, Table III-8 in IIIE Appendix Euro Zone Survival Risk below provides debt of the highly indebted euro zone members at $3927.8 billion in 2012 that increases to $5809.9 billion when adding Germany’s debt, corresponding to 167.0 percent of Germany’s GDP. There are additional sources of debt in bailing out banks. The dimensions of the problem may require more firepower than a bazooka perhaps that of the largest conventional bomb of all times of 44,000 pounds experimentally detonated only once by the US in 1948 (http://www.airpower.au.af.mil/airchronicles/aureview/1967/mar-apr/coker.html).
Second, Risk-Measuring Yields and Exchange Rate. The ten-year government bond of Spain was quoted at 6.868 percent on Aug 10, 2012, declining to 6.447 percent on Aug 17 and 6.403 percent on Aug 24, 2012, and the ten-year government bond of Italy fell from 5.894 percent on Aug 10, 2012 to 5.709 percent on Aug 17 and 5.618 percent on Aug 24, 2012. The yield of the ten-year sovereign bond of Spain traded at 4.966 percent on Mar 22, 2013 and that of the ten-year sovereign bond of Italy at 4.570 percent (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). Risk aversion is captured by flight of investors from risk financial assets to the government securities of the US and Germany. Diminishing aversion is captured by increase of the yield of the two- and ten-year Treasury notes and the two- and ten-year government bonds of Germany. Table III-1A provides yields of US and German governments bonds and the rate of USD/EUR. Yields of US and German government bonds decline during shocks of risk aversion and the dollar strengthens in the form of fewer dollars required to buy one euro. The yield of the US ten-year Treasury note fell from 2.202 percent on Aug 26, 2011 to 1.459 percent on Jul 20, 2012, reminiscent of experience during the Treasury-Fed accord of the 1940s that placed a ceiling on long-term Treasury debt (Hetzel and Leach 2001), while the yield of the ten-year government bond of Germany fell from 2.16 percent to 1.17 percent. In the week of Mar 22, 2013, the yield of the two-year Treasury decreased to 0.242 percent and that of the ten-year Treasury decreased to 1.931 percent while the two-year bond of Germany decreased to 0.03 percent and the ten-year decreased to 1.38 percent; and the dollar appreciated to USD 1.2988/EUR. The zero interest rates for the monetary policy rate of the US, or fed funds rate, carry trades ensure devaluation of the dollar if there is no risk aversion but the dollar appreciates in flight to safe haven during episodes of risk aversion. Unconventional monetary policy induces significant global financial instability, excessive risks and low liquidity. The ten-year Treasury yield is about equal to consumer price inflation of 2.0 percent in the 12 months ending in Feb 2013 (Section II and earlier http://cmpassocregulationblog.blogspot.com/2013/02/world-inflation-waves-united-states.html) and the expectation of higher inflation if risk aversion diminishes. Treasury securities continue to be safe haven for investors fearing risk but with concentration in shorter maturities such as the two-year Treasury. The lower part of Table III-1A provides the same flight to government securities of the US and Germany and the USD during the financial crisis and global recession and the beginning of the European debt crisis in the spring of 2010 with the USD trading at USD 1.192/EUR on Jun 7, 2010.
Table III-1A, Two- and Ten-Year Yields of Government Bonds of the US and Germany and US Dollar/EUR Exchange rate
| US 2Y | US 10Y | DE 2Y | DE 10Y | USD/ EUR | |
| 3/22/13 | 0.242 | 1.931 | 0.03 | 1.38 | 1.2988 |
| 3/15/13 | 0.246 | 1.992 | 0.05 | 1.46 | 1.3076 |
| 3/8/13 | 0.256 | 2.056 | 0.09 | 1.53 | 1.3003 |
| 3/1/13 | 0.236 | 1.842 | 0.03 | 1.41 | 1.3020 |
| 2/22/13 | 0.252 | 1.967 | 0.13 | 1.57 | 1.3190 |
| 2/15/13 | 0.268 | 2.007 | 0.19 | 1.65 | 1.3362 |
| 2/8/13 | 0.252 | 1.949 | 0.18 | 1.61 | 1.3365 |
| 2/1/13 | 0.26 | 2.024 | 0.25 | 1.67 | 1.3642 |
| 1/25/13 | 0.278 | 1.947 | 0.26 | 1.64 | 1.3459 |
| 1/18/13 | 0.252 | 1.84 | 0.18 | 1.56 | 1.3321 |
| 1/11/13 | 0.247 | 1.862 | 0.13 | 1.58 | 1.3343 |
| 1/4/13 | 0.262 | 1.898 | 0.08 | 1.54 | 1.3069 |
| 12/28/12 | 0.252 | 1.699 | -0.01 | 1.31 | 1.3218 |
| 12/21/12 | 0.272 | 1.77 | -0.01 | 1.38 | 1.3189 |
| 12/14/12 | 0.232 | 1.704 | -0.04 | 1.35 | 1.3162 |
| 12/7/12 | 0.256 | 1.625 | -0.08 | 1.30 | 1.2926 |
| 11/30/12 | 0.248 | 1.612 | 0.01 | 1.39 | 1.2987 |
| 11/23/12 | 0.273 | 1.691 | 0.00 | 1.44 | 1.2975 |
| 11/16/12 | 0.24 | 1.584 | -0.03 | 1.33 | 1.2743 |
| 11/9/12 | 0.256 | 1.614 | -0.03 | 1.35 | 1.2711 |
| 11/2/12 | 0.274 | 1.715 | 0.01 | 1.45 | 1.2838 |
| 10/26/12 | 0.299 | 1.748 | 0.05 | 1.54 | 1.2942 |
| 10/19/12 | 0.296 | 1.766 | 0.11 | 1.59 | 1.3023 |
| 10/12/12 | 0.264 | 1.663 | 0.04 | 1.45 | 1.2953 |
| 10/5/12 | 0.26 | 1.737 | 0.06 | 1.52 | 1.3036 |
| 9/28/12 | 0.236 | 1.631 | 0.02 | 1.44 | 1.2859 |
| 9/21/12 | 0.26 | 1.753 | 0.04 | 1.60 | 1.2981 |
| 9/14/12 | 0.252 | 1.863 | 0.10 | 1.71 | 1.3130 |
| 9/7/12 | 0.252 | 1.668 | 0.03 | 1.52 | 1.2816 |
| 8/31/12 | 0.225 | 1.543 | -0.03 | 1.33 | 1.2575 |
| 8/24/12 | 0.266 | 1.684 | -0.01 | 1.35 | 1.2512 |
| 8/17/12 | 0.288 | 1.814 | -0.04 | 1.50 | 1.2335 |
| 8/10/12 | 0.267 | 1.658 | -0.07 | 1.38 | 1.2290 |
| 8/3/12 | 0.242 | 1.569 | -0.02 | 1.42 | 1.2387 |
| 7/27/12 | 0.244 | 1.544 | -0.03 | 1.40 | 1.2320 |
| 7/20/12 | 0.207 | 1.459 | -0.07 | 1.17 | 1.2158 |
| 7/13/12 | 0.24 | 1.49 | -0.04 | 1.26 | 1.2248 |
| 7/6/12 | 0.272 | 1.548 | -0.01 | 1.33 | 1.2288 |
| 6/29/12 | 0.305 | 1.648 | 0.12 | 1.58 | 1.2661 |
| 6/22/12 | 0.309 | 1.676 | 0.14 | 1.58 | 1.2570 |
| 6/15/12 | 0.272 | 1.584 | 0.07 | 1.44 | 1.2640 |
| 6/8/12 | 0.268 | 1.635 | 0.04 | 1.33 | 1.2517 |
| 6/1/12 | 0.248 | 1.454 | 0.01 | 1.17 | 1.2435 |
| 5/25/12 | 0.291 | 1.738 | 0.05 | 1.37 | 1.2518 |
| 5/18/12 | 0.292 | 1.714 | 0.05 | 1.43 | 1.2780 |
| 5/11/12 | 0.248 | 1.845 | 0.09 | 1.52 | 1.2917 |
| 5/4/12 | 0.256 | 1.876 | 0.08 | 1.58 | 1.3084 |
| 4/6/12 | 0.31 | 2.058 | 0.14 | 1.74 | 1.3096 |
| 3/30/12 | 0.335 | 2.214 | 0.21 | 1.79 | 1.3340 |
| 3/2/12 | 0.29 | 1.977 | 0.16 | 1.80 | 1.3190 |
| 2/24/12 | 0.307 | 1.977 | 0.24 | 1.88 | 1.3449 |
| 1/6/12 | 0.256 | 1.957 | 0.17 | 1.85 | 1.2720 |
| 12/30/11 | 0.239 | 1.871 | 0.14 | 1.83 | 1.2944 |
| 8/26/11 | 0.20 | 2.202 | 0.65 | 2.16 | 1.450 |
| 8/19/11 | 0.192 | 2.066 | 0.65 | 2.11 | 1.4390 |
| 6/7/10 | 0.74 | 3.17 | 0.49 | 2.56 | 1.192 |
| 3/5/09 | 0.89 | 2.83 | 1.19 | 3.01 | 1.254 |
| 12/17/08 | 0.73 | 2.20 | 1.94 | 3.00 | 1.442 |
| 10/27/08 | 1.57 | 3.79 | 2.61 | 3.76 | 1.246 |
| 7/14/08 | 2.47 | 3.88 | 4.38 | 4.40 | 1.5914 |
| 6/26/03 | 1.41 | 3.55 | NA | 3.62 | 1.1423 |
Note: DE: Germany
Source:
http://www.bloomberg.com/markets/
http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata
http://www.federalreserve.gov/releases/h15/data.htm
http://www.ecb.int/stats/money/long/html/index.en.html
Chart III-1A of the Board of Governors of the Federal Reserve System provides the ten-year, two-year and one-month Treasury constant maturity yields together with the overnight fed funds rate and the yield of the corporate bond with Moody’s rating of Baa. The riskier yield of the Baa corporate bond exceeds the relatively riskless yields of the Treasury securities. The beginning yields in Chart III-1A for July 31, 2001, are 3.67 percent for one month, 3.79 percent for two years, 5.07 percent for ten years, 3.82 percent for the fed funds rate and 7.85 percent for the Baa corporate bond. On July 30, 2007, yields inverted with the one month at 4.95 percent, the two-year at 4.59 percent and the ten year at 5.82 percent with the yield of the Baa corporate bond at 6.70 percent. Another interesting point is for Oct 31, 2008, with the yield of the Baa jumping to 9.54 percent and the Treasury yields declining: one month 0.12 percent, two years 1.56 percent and ten years 4.01 percent during a flight to the dollar and government securities analyzed by Cochrane and Zingales (2009). Another spike in the series is for Apr 4, 2006 with the yield of the corporate Baa bond at 8.63 and the Treasury yields of 0.12 percent for one month, 0.94 for two years and 2.95 percent for ten years. During the beginning of the flight from risk financial assets to US government securities (see Cochrane and Zingales 2009), the one-month yield was 0.07 percent, the two-year yield 1.64 percent and the ten-year yield 3.41. The combination of zero fed funds rate and quantitative easing caused sharp decline of the yields from 2008 and 2009. Yield declines have also occurred during periods of financial risk aversion, including the current one of stress of financial markets in Europe. The final point of Chart III1-A is for Mar 21, 2013, with the one-month yield at 0.08 percent, the two-year at 0.27 percent, the ten-year at 1.95 percent, the fed funds rate at 0.16 percent and the corporate Baa bond at 4.85 percent.
Chart III-1A, US, Ten-Year, Two-Year and One-Month Treasury Constant Maturity Yields, Overnight Fed Funds Rate and Yield of Moody’s Baa Corporate Bond, Jul 31, 2001-Mar 21, 2013
Note: US Recessions in shaded areas
Source: Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/releases/h15/update/
Kate Linebaugh, writing on “Falling revenue dings stocks,” on Oct 20, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444592704578066933466076070.html?mod=WSJPRO_hpp_LEFTTopStories), identifies a key financial vulnerability: falling revenues across markets for United States reporting companies. Global economic slowdown is reducing corporate sales and squeezing corporate strategies. Linebaugh quotes data from Thomson Reuters that 100 companies of the S&P 500 index have reported declining revenue only 1 percent higher in Jun-Sep 2012 relative to Jun-Sep 2011 but about 60 percent of the companies are reporting lower sales than expected by analysts with expectation that revenue for the S&P 500 will be lower in Jun-Sep 2012 for the entities represented in the index. Results of US companies are likely repeated worldwide. The basic valuation equation that is also used in capital budgeting postulates that the value of stocks or of an investment project is given by:
Where Rτ is expected revenue in the time horizon from τ =1 to T; Cτ denotes costs; and ρ is an appropriate rate of discount. In words, the value today of a stock or investment project is the net revenue, or revenue less costs, in the investment period from τ =1 to T discounted to the present by an appropriate rate of discount. In the current weak economy, revenues have been increasing more slowly than anticipated in investment plans. An increase in interest rates would affect discount rates used in calculations of present value, resulting in frustration of investment decisions. If V represents value of the stock or investment project, as ρ → ∞, meaning that interest rates increase without bound, then V → 0, or
![clip_image004[1]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiBnhRkKZmu5Tegqg5IQA062NrT_XwELMKR_KgewIDIMpqScHVgayg25TypCPwlgSVdDhRNvJ9QYS8rbW1Aq5D9gh3-TyRpUpKVeJQm-BbbLDVZZ-iljwlZ_vEBbFfnzwMUFbLjUKc_T0Q/s1600-h/clip_image004%25255B1%25255D%25255B2%25255D.gif "clip_image004[1]"){kind=small}
declines.
There was mostly strong performance in equity indexes with many indexes gaining in Table III-1 in the week ending on Mar 22, 2013. Stagnating revenues are causing reevaluation of discounted net earnings with deteriorating views on the world economy and United States fiscal sustainability but investors have been driving indexes higher. DJIA increased 0.6 percent on Mar 22, changing 0.0 percent in the week, repeatedly breaking historical highs. Germany’s Dax decreased 0.3 percent on Fri Mar 22 and increased 3.6 percent in the week. Dow Global decreased 0.2 percent on Mar 15 and decreased 1.6 percent in the week. Japan’s Nikkei Average decreased 2.4 percent on Fri Mar 22 and decreased 1.8 percent in the week as the yen continues to be oscillating but relatively weaker and the stock market gains in expectations of fiscal stimulus by a new administration and monetary stimulus by a new board of the Bank of Japan. Dow Asia Pacific TSM decreased 0.6 percent on Mar 22 and decreased 1.5 percent in the week while Shanghai Composite that decreased 0.2 percent on Mar 8 and decreased 1.7 percent in the week of Mar 8, falling below 2000 to close at 1980.13 on Fri Nov 30 but closing at 2328.28 on Fri Mar 22 for gain of 0.2 percent and gain of 2.2 percent in the week of Mar 22. There is evident trend of deceleration of the world economy that could affect corporate revenue and equity valuations, causing oscillation in equity markets with increases during favorable risk appetite.
Commodities were mixed in the week of Mar 22, 2013. The DJ UBS Commodities Index changed 0.0 percent on Fri Mar 22 and decreased 0.3 percent in the week, as shown in Table III-1. WTI increased 0.3 percent in the week of Mar 8 while Brent decreased 2.1 percent in the week. Gold decreased 0.4 percent on Fri Mar 22 and increased 1.0 percent in the week.
Table III-2 provides an update of the consolidated financial statement of the Eurosystem. The balance sheet has swollen with the long-term refinancing operations (LTROs). Line 5 “Lending to Euro Area Credit Institutions Related to Monetary Policy” increased from €546,747 million on Dec 31, 2010, to €879,130 million on Dec 28, 2011 and €920,791 million on Mar 15, 2013 with some repayment of loans already occurring. The sum of line 5 and line 7 (“Securities of Euro Area Residents Denominated in Euro”) has increased to €1,526,650 million in the statement of Mar 8, 2013, with marginal reduction. There is high credit risk in these transactions with capital of only €88,225 million as analyzed by Cochrane (2012Aug31).
Table III-2, Consolidated Financial Statement of the Eurosystem, Million EUR
| Dec 31, 2010 | Dec 28, 2011 | Mar 15, 2013 | |
| 1 Gold and other Receivables | 367,402 | 419,822 | 438,692 |
| 2 Claims on Non Euro Area Residents Denominated in Foreign Currency | 223,995 | 236,826 | 251,417 |
| 3 Claims on Euro Area Residents Denominated in Foreign Currency | 26,941 | 95,355 | 28,694 |
| 4 Claims on Non-Euro Area Residents Denominated in Euro | 22,592 | 25,982 | 22,089 |
| 5 Lending to Euro Area Credit Institutions Related to Monetary Policy Operations Denominated in Euro | 546,747 | 879,130 | 920,791 |
| 6 Other Claims on Euro Area Credit Institutions Denominated in Euro | 45,654 | 94,989 | 70,163 |
| 7 Securities of Euro Area Residents Denominated in Euro | 457,427 | 610,629 | 605,859 |
| 8 General Government Debt Denominated in Euro | 34,954 | 33,928 | 29,912 |
| 9 Other Assets | 278,719 | 336,574 | 280,228 |
| TOTAL ASSETS | 2,004, 432 | 2,733,235 | 2,647,844 |
| Memo Items | |||
| Sum of 5 and 7 | 1,004,174 | 1,489,759 | 1,526,650 |
| Capital and Reserves | 78,143 | 85,748 | 88,225 |
Source: European Central Bank
http://www.ecb.int/press/pr/wfs/2011/html/fs110105.en.html
http://www.ecb.int/press/pr/wfs/2011/html/fs111228.en.html
http://www.ecb.int/press/pr/wfs/2013/html/fs130319.en.html
IIIE Appendix Euro Zone survival risk. Professors Ricardo Caballero and Francesco Giavazzi (2012Jan15) find that the resolution of the European sovereign crisis with survival of the euro area would require success in the restructuring of Italy. That success would be assured with growth of the Italian economy. A critical problem is that the common euro currency prevents Italy from devaluing the exchange rate to parity or the exchange rate that would permit export growth to promote internal economic activity, which could generate fiscal revenues for primary fiscal surplus that ensure creditworthiness. Fiscal consolidation and restructuring are important but of long-term gestation. Immediate growth of the Italian economy would consolidate the resolution of the sovereign debt crisis. Professors Ricardo Caballero and Francesco Giavazzi (2012Jan15) find that the resolution of the European sovereign crisis with survival of the euro area would require success in the restructuring of Italy. That success would be assured with growth of the Italian economy. A critical problem is that the common euro currency prevents Italy from devaluing the exchange rate to parity or the exchange rate that would permit export growth to promote internal economic activity, which could generate fiscal revenues for primary fiscal surplus that ensure creditworthiness. Fiscal consolidation and restructuring are important but of long-term gestation. Immediate growth of the Italian economy would consolidate the resolution of the sovereign debt crisis. Caballero and Giavazzi (2012Jan15) argue that 55 percent of the exports of Italy are to countries outside the euro area such that devaluation of 15 percent would be effective in increasing export revenue. Newly available data in Table III-3 providing Italy’s trade with regions and countries supports the argument of Caballero and Giavazzi (2012Jan15). Italy’s exports to the European Monetary Union (EMU), or euro area, are only 40.5 percent of the total. Exports to the non-European Union area with share of 46.3 percent in Italy’s total exports are growing at 17.6 percent in Jan 2013 relative to Jan 2012 while those to EMU are growing at 1.7 percent.
Table III-3, Italy, Exports and Imports by Regions and Countries, % Share and 12-Month ∆%
| Jan 2013 | Exports | ∆% Jan-Ja Jan 2013/ Jan 2012 | Imports | Imports |
| EU | 53.7 | 2.6 | 52.9 | 2.4 |
| EMU 17 | 40.5 | 1.7 | 42.7 | 3.3 |
| France | 11.1 | 4.0 | 8.3 | 0.0 |
| Germany | 12.5 | 0.3 | 14.6 | -4.4 |
| Spain | 4.7 | -8.6 | 4.4 | 2.3 |
| UK | 4.9 | 8.1 | 2.5 | 5.9 |
| Non EU | 46.3 | 17.6 | 47.1 | -5.6 |
| Europe non EU | 13.9 | 10.7 | 11.3 | 19.9 |
| USA | 6.8 | 19.7 | 3.3 | -16.9 |
| China | 2.3 | 24.6 | 6.5 | -2.8 |
| OPEC | 5.7 | 26.1 | 10.8 | -19.6 |
| Total | 100.0 | 8.7 | 100.0 | -1.8 |
Notes: EU: European Union; EMU: European Monetary Union (euro zone)
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/85204
Table III-4 provides Italy’s trade balance by regions and countries. Italy had trade surplus of €663 million with the 17 countries of the euro zone (EMU 17) in Jan 2013 and cumulative surplus of €663 million in Jan 2013. Depreciation to parity could permit greater competitiveness in improving the trade deficit of €193 million in Jan 2013 with Europe non European Union and the trade surplus of €762 million with the US and trade with non European Union of €2281 million in Jan 2013. There is significant rigidity in the trade deficits in Jan of €1619 million with China and €1143 million with members of the Organization of Petroleum Exporting Countries (OPEC). Higher exports could drive economic growth in the economy of Italy that would permit less onerous adjustment of the country’s fiscal imbalances, raising the country’s credit rating.
Table III-4, Italy, Trade Balance by Regions and Countries, Millions of Euro
| Regions and Countries | Trade Balance Jan 2013 Millions of Euro | Trade Balance Cumulative Jan 2013 Millions of Euro |
| EU | 663 | 663 |
| EMU 17 | -296 | -296 |
| France | 1,002 | 1,002 |
| Germany | -246 | -246 |
| Spain | 156 | 156 |
| UK | 702 | 702 |
| Non EU | -2,281 | -2,281 |
| Europe non EU | -193 | -193 |
| USA | 762 | 762 |
| China | -1,619 | -1,619 |
| OPEC | -1,435 | -1,1435 |
| Total | -1,619 | -1,619 |
Notes: EU: European Union; EMU: European Monetary Union (euro zone)
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/85204
Growth rates of Italy’s trade and major products are provided in Table III-5 for the period Jan 2013 relative to Jan 2012. Growth rates in 12 months of imports are negative for energy with minus 14.9 percent, minus 14.4 percent for durable goods, minus 5.0 percent for exports and minus 1.8 percent for total imports. The higher rate of growth of exports of 8.7 percent in Jan 2013/Jan 2012 relative to imports of minus 1.8 percent may reflect weak demand in Italy with GDP declining during six consecutive quarters from IIIQ2011 through IVQ2012 together with softening commodity prices.
Table III-5, Italy, Exports and Imports % Share of Products in Total and ∆%
| Exports | Exports | Imports | Imports | |
| Consumer | 29.3 | 15.2 | 25.6 | 5.2 |
| Durable | 5.8 | 14.5 | 2.9 | -14.4 |
| Non | 23.5 | 15.3 | 22.7 | 7.7 |
| Capital Goods | 31.6 | 11.7 | 19.5 | -5.0 |
| Inter- | 33.6 | 6.9 | 32.6 | 5.5 |
| Energy | 5.5 | -23.8 | 22.3 | -14.9 |
| Total ex Energy | 94.5 | 11.0 | 77.7 | 2.7 |
| Total | 100.0 | 8.7 | 100.0 | -1.8 |
Note: % Share for Jan-Nov 2012.
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/85204
Table III-6 provides Italy’s trade balance by product categories in Jan 2013 and cumulative Jan 2013. Italy’s trade balance excluding energy generated surplus of €3844 million in Jan 2013 and €3844 million cumulative in Jan 2013 but the energy trade balance created deficit of €5463 million in Jan 2013 and cumulative €63844 million in Jan 2013. The overall deficit in Jan 2013 was €1618 million with cumulative deficit of €1618 million in Jan 2013. Italy has significant competitiveness in various economic activities in contrast with some other countries with debt difficulties.
Table III-6, Italy, Trade Balance by Product Categories, € Millions
| Jan 2013 | Cumulative Jan 2013 | |
| Consumer Goods | 996 | 996 |
| Durable | 802 | 802 |
| Nondurable | 194 | 194 |
| Capital Goods | 3,065 | 3,065 |
| Intermediate Goods | -217 | -217 |
| Energy | -5,463 | -5,463 |
| Total ex Energy | 3,844 | 3,844 |
| Total | -1,619 | -1,619 |
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/85204
Brazil faced in the debt crisis of 1982 a more complex policy mix. Between 1977 and 1983, Brazil’s terms of trade, export prices relative to import prices, deteriorated 47 percent and 36 percent excluding oil (Pelaez 1987, 176-79; Pelaez 1986, 37-66; see Pelaez and Pelaez, The Global Recession Risk (2007), 178-87). Brazil had accumulated unsustainable foreign debt by borrowing to finance balance of payments deficits during the 1970s. Foreign lending virtually stopped. The German mark devalued strongly relative to the dollar such that Brazil’s products lost competitiveness in Germany and in multiple markets in competition with Germany. The resolution of the crisis was devaluation of the Brazilian currency by 30 percent relative to the dollar and subsequent maintenance of parity by monthly devaluation equal to inflation and indexing that resulted in financial stability by parity in external and internal interest rates avoiding capital flight. With a combination of declining imports, domestic import substitution and export growth, Brazil followed rapid growth in the US and grew out of the crisis with surprising GDP growth of 4.5 percent in 1984.
The euro zone faces a critical survival risk because several of its members may default on their sovereign obligations if not bailed out by the other members. The valuation equation of bonds is essential to understanding the stability of the euro area. An explanation is provided in this paragraph and readers interested in technical details are referred to the Subsection IIIF Appendix on Sovereign Bond Valuation. Contrary to the Wriston doctrine, investing in sovereign obligations is a credit decision. The value of a bond today is equal to the discounted value of future obligations of interest and principal until maturity. On Dec 30 the yield of the 2-year bond of the government of Greece was quoted around 100 percent. In contrast, the 2-year US Treasury note traded at 0.239 percent and the 10-year at 2.871 percent while the comparable 2-year government bond of Germany traded at 0.14 percent and the 10-year government bond of Germany traded at 1.83 percent. There is no need for sovereign ratings: the perceptions of investors are of relatively higher probability of default by Greece, defying Wriston (1982), and nil probability of default of the US Treasury and the German government. The essence of the sovereign credit decision is whether the sovereign will be able to finance new debt and refinance existing debt without interrupting service of interest and principal. Prices of sovereign bonds incorporate multiple anticipations such as inflation and liquidity premiums of long-term relative to short-term debt but also risk premiums on whether the sovereign’s debt can be managed as it increases without bound. The austerity measures of Italy are designed to increase the primary surplus, or government revenues less expenditures excluding interest, to ensure investors that Italy will have the fiscal strength to manage its debt of 120 percent of GDP, which is the third largest in the world after the US and Japan. Appendix IIIE links the expectations on the primary surplus to the real current value of government monetary and fiscal obligations. As Blanchard (2011SepWEO) analyzes, fiscal consolidation to increase the primary surplus is facilitated by growth of the economy. Italy and the other indebted sovereigns in Europe face the dual challenge of increasing primary surpluses while maintaining growth of the economy (for the experience of Brazil in the debt crisis of 1982 see Pelaez 1986, 1987).
Much of the analysis and concern over the euro zone centers on the lack of credibility of the debt of a few countries while there is credibility of the debt of the euro zone as a whole. In practice, there is convergence in valuations and concerns toward the fact that there may not be credibility of the euro zone as a whole. The fluctuations of financial risk assets of members of the euro zone move together with risk aversion toward the countries with lack of debt credibility. This movement raises the need to consider analytically sovereign debt valuation of the euro zone as a whole in the essential analysis of whether the single-currency will survive without major changes.
Welfare economics considers the desirability of alternative states, which in this case would be evaluating the “value” of Germany (1) within and (2) outside the euro zone. Is the sum of the wealth of euro zone countries outside of the euro zone higher than the wealth of these countries maintaining the euro zone? On the choice of indicator of welfare, Hicks (1975, 324) argues:
“Partly as a result of the Keynesian revolution, but more (perhaps) because of statistical labours that were initially quite independent of it, the Social Product has now come right back into its old place. Modern economics—especially modern applied economics—is centered upon the Social Product, the Wealth of Nations, as it was in the days of Smith and Ricardo, but as it was not in the time that came between. So if modern theory is to be effective, if it is to deal with the questions which we in our time want to have answered, the size and growth of the Social Product are among the chief things with which it must concern itself. It is of course the objective Social Product on which attention must be fixed. We have indexes of production; we do not have—it is clear we cannot have—an Index of Welfare.”
If the burden of the debt of the euro zone falls on Germany and France or only on Germany, is the wealth of Germany and France or only Germany higher after breakup of the euro zone or if maintaining the euro zone? In practice, political realities will determine the decision through elections.
The prospects of survival of the euro zone are dire. Table III-7 is constructed with IMF World Economic Outlook database (http://www.imf.org/external/datamapper/index.php?db=WEO) for GDP in USD billions, primary net lending/borrowing as percent of GDP and general government debt as percent of GDP for selected regions and countries in 2010.
Table III-7, World and Selected Regional and Country GDP and Fiscal Situation
| GDP 2012 | Primary Net Lending Borrowing | General Government Net Debt | |
| World | 71,277 | ||
| Euro Zone | 12,065 | -0.5 | 73.4 |
| Portugal | 211 | -0.7 | 110.9 |
| Ireland | 205 | -4.4 | 103.0 |
| Greece | 255 | -1.7 | 170.7 |
| Spain | 1,340 | -4.5 | 78.6 |
| Major Advanced Economies G7 | 33,769 | -5.1 | 89.0 |
| United States | 15,653 | -6.5 | 83.8 |
| UK | 2,434 | -5.6 | 83.7 |
| Germany | 3,367 | 1.4 | 58.4 |
| France | 2,580 | -2.2 | 83.7 |
| Japan | 5,984 | -9.1 | 135.4 |
| Canada | 1,770 | -3.2 | 35.8 |
| Italy | 1,980 | 2.6 | 103.1 |
| China | 8,250 | -1.3* | 22.2** |
*Net Lending/borrowing**Gross Debt
Source: IMF World Economic Outlook databank http://www.imf.org/external/datamapper/index.php?db=WEO
The data in Table III-7 are used for some very simple calculations in Table III-8. The column “Net Debt USD Billions” in Table III-8 is generated by applying the percentage in Table III-7 column “General Government Net Debt % GDP 2010” to the column “GDP USD Billions.” The total debt of France and Germany in 2012 is $4155.8 billion, as shown in row “B+C” in column “Net Debt USD Billions” The sum of the debt of Italy, Spain, Portugal, Greece and Ireland is $3975.1 billion, adding rows D+E+F+G+H in column “Net Debt USD billions.” There is some simple “unpleasant bond arithmetic” in the two final columns of Table III-8. Suppose the entire debt burdens of the five countries with probability of default were to be guaranteed by France and Germany, which de facto would be required by continuing the euro zone. The sum of the total debt of these five countries and the debt of France and Germany is shown in column “Debt as % of Germany plus France GDP” to reach $8130.8 billion, which would be equivalent to 136.7 percent of their combined GDP in 2012. Under this arrangement the entire debt of the euro zone including debt of France and Germany would not have nil probability of default. The final column provides “Debt as % of Germany GDP” that would exceed 241.5 percent if including debt of France and 177.4 percent of German GDP if excluding French debt. The unpleasant bond arithmetic illustrates that there is a limit as to how far Germany and France can go in bailing out the countries with unsustainable sovereign debt without incurring severe pains of their own such as downgrades of their sovereign credit ratings. A central bank is not typically engaged in direct credit because of remembrance of inflation and abuse in the past. There is also a limit to operations of the European Central Bank in doubtful credit obligations. Wriston (1982) would prove to be wrong again that countries do not bankrupt but would have a consolation prize that similar to LBOs the sum of the individual values of euro zone members outside the current agreement exceeds the value of the whole euro zone. Internal rescues of French and German banks may be less costly than bailing out other euro zone countries so that they do not default on French and German banks.
Table III-8, Guarantees of Debt of Sovereigns in Euro Area as Percent of GDP of Germany and France, USD Billions and %
| Net Debt USD Billions | Debt as % of Germany Plus France GDP | Debt as % of Germany GDP | |
| A Euro Area | 8,855.7 | ||
| B Germany | 1,996.3 | $8130.9 as % of $3367 =241.5% $5971.4 as % of $3367 =177.4% | |
| C France | 2,159.5 | ||
| B+C | 4,155.8 | GDP $5,947.0 Total Debt $8130.9 Debt/GDP: 136.7% | |
| D Italy | 2,041.4 | ||
| E Spain | 1,053.2 | ||
| F Portugal | 234.0 | ||
| G Greece | 435.3 | ||
| H Ireland | 211.2 | ||
| Subtotal D+E+F+G+H | 3,975.1 |
Source: calculation with IMF data http://www.imf.org/external/datamapper/index.php?db=WEO
There is extremely important information in Table III-9 for the current sovereign risk crisis in the euro zone. Table III-9 provides the structure of regional and country relations of Germany’s exports and imports with newly available data for Jan 2013. German exports to other European Union (EU) members are 58.7 percent of total exports in Jan 2013 and 58.7 percent in cumulative Jan 2013. Exports to the euro area are 38.7 percent in Jan and 38.7 percent cumulative in Jan. Exports to third countries are 41.3 percent of the total in Jan and 41.3 percent cumulative in Jan. There is similar distribution for imports. Exports to non-euro countries are increasing 5.5 percent in Jan 2013 and increasing 5.5 percent cumulative in Jan 2013 while exports to the euro area are increasing 0.4 percent in Jan and increasing 0.4 percent cumulative in Jan 2013. Exports to third countries, accounting for 44.3 percent of the total in Jan 2013, are increasing 4.5 percent in Jan and increasing 4.5 percent cumulative in Jan, accounting for 41.3 percent of the cumulative total in Jan 2013. Price competitiveness through devaluation could improve export performance and growth. Economic performance in Germany is closely related to its high competitiveness in world markets. Weakness in the euro zone and the European Union in general could affect the German economy. This may be the major reason for choosing the “fiscal abuse” of the European Central Bank considered by Buiter (2011Oct31) over the breakdown of the euro zone. There is a tough analytical, empirical and forecasting doubt of growth and trade in the euro zone and the world with or without maintenance of the European Monetary Union (EMU) or euro zone. Germany could benefit from depreciation of the euro because of high share in its exports to countries not in the euro zone but breakdown of the euro zone raises doubts on the region’s economic growth that could affect German exports to other member states.
Table III-9, Germany, Structure of Exports and Imports by Region, € Billions and ∆%
| Jan 2013 | Jan 12-Month | Cumulative Jan 2012 € Billions | Cumulative Jan 2013/ | |
| Total | 88.6 | 3.1 | 88.6 | 3.1 |
| A. EU | 52.0 % 58.7 | 2.1 | 52.0 % 58.7 | 2.1 |
| Euro Area | 34.3 % 38.7 | 0.4 | 34.3 % 38.7 | 0.4 |
| Non-euro Area | 17.7 % 20.0 | 5.5 | 17.7 % 20.0 | 5.5 |
| B. Third Countries | 36.6 % 41.3 | 4.5 | 36.6 % 41.3 | 4.5 |
| Total Imports | 74.9 | 2.9 | 74.9 | 2.9 |
| C. EU Members | 46.9 % 62.6 | 4.6 | 46.9 % 62.6 | 4.6 |
| Euro Area | 32.3 % 43.1 | 2.8 | 32.3 % 43.1 | 2.8 |
| Non-euro Area | 14.6 % 19.5 | 8.7 | 14.6 % 19.5 | 8.7 |
| D. Third Countries | 28.0 % 37.4 | 0.2 | 28.0 % 37.4 | 0.2 |
Notes: Total Exports = A+B; Total Imports = C+D
Source:
Statistisches Bundesamt Deutschland https://www.destatis.de/EN/PressServices/Press/pr/2013/03/PE13_094_51.html
IIIF Appendix on Sovereign Bond Valuation. There are two approaches to government finance and their implications: (1) simple unpleasant monetarist arithmetic; and (2) simple unpleasant fiscal arithmetic. Both approaches illustrate how sovereign debt can be perceived riskier under profligacy.
First, Unpleasant Monetarist Arithmetic. Fiscal policy is described by Sargent and Wallace (1981, 3, equation 1) as a time sequence of D(t), t = 1, 2,…t, …, where D is real government expenditures, excluding interest on government debt, less real tax receipts. D(t) is the real deficit excluding real interest payments measured in real time t goods. Monetary policy is described by a time sequence of H(t), t=1,2,…t, …, with H(t) being the stock of base money at time t. In order to simplify analysis, all government debt is considered as being only for one time period, in the form of a one-period bond B(t), issued at time t-1 and maturing at time t. Denote by R(t-1) the real rate of interest on the one-period bond B(t) between t-1 and t. The measurement of B(t-1) is in terms of t-1 goods and [1+R(t-1)] “is measured in time t goods per unit of time t-1 goods” (Sargent and Wallace 1981, 3). Thus, B(t-1)[1+R(t-1)] brings B(t-1) to maturing time t. B(t) represents borrowing by the government from the private sector from t to t+1 in terms of time t goods. The price level at t is denoted by p(t). The budget constraint of Sargent and Wallace (1981, 3, equation 1) is:
D(t) = {[H(t) – H(t-1)]/p(t)} + {B(t) – B(t-1)[1 + R(t-1)]} (1)
Equation (1) states that the government finances its real deficits into two portions. The first portion, {[H(t) – H(t-1)]/p(t)}, is seigniorage, or “printing money.” The second part,
{B(t) – B(t-1)[1 + R(t-1)]}, is borrowing from the public by issue of interest-bearing securities. Denote population at time t by N(t) and growing by assumption at the constant rate of n, such that:
N(t+1) = (1+n)N(t), n>-1 (2)
The per capita form of the budget constraint is obtained by dividing (1) by N(t) and rearranging:
B(t)/N(t) = {[1+R(t-1)]/(1+n)}x[B(t-1)/N(t-1)]+[D(t)/N(t)] – {[H(t)-H(t-1)]/[N(t)p(t)]} (3)
On the basis of the assumptions of equal constant rate of growth of population and real income, n, constant real rate of return on government securities exceeding growth of economic activity and quantity theory equation of demand for base money, Sargent and Wallace (1981) find that “tighter current monetary policy implies higher future inflation” under fiscal policy dominance of monetary policy. That is, the monetary authority does not permanently influence inflation, lowering inflation now with tighter policy but experiencing higher inflation in the future.
Second, Unpleasant Fiscal Arithmetic. The tool of analysis of Cochrane (2011Jan, 27, equation (16)) is the government debt valuation equation:
(Mt + Bt)/Pt = Et∫(1/Rt, t+τ)st+τdτ (4)
Equation (4) expresses the monetary, Mt, and debt, Bt, liabilities of the government, divided by the price level, Pt, in terms of the expected value discounted by the ex-post rate on government debt, Rt, t+τ, of the future primary surpluses st+τ, which are equal to Tt+τ – Gt+τ or difference between taxes, T, and government expenditures, G. Cochrane (2010A) provides the link to a web appendix demonstrating that it is possible to discount by the ex post Rt, t+τ. The second equation of Cochrane (2011Jan, 5) is:
MtV(it, ·) = PtYt (5)
Conventional analysis of monetary policy contends that fiscal authorities simply adjust primary surpluses, s, to sanction the price level determined by the monetary authority through equation (5), which deprives the debt valuation equation (4) of any role in price level determination. The simple explanation is (Cochrane 2011Jan, 5):
“We are here to think about what happens when [4] exerts more force on the price level. This change may happen by force, when debt, deficits and distorting taxes become large so the Treasury is unable or refuses to follow. Then [4] determines the price level; monetary policy must follow the fiscal lead and ‘passively’ adjust M to satisfy [5]. This change may also happen by choice; monetary policies may be deliberately passive, in which case there is nothing for the Treasury to follow and [4] determines the price level.”
An intuitive interpretation by Cochrane (2011Jan 4) is that when the current real value of government debt exceeds expected future surpluses, economic agents unload government debt to purchase private assets and goods, resulting in inflation. If the risk premium on government debt declines, government debt becomes more valuable, causing a deflationary effect. If the risk premium on government debt increases, government debt becomes less valuable, causing an inflationary effect.
There are multiple conclusions by Cochrane (2011Jan) on the debt/dollar crisis and Global recession, among which the following three:
(1) The flight to quality that magnified the recession was not from goods into money but from private-sector securities into government debt because of the risk premium on private-sector securities; monetary policy consisted of providing liquidity in private-sector markets suffering stress
(2) Increases in liquidity by open-market operations with short-term securities have no impact; quantitative easing can affect the timing but not the rate of inflation; and purchase of private debt can reverse part of the flight to quality
(3) The debt valuation equation has a similar role as the expectation shifting the Phillips curve such that a fiscal inflation can generate stagflation effects similar to those occurring from a loss of anchoring expectations.
IV Global Inflation. There is inflation everywhere in the world economy, with slow growth and persistently high unemployment in advanced economies. Table IV-1, updated with every blog comment, provides the latest annual data for GDP, consumer price index (CPI) inflation, producer price index (PPI) inflation and unemployment (UNE) for the advanced economies, China and the highly-indebted European countries with sovereign risk issues. The table now includes the Netherlands and Finland that with Germany make up the set of northern countries in the euro zone that hold key votes in the enhancement of the mechanism for solution of sovereign risk issues (Peter Spiegel and Quentin Peel, “Europe: Northern Exposures,” Financial Times, Mar 9, 2011 http://www.ft.com/intl/cms/s/0/55eaf350-4a8b-11e0-82ab-00144feab49a.html#axzz1gAlaswcW). Newly available data on inflation is considered below in this section. Data in Table IV-1 for the euro zone and its members are updated from information provided by Eurostat but individual country information is provided in this section as soon as available, following Table IV-1. Data for other countries in Table IV-1 are also updated with reports from their statistical agencies. Economic data for major regions and countries is considered in Section V World Economic Slowdown following with individual country and regional data tables.
Table IV-1, GDP Growth, Inflation and Unemployment in Selected Countries, Percentage Annual Rates
| GDP | CPI | PPI | UNE | |
| US | 1.6 | 2.0 | 1.7 | 7.7 |
| Japan | 0.5 | -0.3 | -0.1 | 4.2 |
| China | 7.9 | 3.2 | -1.6 | |
| UK | 0.3 | 2.8* CPIH 2.6 | 2.3 output | 7.8 |
| Euro Zone | -0.9 | 1.8 | 1.9 | 11.9 |
| Germany | 0.4 | 1.8 | 1.7 | 5.3 |
| France | -0.3 | 1.2 | 1.4 | 10.6 |
| Nether-lands | -0.9 | 3.2 | 1.2 | 6.0 |
| Finland | -1.4 | 2.5 | 2.2 | 7.9 |
| Belgium | -0.4 | 1.3 | 5.4 | 7.4 |
| Portugal | -3.8 | 0.2 | 1.9 | 17.6 |
| Ireland | 0.8 | 1.2 | 1.0 | 14.7 |
| Italy | -2.7 | 2.0 | 2.0 | 11.7 |
| Greece | -6.0 | 0.1 | -0.1 | NA |
| Spain | -1.9 | 2.9 | 2.6 | 26.2 |
Notes: GDP: rate of growth of GDP; CPI: change in consumer price inflation; PPI: producer price inflation; UNE: rate of unemployment; all rates relative to year earlier
*Office for National Statistics http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/february-2013/index.html **Core
PPI http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/february-2013/index.html
Source: EUROSTAT http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/; country statistical sources http://www.census.gov/aboutus/stat_int.html
Table IV-1 shows the simultaneous occurrence of low growth, inflation and unemployment in advanced economies. The US grew at 1.6 percent in IVQ2012 relative to IVQ2011 (Table 8 in http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp4q12_2nd.pdf See I Mediocre and Decelerating United States Economic Growth at http://cmpassocregulationblog.blogspot.com/2013/03/mediocre-gdp-growth-at-16-to-20-percent.html and earlier at http://cmpassocregulationblog.blogspot.com/2013/02/thirty-one-million-unemployed-or.html). Japan’s GDP grew 0.3 percent in IVQ2011 relative to IVQ2010 and contracted 1.6 percent in IIQ2011 relative to IIQ2010 because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 but grew at the seasonally-adjusted annual rate (SAAR) of 10.6 percent in IIIQ2011, increasing at the SAAR of 0.4 percent in IVQ 2011, increasing at the SAAR of 6.1 percent in IQ2012 and decreasing at 0.9 percent in IIQ2012 but contracting at the SAAR of 3.7 percent in IIIQ2012 and increasing at the SAAR of 0.2 percent in IVQ2012 (see Section VB http://cmpassocregulationblog.blogspot.com/2013/03/thirty-one-million-unemployed-or.htm and earlier at
http://cmpassocregulationblog.blogspot.com/2013/02/recovery-without-hiring-united-states.html); the UK grew at minus 0.3 percent in IVQ2012 relative to IIIQ2012 and GDP increased 0.3 percent in IVQ2012 relative to IVQ2011 (see Section VH at http://cmpassocregulationblog.blogspot.com/2013/03/mediocre-gdp-growth-at-16-to-20-percent.html and earlier at http://cmpassocregulationblog.blogspot.com/2013/01/united-states-commercial-banks-assets_27.html); and the Euro Zone grew at minus 0.6 percent in IVQ2012 and minus 0.9 percent in IVQ2012 relative to IVQ2011 (see Section VD http://cmpassocregulationblog.blogspot.com/2013/03/thirty-one-million-unemployed-or.htm and earlier at
http://cmpassocregulationblog.blogspot.com/2013/02/recovery-without-hiring-united-states.html). These are stagnating or “growth recession” rates, which are positive or about nil growth rates with some contractions that are insufficient to recover employment. The rates of unemployment are quite high: 7.7 percent in the US but 19.0 percent for unemployment/underemployment or job stress of 30.8 million (see Table I-4 http://cmpassocregulationblog.blogspot.com/2013/03/thirty-one-million-unemployed-or.htm and earlier at http://cmpassocregulationblog.blogspot.com/2013/02/thirty-one-million-unemployed-or.html), 4.2 percent for Japan (see Section VB at http://cmpassocregulationblog.blogspot.com/2013/03/mediocre-gdp-growth-at-16-to-20-percent.html and earlier at http://cmpassocregulationblog.blogspot.com/2013/02/thirty-one-million-unemployed-or.html), 7.8 percent for the UK with high rates of unemployment for young people (see the labor statistics of the UK in Subsection VH and earlier at http://cmpassocregulationblog.blogspot.com/2013/02/world-inflation-waves-united-states.html). Twelve-month rates of inflation have been quite high, even when some are moderating at the margin: 1.7 percent in the US, -0.3 percent for Japan, 3.2 percent for China, 1.8 percent for the Euro Zone and 2.8 percent for the UK. Stagflation is still an unknown event but the risk is sufficiently high to be worthy of consideration (see http://cmpassocregulationblog.blogspot.com/2011/06/risk-aversion-and-stagflation.html). The analysis of stagflation also permits the identification of important policy issues in solving vulnerabilities that have high impact on global financial risks. There are six key interrelated vulnerabilities in the world economy that have been causing global financial turbulence: (1) sovereign risk issues in Europe resulting from countries in need of fiscal consolidation and enhancement of their sovereign risk ratings (see Section III and earlier http://cmpassocregulationblog.blogspot.com/2013/03/recovery-without-hiring-ten-million.html); (2) the tradeoff of growth and inflation in China now with change in growth strategy to domestic consumption instead of investment and political developments in a decennial transition; (3) slow growth by repression of savings with de facto interest rate controls (http://cmpassocregulationblog.blogspot.com/2013/03/mediocre-gdp-growth-at-16-to-20-percent.html and earlier at http://cmpassocregulationblog.blogspot.com/2013/02/thirty-one-million-unemployed-or.html), weak hiring with the loss of 10 million full-time jobs (http://cmpassocregulationblog.blogspot.com/2013/03/recovery-without-hiring-ten-million.html and earlier http://cmpassocregulationblog.blogspot.com/2013/02/recovery-without-hiring-united-states.html) and continuing job stress of 24 to 30 million people in the US and stagnant wages in a fractured job market (http://cmpassocregulationblog.blogspot.com/2013/03/thirty-one-million-unemployed-or.htm and earlier at http://cmpassocregulationblog.blogspot.com/2013/02/thirty-one-million-unemployed-or.html); (4) the timing, dose, impact and instruments of normalizing monetary and fiscal policies (see http://cmpassocregulationblog.blogspot.com/2013/02/united-states-unsustainable-fiscal.html http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html http://cmpassocregulationblog.blogspot.com/2012/08/expanding-bank-cash-and-deposits-with.html http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html http://cmpassocregulationblog.blogspot.com/2011/03/global-financial-risks-and-fed.html http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html) in advanced and emerging economies; (5) the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 that had repercussions throughout the world economy because of Japan’s share of about 9 percent in world output, role as entry point for business in Asia, key supplier of advanced components and other inputs as well as major role in finance and multiple economic activities (http://professional.wsj.com/article/SB10001424052748704461304576216950927404360.html?mod=WSJ_business_AsiaNewsBucket&mg=reno-wsj); and (6) geopolitical events in the Middle East.
In the effort to increase transparency, the Federal Open Market Committee (FOMC) provides both economic projections of its participants and views on future paths of the policy rate that in the US is the federal funds rate or interest on interbank lending of reserves deposited at Federal Reserve Banks. These projections and views are discussed initially followed with appropriate analysis.
Charles Evans, President of the Federal Reserve Bank of Chicago, proposed an “economic state-contingent policy” or “7/3” approach (Evans 2012 Aug 27):
“I think the best way to provide forward guidance is by tying our policy actions to explicit measures of economic performance. There are many ways of doing this, including setting a target for the level of nominal GDP. But recognizing the difficult nature of that policy approach, I have a more modest proposal: I think the Fed should make it clear that the federal funds rate will not be increased until the unemployment rate falls below 7 percent. Knowing that rates would stay low until significant progress is made in reducing unemployment would reassure markets and the public that the Fed would not prematurely reduce its accommodation.
Based on the work I have seen, I do not expect that such policy would lead to a major problem with inflation. But I recognize that there is a chance that the models and other analysis supporting this approach could be wrong. Accordingly, I believe that the commitment to low rates should be dropped if the outlook for inflation over the medium term rises above 3 percent.
The economic conditionality in this 7/3 threshold policy would clarify our forward policy intentions greatly and provide a more meaningful guide on how long the federal funds rate will remain low. In addition, I would indicate that clear and steady progress toward stronger growth is essential.”
Evans (2012Nov27) modified the “7/3” approach to a “6.5/2.5” approach:
“I have reassessed my previous 7/3 proposal. I now think a threshold of 6-1/2 percent for the unemployment rate and an inflation safeguard of 2-1/2 percent, measured in terms of the outlook for total PCE (Personal Consumption Expenditures Price Index) inflation over the next two to three years, would be appropriate.”
The Federal Open Market Committee (FOMC) decided at its meeting on Dec 12, 2012 to implement the “6.5/2.5” approach (http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm):
“To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”
Another rising risk is division within the Federal Open Market Committee (FOMC) on risks and benefits of current policies as expressed in the minutes of the meeting held on Jan 29-30, 2013 (http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20130130.pdf 13):
“However, many participants also expressed some concerns about potential costs and risks arising from further asset purchases. Several participants discussed the possible complications that additional purchases could cause for the eventual withdrawal of policy accommodation, a few mentioned the prospect of inflationary risks, and some noted that further asset purchases could foster market behavior that could undermine financial stability. Several participants noted that a very large portfolio of long-duration assets would, under certain circumstances, expose the Federal Reserve to significant capital losses when these holdings were unwound, but others pointed to offsetting factors and one noted that losses would not impede the effective operation of monetary policy.
Jon Hilsenrath and Victoria McGrane, writing on “Fed slip over how long to keep cash spigot open,” published on Feb 20, 2013 in the Wall street Journal (http://professional.wsj.com/article/SB10001424127887323511804578298121033876536.html), analyze the minutes of the Fed, comments by members of the FOMC and data showing increase in holdings of riskier debt by investors, record issuance of junk bonds, mortgage securities and corporate loans. Jon Hilsenrath, writing on “Jobs upturn isn’t enough to satisfy Fed,” on Mar 8, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324582804578348293647760204.html), finds that much stronger labor market conditions are required for the Fed to end quantitative easing. Unconventional monetary policy with zero interest rates and quantitative easing is quite difficult to unwind because of the adverse effects of raising interest rates on valuations of risk financial assets and home prices, including the very own valuation of the securities held outright in the Fed balance sheet. Gradual unwinding of 1 percent fed funds rates from Jun 2003 to Jun 2004 by seventeen consecutive increases of 25 percentage points from Jun 2004 to Jun 2006 to reach 5.25 percent caused default of subprime mortgages and adjustable-rate mortgages linked to the overnight fed funds rate. The zero interest rate has penalized liquidity and increased risks by inducing carry trades from zero interest rates to speculative positions in risk financial assets. There is no exit from zero interest rates without provoking another financial crash.
Unconventional monetary policy will remain in perpetuity, or QE→∞, changing to a “growth mandate.” There are two reasons explaining unconventional monetary policy of QE→∞: insufficiency of job creation to reduce unemployment/underemployment at current rates of job creation; and growth of GDP at 1.5 percent, which is well below 3.0 percent estimated by Lucas (2011May) from 1870 to 2010. Unconventional monetary policy interprets the dual mandate of low inflation and maximum employment as mainly a “growth mandate” of forcing economic growth in the US at a rate that generates full employment. A hurdle to this “growth mandate” is that the US economy grew at 6.2 percent on average during cyclical expansions in the postwar period while growth has been at only 2.1 percent on average in the cyclical expansion in the 14 quarters from IIIQ2009 to IVQ2012. Zero interest rates and quantitative easing have not provided the impulse for growth and were not required in past successful cyclical expansions.
First, total nonfarm payroll employment seasonally adjusted (SA) increased 236,000 in Feb 2013 and private payroll employment rose 246,000. The number of nonfarm jobs and private jobs created has been declining in 2012 from 311,000 in Jan 2012 to 87,000 in Jun, 138,000 in Sep, 160,000 in Oct, 247,000 in Nov and 219,000 in Dec 2012 for total nonfarm jobs and from 323,000 in Jan 2012 to 78,000 in Jun, 118,000 in Sep, 217,000 in Oct, 256,000 in Nov and 224,000 in Dec 2012 for private jobs. Average new nonfarm jobs in the quarter Dec 2011 to Feb 2012 were 270,667 per month, declining to average 157,273 per month in the eleven months from Mar 2012 to Jan 2013. Average new private jobs in the quarter Dec 2011 to Feb 2012 were 279,000 per month, declining to average 165,545 per month in the eleven months from Mar 2012 to Jan 2013. The number of 140,000 new private new jobs created in Jan 2013 is lower than the average 165,545 per month in Mar 2012 to Jan 2013. New farm jobs created in Feb 2013 were 236,000 and 246,000 in private jobs, which exceeds the average for the prior eleven months. The US labor force increased from 153.617 million in 2011 to 154.975 million in 2012 by 1.358 million or 113,167 per month. The average increase of nonfarm jobs in the six months from Sep 2012 to Feb 2013 was 186,500, which is a rate of job creation inadequate to reduce significantly unemployment and underemployment in the United States because of 113,167 new entrants in the labor force per month with 30.8 million unemployed or underemployed. The difference between the average increase of 186,500 new private nonfarm jobs per month in the US from Sep 2012 to Feb 2013 and the 113,167 average monthly increase in the labor force from 2011 to 2012 is 73,333 monthly new jobs net of absorption of new entrants in the labor force. There are 30.8 million in job stress in the US currently. The provision of 73,333 new jobs per month net of absorption of new entrants in the labor force would require 419 months to provide jobs for the unemployed and underemployed (30.761 million divided by 73,333) or 34.9 years (419 divided by 12). The civilian labor force of the US in Feb 2013 not seasonally adjusted stood at 154.727 million with 12.500 million unemployed or effectively 19.849 million unemployed in this blog’s calculation by inferring those who are not searching because they believe there is no job for them for effective labor force of 162.076 million. Reduction of one million unemployed at the current rate of job creation without adding more unemployment requires 1.1 years (1 million divided by product of 73,333 by 12, which is 879,996). Reduction of the rate of unemployment to 5 percent of the labor force would be equivalent to unemployment of only 7.736 million (0.05 times labor force of 154.727 million) for new net job creation of 4.764 million (12.500 million unemployed minus 7.736 million unemployed at rate of 5 percent) that at the current rate would take 5.4 years (4.764 million divided by 879,996). Under the calculation in this blog there are 19.849 million unemployed by including those who ceased searching because they believe there is no job for them and effective labor force of 162.076 million. Reduction of the rate of unemployment to 5 percent of the labor force would require creating 12.614 million jobs net of labor force growth that at the current rate would take 13.3 years (19.849 million minus 0.05(162.076 million) or 11.745 million divided by 879,996, using LF PART 66.2% and Total UEM in Table I-4). These calculations assume that there are no more recessions, defying United States economic history with periodic contractions of economic activity when unemployment increases sharply. The number employed in the US fell from 147.118 million in Nov 2007 to 142.228 million in Feb 2013, by 4.890 million, or decline of 3.3 percent, while the noninstitutional population increased from 232.939 million in Nov 2007 to 244.828 million in Feb 2013, by 11.889 million or increase of 5.1 percent, using not seasonally adjusted data. There is actually not sufficient job creation to merely absorb new entrants in the labor force because of those dropping from job searches, worsening the stock of unemployed or underemployed in involuntary part-time jobs.
Second, calculations show that actual growth is around 1.6 to 2.0 percent per year. This rate is well below 3 percent per year in trend from 1870 to 2010, which has been always recovered after events such as wars and recessions (Lucas 2011May). Growth is not only mediocre but sharply decelerating to a rhythm that is not consistent with reduction of unemployment and underemployment of 30.8 million people corresponding to 19.0 percent of the effective labor force of the United States (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/02/thirty-one-million-unemployed-or.html). In the four quarters of 2011 and the four quarters of 2012, US real GDP grew at the seasonally-adjusted annual equivalent rates of 0.1 percent in the first quarter of 2011 (IQ2011), 2.5 percent in IIQ2011, 1.3 percent in IIIQ2011, 4.1 percent in IVQ2011, 2.0 percent in IQ2012, 1.3 percent in IIQ2012, 3.1 percent in IIIQ2012 and revised 0.1 percent in IVQ2012. GDP growth in IIIQ2012 was revised from 2.7 percent seasonally adjusted annual rate (SAAR) to 3.1 percent but mostly because of contribution of 0.73 percentage points of inventory accumulation and one-time contribution of 0.64 percentage points of expenditures in national defense that without them would have reduced growth from 3.1 percent to 1.73 percent. Equally, GDP growth in IVQ2012 is measured in the advanced estimate as 0.1 percent but mostly because of deduction of divestment of inventories of 1.55 percentage points and deduction of one-time national defense expenditures of 1.28 percentage points. The annual equivalent rate of growth of GDP for the four quarters of 2011 and the four quarters of 2012 is 2.0 percent, obtained as follows. Discounting 0.1 percent to one quarter is 0.025 percent {[(1.001)1/4 -1]100 = 0.025}; discounting 2.5 percent to one quarter is 0.62 percent {[(1.025)1/4 – 1]100}; discounting 1.3 percent to one quarter is 0.32 percent {[(1.013)1/4 – 1]100}; discounting 4.1 percent to one quarter is 1.0 {[(1.04)1/4 -1]100; discounting 2.0 percent to one quarter is 0.50 percent {[(1.020)1/4 -1]100); discounting 1.3 percent to one quarter is 0.32 percent {[(1.013)1/4 -1]100}; discounting 3.1 percent to one quarter is 0.77 {[(1.031)1/4 -1]100); and discounting 0.1 percent to one quarter is 0.025 percent {[(1.001)1/4 – 1]100}. Real GDP growth in the four quarters of 2011 and the four quarters of 2012 accumulated to 3.6 percent {[(1.00025 x 1.0062 x 1.0032 x 1.010 x 1.005 x 1.0032 x 1.0077 x 1.00025) - 1]100 = 3.6%}. This is equivalent to growth from IQ2011 to IVQ2012 obtained by dividing the seasonally-adjusted annual rate (SAAR) of IVQ2012 of $13,656.8 billion by the SAAR of IVQ2010 of $13,181.2 (http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1) and expressing as percentage {[($13,658.8/$13,181.2) - 1]100 = 3.6%}. The growth rate in annual equivalent for the four quarters of 2011 and the four quarters of 2012 is 1.8 percent {[(1.00025 x 1.0062 x 1.0032 x 1.010 x 1.005 x 1.0032 x 1.0077 x 1.00025)4/8 -1]100 = 1.8%], or {[($13,656.8/$13,181.2)]4/8-1]100 = 1.8%} dividing the SAAR of IVQ2012 by the SAAR of IVQ2010 in Table II-6 below, obtaining the average for eight quarters and the annual average for one year of four quarters. Growth in the four quarters of 2012 accumulates to 1.6 percent {[(1.02)1/4(1.013)1/4(1.031)1/4(1.001)1/4 -1]100 = 1.6%}. This is equivalent to dividing the SAAR of $13,656.8 billion for IVQ2012 by the SAAR of $13,441.0 billion in IVQ2011 to obtain 1.6 percent {[($13,656.8/$13,441.0) – 1]100 = 1.6%}. The US economy is still close to a standstill especially considering the GDP report in detail. Excluding growth at the SAAR of 2.5 percent in IIQ2011 and 4.1 percent in IVQ2011 while converting growth in IIIQ2012 to 1.73 percent by deducting from 3.1 percent one-time inventory accumulation of 0.73 percentage points and national defense expenditures of 0.64 percentage points and converting growth in IVQ2012 by adding 1.55 percentage points of inventory divestment and 1.28 percentage points of national defense expenditure reductions to obtain 2.84 percent, the US economy grew at 1.5 percent in the remaining six quarters {[(1.00025x1.0032x1.005x1.0032x1.0043x1.0070)4/6 – 1]100 = 1.5%} with declining growth trend in three consecutive quarters from 4.1 percent in IVQ2011, to 2.0 percent in IQ2012, 1.3 percent in IIQ2012, 3.1 percent in IIIQ2012 that is more like 1.73 percent without inventory accumulation and national defense expenditures and 0.1 percent in IVQ2012 that is more likely 2.84 percent by adding 1.55 percentage points of inventory divestment and 1.28 percentage points of national defense expenditures. Weakness of growth is more clearly shown by adjusting the exceptional one-time contributions to growth from items that are not aggregate demand: 2.53 percentage points contributed by inventory change to growth of 4.1 percent in IVQ2011; 0.64 percentage points contributed by expenditures in national defense together with 0.73 points of inventory accumulation to growth of 3.1 percent in IIIQ2012; and deduction of 1.55 percentage points of inventory divestment and 1.28 percentage points of national defense expenditure reductions. The Bureau of Economic Analysis (BEA) of the US Department of Commerce released on Thus Feb 28, 2012, the second estimate of GDP for IVQ2012 at 0.1 percent seasonally-adjusted annual rate (SAAR) (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp4q12_2nd.pdf). In the four quarters of 2012, the US economy is growing at the annual equivalent rate of 2.0 percent {([(1.021/4(1.013)1/4(1.0173)1/4(1.0284)1/4]-1)100 = 2.0%} by excluding inventory accumulation of 0.73 percentage points and exceptional defense expenditures of 0.64 percentage points from growth 3.1 percent at SAAR in IIIQ2012 to obtain adjusted 1.73 percent SSAR and adding 1.28 percentage points of national defense expenditure reductions and 1.55 percentage points of inventory divestment to growth of 0.1 percent SAAR in IVQ2012 to obtain 2.84 percent.
In fact, it is evident to the public that this policy will be abandoned if inflation costs rise. There is concern of the production and employment costs of controlling future inflation. Even if there is no inflation, QE→∞ cannot be abandoned because of the fear of rising interest rates. The economy would operate in an inferior allocation of resources and suboptimal growth path, or interior point of the production possibilities frontier where the optimum of productive efficiency and wellbeing is attained, because of the distortion of risk/return decisions caused by perpetual financial repression. Not even a second-best allocation is feasible with the shocks to efficiency of financial repression in perpetuity.
The statement of the FOMC at the conclusion of its meeting on Dec 12, 2012, revealed policy intentions (http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm) practically unchanged in the statement at the conclusion of its meeting on Jan 30, 2013 (http://www.federalreserve.gov/newsevents/press/monetary/20130130a.htm) and at its meeting on Mar 20, 2013 (http://www.federalreserve.gov/newsevents/press/monetary/20130320a.htm):
“Release Date: Mar 20, 2013
For immediate release
Information received since the Federal Open Market Committee met in January suggests a return to moderate economic growth following a pause late last year. Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy has become somewhat more restrictive. Inflation has been running somewhat below the Committee's longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee continues to see downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. “
There are several important issues in this statement.
1. Mandate. The FOMC pursues a policy of attaining its “dual mandate” of (http://www.federalreserve.gov/aboutthefed/mission.htm):
“Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates”
2. Open-ended Quantitative Easing or QE∞. Earlier programs are continued with an additional open-ended $85 billion of bond purchases per month: “To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.”
3. Advance Guidance on “6 ¼ 2 ½ “Rule. Policy will be accommodative even after the economy recovers satisfactorily: “To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”
4. Monitoring and Policy Focus on Jobs. The FOMC reconsiders its policy continuously in accordance with available information: “In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.”
Unconventional monetary policy drives wide swings in allocations of positions into risk financial assets that generate instability instead of intended pursuit of prosperity without inflation. There is insufficient knowledge and imperfect tools to maintain the gap of actual relative to potential output constantly at zero while restraining inflation in an open interval of (1.99, 2.0). Symmetric targets appear to have been abandoned in favor of a self-imposed single jobs mandate of easing monetary policy even with the economy growing at or close to potential output that is actually a target of growth forecast. The impact on the overall economy and the financial system of errors of policy are magnified by large-scale policy doses of trillions of dollars of quantitative easing and zero interest rates. The US economy has been experiencing financial repression as a result of negative real rates of interest during nearly a decade and programmed in monetary policy statements until 2015 or, for practical purposes, forever. The essential calculus of risk/return in capital budgeting and financial allocations has been distorted. If economic perspectives are doomed until 2015 such as to warrant zero interest rates and open-ended bond-buying by “printing” digital bank reserves (http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html; see Shultz et al 2012), rational investors and consumers will not invest and consume until just before interest rates are likely to increase. Monetary policy statements on intentions of zero interest rates for another three years or now virtually forever discourage investment and consumption or aggregate demand that can increase economic growth and generate more hiring and opportunities to increase wages and salaries. The doom scenario used to justify monetary policy accentuates adverse expectations on discounted future cash flows of potential economic projects that can revive the economy and create jobs. If it were possible to project the future with the central tendency of the monetary policy scenario and monetary policy tools do exist to reverse this adversity, why the tools have not worked before and even prevented the financial crisis? If there is such thing as “monetary policy science”, why it has such poor record and current inability to reverse production and employment adversity? There is no excuse of arguing that additional fiscal measures are needed because they were deployed simultaneously with similar ineffectiveness.
Table IV-2 provides economic projections of governors of the Board of Governors of the Federal Reserve and regional presidents of Federal Reserve Banks released at the meeting of Mar 20, 2013. The Fed releases the data with careful explanations (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20130320.pdf). Columns “∆% GDP,” “∆% PCE Inflation” and “∆% Core PCE Inflation” are changes “from the fourth quarter of the previous year to the fourth quarter of the year indicated.” The GDP report for IVQ2012 is analyzed in Section I (http://cmpassocregulationblog.blogspot.com/2013/03/mediocre-gdp-growth-at-16-to-20-percent.html and earlier at http://cmpassocregulationblog.blogspot.com/2013/02/thirty-one-million-unemployed-or.html http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html) and the PCE inflation data from the report on personal income and outlays in Section IV (http://cmpassocregulationblog.blogspot.com/2013/03/mediocre-gdp-growth-at-16-to-20-percent.html and earlier at (http://cmpassocregulationblog.blogspot.com/2013/02/thirty-one-million-unemployed-or.html). The Bureau of Economic Analysis (BEA) provides the second estimate of IVQ2012 GDP and annual for 2012 with the third estimate be released on Mar 28 (http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm See Section I http://cmpassocregulationblog.blogspot.com/2013/03/mediocre-gdp-growth-at-16-to-20-percent.html and earlier at http://cmpassocregulationblog.blogspot.com/2013/02/thirty-one-million-unemployed-or.html). PCE inflation is the index of personal consumption expenditures (PCE) of the report of the Bureau of Economic Analysis (BEA) on “Personal Income and Outlays” (http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm), which is analyzed in Section IV http://cmpassocregulationblog.blogspot.com/2013/03/mediocre-gdp-growth-at-16-to-20-percent.html and earlier at http://cmpassocregulationblog.blogspot.com/2013/02/thirty-one-million-unemployed-or.html and the report for Nov 2012 at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states.html. The next report on “Personal Income and Outlays” for Feb will be released at 8:30 AM on Mar 29, 2013 (http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm). PCE core inflation consists of PCE inflation excluding food and energy. Column “UNEMP %” is the rate of unemployment measured as the average civilian unemployment rate in the fourth quarter of the year. The Bureau of Labor Statistics (BLS) provides the Employment Situation Report with the civilian unemployment rate in the first Friday of every month, which is analyzed in this blog. The report for Jan 2013 was released on Feb 1, 2013 and analyzed in this blog (http://cmpassocregulationblog.blogspot.com/2013/02/thirty-one-million-unemployed-or.html). The report for Feb 2013 was released on Mar 8, 2013 (http://www.bls.gov/ces/) and analyzed in this blog on Mar 10, 2013 (http://cmpassocregulationblog.blogspot.com/2013/03/thirty-one-million-unemployed-or.htm). The report for Mar 2013 will be released on Apr 5, 2013 (http://www.bls.gov/ces/) and analyzed in this blog in the comment on Apr 7. “Longer term projections represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy” (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20121212.pdf).
It is instructive to focus on 2013 as 2014, 2015 and longer term are too far away, and there is not much information even on what will happen in 2013 and beyond. The central tendency should provide reasonable approximation of the view of the majority of members of the FOMC but the second block of numbers provides the range of projections by FOMC participants. The first row for each year shows the projection introduced after the meeting of Mar 20, 2012 and the second row “PR” the projection of the Dec 12, 2012 meeting. There are three major changes in the view.
1. Growth “∆% GDP.” The FOMC has reduced the forecast of GDP growth in 2013 from 2.3 to 3.0 percent at the meeting in Dec 2012 to 2.3 to 2.8 percent at the meeting on Mar 20, 2013.
2. Rate of Unemployment “UNEM%.” The FOMC reduced the forecast of the rate of unemployment from 7.4 to 7.7 percent at the meeting on Dec 12, 2012 to 7.3 to 7.5 percent at the meeting on Mar 20, 2013.
3. Inflation “∆% PCE Inflation.” The FOMC changed the forecast of personal consumption expenditures (PCE) inflation from 1.3 to 2.0 percent at the meeting on Dec 12, 2012 to 1.3 to 1.7 percent at the meeting on Mar 20, 2013.
4. Core Inflation “∆% Core PCE Inflation.” Core inflation is PCE inflation excluding food and energy. There is again not much of a difference of the projection that changed from 1.6 to 1.9 percent at the meeting on Dec 12, 2012 to 1.5 to 1.6 percent at the meeting on Mar 20, 2013.
Table IV-2, US, Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents in FOMC, Dec 2012 and Mar 2012
| ∆% GDP | UNEM % | ∆% PCE Inflation | ∆% Core PCE Inflation | |
| Central | ||||
| 2013 | 2.3 to 2.8 | 7.3 to 7.5 | 1.3 to 1.7 | 1.5 to 1.6 1.6 to 1.9 |
| 2014 | 2.9 to 3.4 | 6.7 to 7.0 | 1.5 to 2.0 | 1.7 to 2.0 |
| 2015 | 2.9 to 3.7 3.0 to 3.7 | 6.0 to 6.5 6.0 to 6.6 | 1.7 to 2.0 1.7 to 2.0 | 1.8 to 2.1 1.8 to 2.0 |
| Longer Run Sep PR | 2.3 to 2.5 2.3 to 2.5 | 5.2 to 6.0 5.2 to 6.0 | 2.0 2.0 | |
| Range | ||||
| 2013 | 2.0 to 3.0 | 6.9 to 7.6 | 1.3 to 2.0 | 1.5 to 2.0 |
| 2014 | 2.6 to 3.8 | 6.1 to 7.1 | 1.4 to 2.1 | 1.5 to 2.1 |
| 2015 Dec PR | 2.5 to 3.8 2.5 to 4.2 | 5.7 to 6.5 5.7 to 6.8 | 1.6 to 2.6 1.5 to 2.2 | 1.7 to 2.6 1.7 to 2.2 |
| Longer Run Dec PR | 2.0 to 3.0 2.2 to 3.0 | 5.0 to 6.0 5.0 to 6.0 | 2.0 2.0 |
Notes: UEM: unemployment; PR: Projection
Source: Board of Governors of the Federal Reserve System, FOMC http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20130320.pdf
Another important decision at the FOMC meeting on Jan 25, 2012, is formal specification of the goal of inflation of 2 percent per year but without specific goal for unemployment (http://www.federalreserve.gov/newsevents/press/monetary/20120125c.htm):
“Following careful deliberations at its recent meetings, the Federal Open Market Committee (FOMC) has reached broad agreement on the following principles regarding its longer-run goals and monetary policy strategy. The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January.
The FOMC is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decision making by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.
Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee's policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee's goals.
The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances.
The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants' estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC's Summary of Economic Projections. For example, in the most recent projections, FOMC participants' estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 6.0 percent, roughly unchanged from last January but substantially higher than the corresponding interval several years earlier.
In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate. ”
The probable intention of this specific inflation goal is to “anchor” inflationary expectations. Massive doses of monetary policy of promoting growth to reduce unemployment could conflict with inflation control. Economic agents could incorporate inflationary expectations in their decisions. As a result, the rate of unemployment could remain the same but with much higher rate of inflation (see Kydland and Prescott 1977 and Barro and Gordon 1983; http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html See Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 99-116). Strong commitment to maintaining inflation at 2 percent could control expectations of inflation.
The FOMC continues its efforts of increasing transparency that can improve the credibility of its firmness in implementing its dual mandate. Table IV-3 provides the views by participants of the FOMC of the levels at which they expect the fed funds rate in 2012, 2013, 2014 and the in the longer term. Table IV-3 is inferred from a chart provided by the FOMC with the number of participants expecting the target of fed funds rate (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20130320.pdf). There are 18 participants expecting the rate to remain at 0 to ¼ percent in 2013 and one to be higher in the interval below 1.0 percent. The rate would still remain at 0 to ¼ percent in 2014 for 14 participants with three expecting the rate to be in the range of 1.0 to 2.0 percent, one participant expecting rates at 0.5 to 1.0 percent and one participant expecting rates from 2.0 to 3.0. This table is consistent with the guidance statement of the FOMC that rates will remain at low levels until late in 2014. For 2015, nine participants expect rates to be below 1.0 percent while nine expect rates from 1.0 to 4.5 percent. In the long-run, all 19 participants expect rates to be between 3.0 and 4.5 percent.
Table IV-3, US, Views of Target Federal Funds Rate at Year-End of Federal Reserve Board
Members and Federal Reserve Bank Presidents Participating in FOMC, June 20, 2012
| 0 to 0.25 | 0.5 to 1.0 | 1.0 to 1.5 | 1.0 to 2.0 | 2.0 to 3.0 | 3.0 to 4.5 | |
| 2013 | 18 | 1 | ||||
| 2014 | 14 | 1 | 3 | 1 | ||
| 2015 | 1 | 8 | 6 | 1 | 2 | 1 |
| Longer Run | 19 |
Source: Board of Governors of the Federal Reserve System, FOMC http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20130320.pdf
Additional information is provided in Table IV-4 with the number of participants expecting increasing interest rates in the years from 2013 to 2015. It is evident from Table IV-4 that the prevailing view of the FOMC is for interest rates to continue at low levels in future years. This view is consistent with the economic projections of low economic growth, relatively high unemployment and subdued inflation provided in Table IV-2.
Table IV-4, US, Views of Appropriate Year of Increasing Target Federal Funds Rate of Federal
Reserve Board Members and Federal Reserve Bank Presidents Participating in FOMC, June 20, 2012
| Appropriate Year of Increasing Target Fed Funds Rate | Number of Participants |
| 2013 | 1 |
| 2014 | 4 |
| 2015 | 13 |
| 2016 | 1 |
Source: Board of Governors of the Federal Reserve System, FOMC http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20130320.pdf
There are two categories of responses in the Empire State Manufacturing Survey of the Federal Reserve Bank of New York (http://www.newyorkfed.org/survey/empire/empiresurvey_overview.html): current conditions and expectations for the next six months. There are responses in the survey for two types of prices: prices received or inputs of production and prices paid or sales prices of products. Table IV-5 provides indexes for the two categories and within them for the two types of prices from Jan 2011 to Mar 2013. Current prices paid were rising at an accelerating rate from 35.79 in Jan 2011 to 69.89 in May 2011 but the rate of increase dropped significantly to 25.88 in Feb 2012, increasing sharply to 50.62 in Mar in the commodity price shock but falling to 45.78 in Apr, 37.35 in May, 19.59 in Jun and 7.41 in Jul as risk aversion caused decline of commodity prices. At the margin, the index of prices paid rose to 16.47 in Aug and 19.15 in Sep in yet net another bout of carry trade but eased to 17.20 in Oct, 14.61 in Nov and 16.13 in Dec 2012 with renewed risk aversion. The index of current prices paid increased to 22.58 in Jan 2013 and 26.26 in Feb 2013, easing marginally to 26.26 in Mar 2013. The index of current prices received also fell sharply from 27.96 in May 2011 to 4.49 in Oct 2011, meaning that prices were increasing at a very low rate and then rose to 13.58 in Mar 2012, increasing to 19.28 in Apr but declining to 12.05 in May, 1.03 in Jun, 3.70 in Jul, 2.35 in Aug, which is also relatively low, near the border of contraction at 0.0, and 5.32 in Sep 2012, easing to 4.30 in Oct 2012 and increasing to 5.62 in Nov 2012, falling to 1.08 in Dec 2012 and increasing to 10.75 in Jan 2013 and 8.08 in Feb 2013 but falling to 2.15 in Mar 2013. In the expectations for the next six months, the index of prices paid also declined from 68.82 in May 2011 to 56.98 in Dec 2011, rising to 66.67 in Mar 2012 but declining to 50.60 in Apr 2012, increasing to 57.83 in May and falling to 34.02 in Jun 2012, 35.80 in Jul and 31.76 in Aug but increasing to 40.43 in Sep 2012 and 44.09 in Oct 2012, declining to 39.33 in Nov 2012 and rising to 51.61 in Dec 2012, decreasing to 38.71 in Jan 2013 and 44.4 in Feb 2013, reaching 50.54 in Mar 2013. Expected prices received also rose in the first five months of 2011, declining from 35.48 in May 2011 to 15.22 in Aug 2011 but then rising to 32.10 in Mar 2012 and declining to 22.89 in Apr and May 2012, 17.53 in Jun, 16.05 in Jul and 14.12 in Aug but increasing to 23.40 in Sep 2012 and 24.73 in Oct 2012, declining to 15.73 in Nov 2012, rising to 25.81 in Dec 2012 and declining to 21.51 in Jan 2013 and 13.13 in Feb 2013 and increasing to 23.66 in Mar 2013. Unconventional monetary policy of zero interest rates and quantitative easing has increased the volatility of inflation via carry trades, creating uncertainty in financial and economic decisions.
Table IV-5, US, FRBNY Empire State Manufacturing Survey, Diffusion Indexes, Prices Paid and Prices Received, SA
| Current Prices Paid | Current Prices Received | Six Months Prices Paid | Six Months Prices Received | |
| Mar 2013 | 25.81 | 2.15 | 50.54 | 23.66 |
| Feb | 26.26 | 8.08 | 44.44 | 13.13 |
| Jan | 22.58 | 10.75 | 38.71 | 21.51 |
| Dec 2012 | 16.13 | 1.08 | 51.61 | 25.81 |
| Nov | 14.61 | 5.62 | 39.33 | 15.73 |
| Oct | 17.20 | 4.30 | 44.09 | 24.73 |
| Sep | 19.15 | 5.32 | 40.43 | 23.40 |
| Aug | 16.47 | 2.35 | 31.76 | 14.12 |
| Jul | 7.41 | 3.70 | 35.80 | 16.05 |
| Jun | 19.59 | 1.03 | 34.02 | 17.53 |
| May | 37.35 | 12.05 | 57.83 | 22.89 |
| Apr | 45.78 | 19.28 | 50.60 | 22.89 |
| Mar | 50.62 | 13.58 | 66.67 | 32.10 |
| Feb | 25.88 | 15.29 | 62.35 | 34.12 |
| Jan | 26.37 | 23.08 | 53.85 | 30.77 |
| Dec 2011 | 24.42 | 3.49 | 56.98 | 36.05 |
| Nov | 18.29 | 6.10 | 36.59 | 25.61 |
| Oct | 22.47 | 4.49 | 40.45 | 17.98 |
| Sep | 32.61 | 8.70 | 53.26 | 22.83 |
| Aug | 28.26 | 2.17 | 42.39 | 15.22 |
| Jul | 43.33 | 5.56 | 51.11 | 30.00 |
| Jun | 56.12 | 11.22 | 55.10 | 19.39 |
| May | 69.89 | 27.96 | 68.82 | 35.48 |
| Apr | 57.69 | 26.92 | 56.41 | 38.46 |
| Mar | 53.25 | 20.78 | 71.43 | 36.36 |
| Feb | 45.78 | 16.87 | 55.42 | 27.71 |
| Jan | 35.79 | 15.79 | 60.00 | 42.11 |
Source: http://www.newyorkfed.org/survey/empire/empiresurvey_overview.html
Price indexes of the Federal Reserve Bank of Philadelphia Outlook Survey are provided in Table IV-6. As inflation waves throughout the world (http://cmpassocregulationblog.blogspot.com/2013/03/recovery-without-hiring-ten-million.html), indexes of both current and expectations of future prices paid and received were quite high until May 2011. Prices paid, or inputs, were more dynamic, reflecting carry trades from zero interest rates to commodity futures. All indexes softened after May 2011 with even decline of prices received in Aug 2011 during the first round of risk aversion. Current and future price indexes have increased again but not back to the levels in the beginning of 2011 because of risk aversion frustrating carry trades even under zero interest rates. The index of prices paid or prices of inputs fell from 23.5 in Dec 2012 to 8.9 in Feb 2013. In Feb 2013 and 8.5 in Mar 2013; the index of current prices received was minus 0.5 in Feb 2013 and minus 0.7 in Mar 2013, indicating moderate decrease of prices received. The index of future prices paid fell to 26.4 in Feb 2013 from 45.8 in Dec 2012, indicating expectation of lower pressure of increases of input prices but rose to 30.9 in Mar 2013 while the index of future prices received fell marginally from 25.6 in Dec 2012 to 25.4 in Feb 2013 and 16.6 in Mar 2013. Expectations are incorporating faster increases in prices of inputs or costs of production than of sales of produced goods.
Table IV-6, US, Federal Reserve Bank of Philadelphia Business Outlook Survey, Current and Future Prices Paid and Prices Received, SA
| Current Prices Paid | Current Prices Received | Future Prices Paid | Future Prices Paid | |
| Dec 2010 | 44.3 | 6.6 | 59.6 | 25.3 |
| Jan 2011 | 48.9 | 11.9 | 58.3 | 34.4 |
| Feb | 58.9 | 13.1 | 62.1 | 33.3 |
| Mar | 57.5 | 16.8 | 60.2 | 31.8 |
| Apr | 49.4 | 19.8 | 54.2 | 32.4 |
| May | 47.7 | 18.5 | 52.7 | 27.6 |
| Jun | 38.9 | 8.1 | 38.3 | 6.8 |
| Jul | 35.6 | 6.0 | 49.6 | 16.7 |
| Aug | 23.3 | -4.7 | 44.3 | 22.7 |
| Sep | 31.6 | 7.6 | 41.8 | 21.8 |
| Oct | 25.4 | 4.1 | 44.5 | 28.4 |
| Nov | 26.3 | 7.6 | 39.0 | 29.1 |
| Dec 2011 | 27.5 | 8.2 | 46.7 | 23.5 |
| Jan 2012 | 27.1 | 7.9 | 47.2 | 21.9 |
| Feb | 30.2 | 9.7 | 43.5 | 28.6 |
| Mar | 14.3 | 5.4 | 35.9 | 22.0 |
| Apr | 16.0 | 5.3 | 33.3 | 18.6 |
| May | 5.4 | -2.2 | 37.2 | 8.3 |
| Jun | 5.4 | -3.4 | 29.6 | 16.6 |
| Jul | 10.3 | 4.2 | 29.3 | 19.6 |
| Aug | 15.7 | 4.7 | 38.0 | 23.9 |
| Sep | 15.4 | 4.0 | 42.8 | 27.4 |
| Oct | 20.6 | 8.4 | 48.1 | 16.1 |
| Nov | 27.9 | 7.5 | 50.7 | 14.0 |
| Dec 2012 | 23.5 | 12.4 | 45.8 | 25.6 |
| Jan 2013 | 14.7 | -1.1 | 34.3 | 21.7 |
| Feb | 8.9 | -0.5 | 26.4 | 25.4 |
| Mar | 8.5 | -0.8 | 30.9 | 16.6 |
Source: Federal Reserve Bank of Philadelphia http://www.philadelphiafed.org/index.cfm
Chart IV-1 of the Business Outlook Survey of the Federal Reserve Bank of Philadelphia Outlook Survey provides the diffusion index of current prices paid or prices of inputs from 2006 to 2013. Recession dates are in shaded areas. In the middle of deep global contraction after IVQ2007, input prices continued to increase in speculative carry trades from central bank policy rates falling toward zero into commodities futures. The index peaked above 70 in the second half of 2008. Inflation of inputs moderated significantly during the shock of risk aversion in late 2008, even falling briefly into contraction territory below zero during several months in 2009 in the flight away from risk financial assets into US government securities (Cochrane and Zingales 2009) that unwound carry trades. Return of risk appetite induced carry trade with significant increase until return of risk aversion in the first round of the European sovereign debt crisis in Apr 2010. Carry trades returned during risk appetite in expectation that the European sovereign debt crisis was resolved. The various inflation waves originating in carry trades induced by zero interest rates with alternating episodes of risk aversion are mirrored in the prices of inputs after 2011, in particular after Aug 2012 with the announcement of the Outright Monetary Transactions Program of the European Central Bank (http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html). Subsequent risk aversion caused sharp decline in the index of prices paid.
Chart IV-1, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid Diffusion Index SA
Source: Federal Reserve Bank of Philadelphia
http://www.philadelphiafed.org/index.cfm
Chart IV-2 of the Federal Reserve Bank of Philadelphia Outlook Survey provides the diffusion index of current prices received from 2006 to 2013. The significant difference between the index of current prices paid in Chart IV-1 and the index of current prices paid in Chart IV-2 is that increases in prices paid are significantly sharper than increases in prices received. There were several periods of negative readings of prices received from 2010 to 2013 but none of prices paid. Prices paid relative to prices received deteriorate most of the time largely because of the carry trades from zero interest rates to commodity futures. Profit margins of business are compressed intermittently by fluctuations of commodity prices induced by unconventional monetary policy of zero interest rates, frustrating production, investment and hiring decisions of business, which is precisely the opposite outcome desired by unconventional monetary policy.
Chart IV-2, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Received Diffusion Index SA
Source: Federal Reserve Bank of Philadelphia http://www.philadelphiafed.org/index.cfm
The producer price index of Germany decreased 0.1 percent in Feb 2013, calendar and seasonally adjusted (CSA), increased 0.1 not seasonally adjusted (NS) in Feb 2013 and increased 1.2 percent in the 12 months ending in Feb 2013, as shown in Table IV-7. The producer price index of Germany has similar waves of inflation as in many other countries (http://cmpassocregulationblog.blogspot.com/2013/03/recovery-without-hiring-ten-million.html). In the first wave from Jan to Apr 2011, the annual equivalent rate of producer price inflation was 10.4 percent NSA and 6.5 percent CSA, propelled by carry trades from zero interest rates to exposures in commodity futures in a mood of risk appetite. In the second wave in May and Jun 2011, the annual equivalent rate of producer price inflation was only 0.6 percent NSA because of the collapse of the carry trade in fear of risks of European sovereign debt but 4.3 percent CSA. In the third wave from Jul to Sep 2011, annual-equivalent producer price inflation in Germany was 2.8 percent NSA and 3.7 percent CSA with fluctuations in commodity prices resulting from perceptions of the sovereign risk crisis in Europe. In the fourth wave from Oct to Nov 2011, annual equivalent inflation was 1.8 percent NSA and 3.7 percent CSA. In the fifth wave from Dec 2011 to Jan 2012, annual equivalent inflation was at 1.2 percent NSA and 0.0 percent CSA in return of risk aversion. In the sixth wave, annual equivalent inflation increased to 6.2 percent in Feb-Mar 2012 NSA and 4.9 percent in Feb-Apr and 1.2 percent CSA. In the seventh wave, annual equivalent inflation was minus 2.8 percent in May-Jul 2012 NSA and minus 0.8 percent SA. In the eighth wave, annual equivalent inflation was 4.9 percent in Aug-Sep 2012 NSA and 5.5 percent SA. In the ninth wave, renewed risk aversion resulted in annual equivalent inflation of minus 1.6 percent in Oct-Dec 2012 and 1.6 percent CSA. In the tenth wave, annual equivalent inflation was 5.5 percent NSA and 0.6 percent CSA in Jan-Feb 2013. Data in the bottom of Table IV-9 show that the producer price index fell 5.2 percent in the 12 months ending in Dec 2009 as a result of the fall of commodity prices originating in risk aversion after the panic of 2008.
Table IV-7, Germany, Index of Producer Prices for Industrial Products ∆%
| 12 Months ∆% NSA | Month ∆% Calendar and SA | Month ∆% NSA | |
| Feb 2013 | 1.2 | -0.1 | 0.1 |
| Jan | 1.7 | 0.2 | 0.8 |
| AE ∆% Jan-Feb | 0.6 | 5.5 | |
| Dec 2012 | 1.5 | 0.2 | -0.3 |
| Nov | 1.4 | 0.1 | -0.1 |
| Oct | 1.5 | 0.1 | 0.0 |
| AE ∆% Oct-Dec | 1.6 | -1.6 | |
| Sep | 1.7 | 0.3 | 0.3 |
| Aug | 1.6 | 0.6 | 0.5 |
| AE ∆% Aug-Sep | 5.5 | 4.9 | |
| Jul | 0.9 | -0.2 | 0.0 |
| Jun | 1.6 | -0.1 | -0.4 |
| May | 2.1 | 0.1 | -0.3 |
| AE ∆% May-Jul | -0.8 | -2.8 | |
| Apr | 2.4 | -0.2 | 0.2 |
| Mar | 3.3 | 0.3 | 0.6 |
| Feb | 3.2 | 0.2 | 0.4 |
| AE ∆% Feb-Apr | 1.2 | 4.9 | |
| Jan | 3.4 | 0.1 | 0.6 |
| Dec 2011 | 4.0 | -0.1 | -0.4 |
| AE ∆% Dec-Jan | 0.0 | 1.2 | |
| Nov | 5.2 | 0.3 | 0.1 |
| Oct | 5.3 | 0.3 | 0.2 |
| AE ∆% Oct-Nov | 3.7 | 1.8 | |
| Sep | 5.5 | 0.3 | 0.3 |
| Aug | 5.5 | 0.1 | -0.3 |
| Jul | 5.8 | 0.5 | 0.7 |
| AE ∆% Jul-Sep | 3.7 | 2.8 | |
| Jun | 5.6 | 0.3 | 0.1 |
| May | 6.1 | 0.4 | 0.0 |
| AE ∆% May-Jun | 4.3 | 0.6 | |
| Apr | 6.4 | 0.6 | 1.0 |
| Mar | 6.2 | 0.3 | 0.4 |
| Feb | 6.4 | 0.6 | 0.7 |
| Jan | 5.7 | 0.6 | 1.2 |
| AE ∆% Jan-Apr | 6.5 | 10.4 | |
| Dec 2010 | 5.3 | 0.8 | 0.7 |
| Nov | 4.4 | 0.4 | 0.2 |
| Oct | 4.3 | 0.4 | 0.4 |
| Sep | 3.9 | 0.5 | 0.3 |
| Aug | 3.2 | 0.2 | 0.0 |
| Jul | 3.7 | 0.6 | 0.5 |
| Jun | 1.7 | 0.5 | 0.6 |
| May | 0.9 | 0.3 | 0.3 |
| Apr | 0.6 | 0.5 | 0.8 |
| Mar | -1.5 | 0.6 | 0.7 |
| Feb | -2.9 | 0.1 | 0.0 |
| Jan | -3.4 | 0.4 | 0.8 |
| Dec 2009 | -5.2 | 0.2 | -0.1 |
| Dec 2008 | 4.0 | -0.2 | -0.8 |
| Dec 2007 | 1.9 | 0.4 | -0.1 |
| Dec 2006 | 4.2 | 0.3 | 0.1 |
| Dec 2005 | 4.8 | 0.5 | 0.3 |
| Dec 2004 | 2.9 | 0.3 | 0.1 |
| Dec 2003 | 1.8 | 0.0 | |
| Dec 2002 | 0.5 | 0.1 | |
| Dec 2001 | 0.1 | -0.2 |
Source: Statistisches Bundesamt Deutschland https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
Chart IV-7 of the Federal Statistical Agency of Germany Statistiche Bundesamt Deutschland provides the producer price index of Germany from 2005 to 2013. Producer price inflation peaked in 2008 with the rise of commodity prices induced by the carry trade from zero interest rates to commodity futures during a global contraction. Prices then declined with the flight away from risk financial assets to government obligations after the financial panic in Sep 2008. With zero interest rates and no risk aversion, the carry trade pushed commodity futures prices upwardly resulting in new rising trend of the producer price index. The right-hand side of the chart shows moderation and even decline in prices because of severe risk aversion frustrating carry trades from zero interest rates to commodity futures but then return of risk appetite with another surge of the index in annual equivalent rate at 6.2 percent in Feb-Mar 2012 and 4.9 percent annual equivalent in Feb-Apr 2012 but decline of 0.3 percent in May 2012 and 0.4 percent in Jun 2012 with flat prices in Jul 2012 with the pace at annual equivalent rate of minus 4.1 percent in May-Jun 2012 and flat prices in Jul 2012. Inflation returned in Aug and Sep 2012 with carry trades into commodity futures with 4.9 percent annual equivalent. Inflation then collapsed to zero in Oct 2012 NSA, minus 0.1 percent in Nov 2012 and minus 0.3 percent in Dec 2012 with increases of 0.8 percent in Jan 2013 and 0.1 percent in Feb 2013.
Chart IV-3, Germany, Index of Producer Prices for Industrial Products, 2005=100
Source: Statistisches Bundesamt Deutschland
https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
Chart IV-4 provides the index of producer finished goods in the US from 2005 to 2013. Chart IV-4 of the US mirrors behavior in Chart IV-3 of Germany. Carry trades from zero interest rates to exposures in commodity futures and risk financial assets have synchronized worldwide inflation during periods of risk appetite and disinflation during periods of risk aversion.
Chart IV-4, US, Producer Price Index, Finished Goods, NSA, 2005-2013
Source: US Bureau of Labor Statistics
Chart IV-5 of the Federal Statistical Agency of Germany Statistiche Bundesamt Deutschland provides the unadjusted producer price index, trend and trend ends. There is a clear upward trend of prices after the end of risk aversion with zero interest rates in 2009. The actual curve fell below trend in the current episode of severe risk aversion but rose again in Feb-Apr 2012, falling in May-Jun 2012 with flat prices in Jul 2012, another increase in Aug-Sep 2012 and flat prices in Oct 2012 with declines of 0.1 percent in Nov 2012 and 0.3 percent in Dec 2012 followed by sharp increase of 0.8 percent in Jan 2013 and 0.1 percent in Feb 2013.
Chart IV-5, Germany, Producer Price Index, Non-adjusted Value and Trend, 2005=100
Source: Statistiche Bundesamt Deutschland
https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html
Inflation in the UK is somewhat higher than in many advanced economies, deserving more detailed analysis. Table IV-8 provides 12-month percentage changes of UK output prices for all manufactured products, excluding food, beverage and petroleum and excluding duty. The 12-month rates rose significantly in 2011 in all three categories, reaching 6.3 percent for all manufactured products in Sep 2011 but declining to 5.7 percent in Oct, 5.4 in Nov and down to 1.8 percent in Jul 2012, increasing marginally to 2.3 percent in Aug 2012, 2.5 percent in Sep, 2.6 in Oct, 2.1 percent in Nov 2012, 2.2 percent in Dec 2012, 2.1 percent in Jan 2013 and 2.3 percent in Feb 2013. Output price inflation is highly sensitive to commodity prices as shown by the increase by 6.7 percent in 2008 when oil prices rose over $140/barrel even in the midst of a global recession driven by the carry trade from zero interest rates to oil futures. The mirage episode of false deflation in 2001 and 2002 is also captured by output prices for the UK, which was originated in decline of commodity prices (see Barsky and Killian 2004) but was used as an argument for unconventional monetary policy of zero interest rates and quantitative easing during the past decade.
Table IV-8, UK Output Prices 12 Months ∆% NSA
| All Manufactured Products | Excluding Food, Beverage, Tobacco and | All Excluding Duty | |
| Feb 2013 | 2.3 | 1.3 | 2.1 |
| Jan | 2.1 | 1.4 | 1.9 |
| Dec 2012 | 2.2 | 1.5 | 1.9 |
| Nov | 2.1 | 1.4 | 1.8 |
| Oct | 2.6 | 1.4 | 2.3 |
| Sep | 2.5 | 1.2 | 2.2 |
| Aug | 2.3 | 1.2 | 1.9 |
| Jul | 1.8 | 1.2 | 1.5 |
| Jun | 2.0 | 1.7 | 1.7 |
| May | 2.8 | 2.1 | 2.5 |
| Apr | 3.3 | 2.3 | 3.1 |
| Mar | 3.7 | 2.5 | 3.5 |
| Feb | 4.1 | 3.0 | 4.1 |
| Jan | 4.0 | 2.4 | 4.0 |
| Dec 2011 | 4.8 | 3.0 | 4.8 |
| Nov | 5.4 | 3.1 | 5.6 |
| Oct | 5.7 | 3.3 | 5.9 |
| Sep | 6.3 | 3.7 | 6.4 |
| Aug | 6.0 | 3.5 | 6.2 |
| Jul | 6.1 | 3.4 | 6.2 |
| Jun | 5.8 | 3.2 | 5.9 |
| May | 5.4 | 3.4 | 5.5 |
| Apr | 5.6 | 3.6 | 5.8 |
| Mar | 5.6 | 3.1 | 5.5 |
| Feb | 5.3 | 3.1 | 5.2 |
| Jan | 5.0 | 3.3 | 5.0 |
| Dec 2010 | 4.2 | 2.7 | 4.0 |
| Year ∆% | |||
| 2012 | 2.8 | 1.8 | 2.5 |
| 2011 | 5.6 | 3.4 | 5.7 |
| 2010 | 4.2 | 3.0 | 3.9 |
| 2009 | 1.6 | 2.5 | 1.0 |
| 2008 | 6.7 | 3.7 | 6.7 |
| 2007 | 2.4 | 1.4 | 2.1 |
| 2006 | 2.0 | 1.5 | 2.0 |
| 2005 | 1.9 | 1.0 | 1.9 |
| 2004 | 1.0 | -0.3 | 0.6 |
| 2003 | 0.6 | 0.1 | 0.5 |
| 2002 | -0.1 | -0.4 | -0.1 |
| 2001 | -0.3 | -0.6 | -0.3 |
| 2000 | 1.4 | -0.5 | 0.8 |
| 1999 | 0.6 | -1.0 | -0.3 |
| 1998 | 0.0 | -0.9 | -0.9 |
| 1997 | 0.9 | 0.3 | 0.1 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/february-2013/index.html
Monthly and annual equivalent rates of change of output prices are shown in Table IV-9. There are waves of inflation similar to those in other countries (http://cmpassocregulationblog.blogspot.com/2013/03/recovery-without-hiring-ten-million.html). In the first wave, annual equivalent inflation was 12.0 percent in Jan-Apr 2011 with relaxed risk aversion in commodity markets. In the second wave, intermittent risk aversion resulted in annual equivalent inflation of 2.0 percent in May-Oct 2011. In the third wave, alternation of risk aversion resulted in annual equivalent inflation of 1.6 percent in Nov 2011 to Jan 2012. In the fourth wave, the energy commodity shock processed through carry trades caused the jump of annual equivalent inflation to 7.9 percent in Feb-Apr 2012. A fifth wave occurred in May-Jun 2012 with decline of output inflation by 5.3 percent annual equivalent in an environment of risk aversion that caused decline of commodity prices. A sixth wave under commodity shocks induced by carry trades from zero interest rates resulted in annual equivalent inflation of 4.5 percent in Jul-Sep 2012 and 4.0 percent in Jul-Oct 2012. In the seventh wave, annual equivalent inflation in Nov-Dec 2012 fell to minus 2.4 percent. In the eighth wave, annual equivalent inflation returned at 6.2 percent in Jan-Feb 2013.
Table IV-9, UK Output Prices Month ∆% NSA
| All Manufactured Products | Excluding Food, Beverage and | All Excluding Duty | |
| Feb 2013 | 0.8 | 0.3 | 0.8 |
| Jan | 0.2 | 0.3 | 0.3 |
| ∆% AE Jan | 6.2 | 3.7 | 6.8 |
| Dec 2012 | -0.1 | 0.0 | -0.1 |
| Nov | -0.3 | -0.1 | -0.2 |
| ∆% AE Nov-Dec | -2.4 | -0.6 | -1.8 |
| Oct | 0.2 | 0.1 | 0.2 |
| Sep | 0.5 | 0.3 | 0.5 |
| Aug | 0.5 | 0.1 | 0.6 |
| Jul | 0.1 | -0.1 | 0.1 |
| ∆% AE Jul-Oct | 4.0 | 1.2 | 4.3 |
| Jun | -0.6 | -0.2 | -0.6 |
| May | -0.3 | -0.1 | -0.4 |
| ∆% AE May-Jun | -5.3 | -1.8 | -5.8 |
| Apr | 0.7 | 0.6 | 0.5 |
| Mar | 0.6 | 0.1 | 0.5 |
| Feb | 0.6 | 0.5 | 0.6 |
| ∆% AE Feb-Apr | 7.9 | 4.9 | 6.6 |
| Jan | 0.4 | 0.3 | 0.3 |
| Dec 2011 | -0.2 | -0.1 | -0.2 |
| Nov | 0.2 | -0.1 | 0.2 |
| ∆% AE Nov-Jan | 1.6 | 0.4 | 1.2 |
| Oct | 0.0 | -0.1 | 0.1 |
| Sep | 0.3 | 0.3 | 0.2 |
| Aug | 0.0 | 0.1 | 0.1 |
| Jul | 0.3 | 0.4 | 0.3 |
| Jun | 0.2 | 0.2 | 0.2 |
| May | 0.2 | 0.2 | 0.2 |
| ∆% AE May-Oct | 2.0 | 2.2 | 2.2 |
| Apr | 1.1 | 0.8 | 0.9 |
| Mar | 1.1 | 0.5 | 1.1 |
| Feb | 0.5 | 0.0 | 0.5 |
| Jan | 1.1 | 0.8 | 1.1 |
| Jan-Apr | 12.0 | 6.5 | 11.4 |
| Dec 2010 | 0.5 | 0.0 | 0.6 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/february-2013/index.html
Input prices in the UK have been more dynamic than output prices until the current event of risk aversion, as shown by Table IV-10, but with sharp oscillations because of the commodity and raw material content. The 12-month rates of increase of input prices, even excluding food, tobacco, beverages and petroleum, are very high, reaching 18.1 percent in Sep 2011 for materials and fuels purchased and 13.3 percent excluding food, beverages and petroleum. Inflation in 12 months of materials and fuels purchased moderated to 5.4 percent in Mar 2012 and 4.1 percent excluding food, tobacco, beverages and petroleum with the rates falling further in Apr to 1.1 percent for materials and fuels purchased and 2.2 percent excluding food, tobacco, beverages and petroleum. Input-price inflation collapsed in the 12 months ending in Jul 2012 to minus 2.6 percent for materials and fuels purchased and minus 1.5 percent excluding food, beverages and tobacco. Inflation returned at 1.2 percent in the 12 months ending in Aug 2012 but minus 0.5 percent excluding food, tobacco, beverages and petroleum. Inflation of input prices in Sep 2012 was minus 0.8 percent and minus 0.8 percent excluding food, beverages and petroleum. In Nov 2012, inflation of input prices of all manufacturing and materials purchased was minus 0.1 percent in 12 months and minus 0.2 percent in 12 months excluding food, tobacco, beverages and petroleum. Inflation of materials and fuels purchased in 12 months was 0.6 percent in Dec 2012 and 0.1 percent excluding tobacco, beverages and petroleum. Inflation of inputs returned with 1.9 percent in the 12 months ending in Jan 2013 and 0.7 percent excluding various items, increasing to 2.5 percent in Feb 2013 and 1.8 percent excluding various items. There is comparable experience with 22.2 percent inflation of materials and fuels purchased in 2008 and 16.9 percent excluding food, beverages and petroleum followed in 2009 by decline of 3.8 percent by materials and fuels purchased and increase of 1.6 percent for the index excluding items. UK input and output inflation is sensitive to commodity price increases driven by carry trades from zero interest rates. The mirage of false deflation is also observed in input prices in 1997-9 and then again from 2001 to 2003.
Table IV-10, UK, Input Prices 12-Month ∆% NSA
| All Manufacturing Materials and Fuels Purchased | Excluding Food, Tobacco, Beverages and Petroleum | |
| Feb 2013 | 2.5 | 1.8 |
| Jan | 1.9 | 0.7 |
| Dec 2012 | 0.6 | 0.1 |
| Nov | -0.1 | -0.2 |
| Oct | 0.2 | -0.4 |
| Sep | -0.8 | -0.8 |
| Aug | 1.2 | -0.5 |
| Jul | -2.6 | -1.5 |
| Jun | -2.2 | -0.3 |
| May | 0.1 | 1.1 |
| Apr | 1.1 | 2.2 |
| Mar | 5.4 | 4.1 |
| Feb | 7.7 | 5.7 |
| Jan | 6.5 | 5.6 |
| Dec 2011 | 8.9 | 7.2 |
| Nov | 13.8 | 10.2 |
| Oct | 14.5 | 11.0 |
| Sep | 18.1 | 13.3 |
| Aug | 16.3 | 13.0 |
| Jul | 18.5 | 13.3 |
| Jun | 16.8 | 12.6 |
| May | 16.3 | 11.4 |
| Apr | 17.9 | 12.2 |
| Mar | 14.8 | 10.3 |
| Feb | 14.9 | 10.7 |
| Jan | 14.2 | 10.5 |
| Dec 2010 | 13.1 | 9.0 |
| Year ∆% | ||
| 2012 | 1.3 | 1.2 |
| 2011 | 15.4 | 11.3 |
| 2010 | 9.9 | 5.7 |
| 2009 | -3.8 | 1.6 |
| 2008 | 22.2 | 16.9 |
| 2007 | 2.9 | 2.4 |
| 2006 | 9.8 | 7.2 |
| 2005 | 11.0 | 6.9 |
| 2004 | 3.3 | 1.6 |
| 2003 | 1.2 | -0.6 |
| 2002 | -4.4 | -4.8 |
| 2001 | -1.2 | -1.2 |
| 2000 | 7.4 | 3.7 |
| 1999 | -1.3 | -3.6 |
| 1998 | -9.1 | -4.6 |
| 1997 | -8.2 | -6.3 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/february-2013/index.html
Table IV-11 provides monthly percentage changes of UK input prices for materials and fuels purchased and excluding food, tobacco, beverages and petroleum. There are strong waves of inflation of input prices in the UK similar to those worldwide (http://cmpassocregulationblog.blogspot.com/2013/03/recovery-without-hiring-ten-million.html). In the first wave, input prices rose at the high annual equivalent rate of 35.6 percent in Jan-Apr 2011, driven by carry trades from unconventional monetary policy into commodity exposures. In the second wave, alternating risk aversion caused annual equivalent inflation of minus 3.1 percent in May-Oct 2011. In the third wave, renewed risk aversion resulted in annual equivalent inflation of minus 1.2 percent in Nov-Dec 2011. In the fourth wave, annual equivalent inflation of input prices in the UK surged at 18.1 percent in Jan-Mar 2012 under relaxed risk aversion. In the fifth wave, annual equivalent inflation was minus 21.9 percent in Apr-Jun 2012 because of collapse of commodity prices during increasing risk aversion. In the sixth wave, annual equivalent inflation of materials and fuels purchased jumped to 14.0 percent in Jul-Aug 2012. In the seventh wave, annual equivalent inflation moderated to 1.5 percent in Sep-Dec 2012. In the eighth wave, annual equivalent inflation in Jan-Feb 2013 jumped to 30.5 percent.
Table IV-11, UK Input Prices Month ∆%
| All Manufacturing Materials and Fuels Purchased NSA | Excluding Food, Tobacco, Beverages and Petroleum SA | |
| Feb 2013 | 3.2 | 1.5 |
| Jan | 1.3 | 0.4 |
| ∆% Jan-Feb | 30.5 | 12.0 |
| Dec 2012 | 0.1 | -0.1 |
| Nov | 0.1 | 0.3 |
| Oct | 0.2 | 0.3 |
| Sep | 0.1 | 0.2 |
| ∆% Sep-Dec | 1.5 | 2.1 |
| Aug | 2.0 | 1.0 |
| Jul | 0.2 | -0.3 |
| ∆% Jul-Aug | 14.0 | 4.3 |
| Jun | -2.1 | -0.2 |
| May | -2.6 | -0.8 |
| Apr | -1.4 | 0.1 |
| ∆% Apr-Jun | -21.9 | -3.6 |
| Mar | 1.6 | -0.6 |
| Feb | 2.5 | 0.7 |
| Jan | 0.1 | -0.1 |
| ∆% AE Jan-Mar | 18.1 | 0.0 |
| Dec 2011 | -0.6 | -0.7 |
| Nov | 0.4 | 0.1 |
| ∆% AE Nov-Dec | -1.2 | -3.6 |
| Oct | -0.8 | -0.5 |
| Sep | 2.1 | 0.6 |
| Aug | -1.9 | 0.1 |
| Jul | 0.6 | 0.9 |
| Jun | 0.1 | 1.0 |
| May | -1.6 | -0.1 |
| ∆% AE May-Oct | -3.1 | 4.1 |
| Apr | 2.8 | 2.0 |
| Mar | 3.8 | 1.0 |
| Feb | 1.4 | 1.0 |
| Jan | 2.3 | 1.5 |
| ∆% AE Jan-Apr | 35.6 | 17.8 |
| Dec 2010 | 3.9 | 1.9 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/february-2013/index.html
The UK Office for National Statistics also provides contributions in percentage points to the monthly and 12-month rates of inflation of manufactured products, shown in Table IV-12. There are high contributions of 0.56 percentage points by food products, 0.67 percentage points by tobacco and alcohol, 0.29 percentage points by computer, electrical and optical and 0.32 percentage points by other manufactured products. There are diversified sources of contributions to 12 months output price inflation such as 0.14 percentage points by clothing, textile and leather and 0.13 percentage points by transport equipment. Petroleum contributed 0.17 percentage points. In general, contributions by products rich in commodities are the drivers of inflation. There were diversified contributions in percentage points to monthly inflation: 0.06 percentage points by food products, 0.10 percentage points by tobacco and alcohol, 0.04 percentage points by other manufactured products and 0.04 percentage points by transport equipment. The increase of petroleum prices by 3.7 percent contributed 0.43 percentage points to monthly inflation of manufactured products and increase of 0.1 percent by clothing added 0.01 percentage points.
Table IV-12, UK, Contributions to Month and 12-Month Change in Prices of All Manufactured Products, Percentage Points, NSA
| Feb 2013 | 12 Months | 12 Months ∆% | Month % Points | Month ∆% |
| Total % | 2.3 | 0.8 | ||
| Food Products | 0.56 | 3.4 | 0.06 | 0.4 |
| Tobacco & Alcohol | 0.67 | 6.2 | 0.10 | 0.8 |
| Clothing, Textile & Leather | 0.13 | 1.2 | 0.01 | 0.1 |
| Paper and Printing | -0.03 | -0.9 | -0.01 | -0.3 |
| Petroleum | 0.17 | 1.4 | 0.43 | 3.7 |
| Chemical & Pharmaceutical | 0.03 | 0.4 | 0.07 | 0.7 |
| Metal, Machinery & Equipment | -0.01 | -0.2 | 0.01 | 0.3 |
| Computer, Electrical & Optical | 0.29 | 3.4 | 0.05 | 0.6 |
| Transport Equipment | 0.16 | 1.7 | 0.04 | 0.4 |
| Other Manufactured Products | 0.32 | 1.9 | 0.04 | 0.2 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/february-2013/index.html
The UK Office for National Statistics also provides contributions in percentage points to the monthly and 12-month rates of inflation of input prices, shown in Table IV-13. Crude oil is a large factor with contribution of 0.01 percentage points to the 12-month rate but dominating contribution of 1.9 percentage points to the monthly rate in Feb 2013. Inflation also transfers to the domestic economy through the prices of imported inputs: imported metals deducted 0.29 percentage points from the 12-month rate and added 0.26 percentage points to the Feb rate. Domestic food added 1.46 percentage points to the 12-month rate and added 0.13 percentage points to the Feb rate. Reversals of commodity exposures in carry trades during risk aversion and renewals of exposures during risk appetite are a major source of financial instability.
Table IV-13, UK, Contributions to Month and 12-Month Change in Prices of Inputs, Percentage Points NSA
| Feb 2013 | 12 Months | 12 Months ∆% | Month % Points | Month ∆% |
| Total | 2.5 | 3.2 | ||
| Fuel | 0.22 | 2.2 | -0.02 | -0.2 |
| Crude Oil | 0.01 | 0.0 | 1.93 | 7.1 |
| Domestic Food Materials | 1.46 | 15.3 | 0.13 | 1.1 |
| Imported Food Materials | 0.26 | 5.0 | 0.10 | 1.8 |
| Other Domestic Produced Materials | 0.00 | 0.1 | -0.01 | -0.3 |
| Imported Metals | -0.29 | -3.8 | 0.26 | 3.6 |
| Imported Chemicals | 0.22 | 2.1 | 0.24 | 2.2 |
| Imported Parts and Equipment | 0.33 | 2.3 | 0.37 | 2.5 |
| Other Imported Materials | 0.30 | 3.1 | 0.21 | 2.1 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/february-2013/index.html
Consumer price inflation in the UK is shown in Table IV-14. The CPI index increased 0.7 percent in Feb 2013 and 2.8 percent in 12 months. The same inflation waves (http://cmpassocregulationblog.blogspot.com/2013/03/recovery-without-hiring-ten-million.html) are present in UK CPI inflation. In the first wave in Jan-Apr 2011, annual equivalent inflation was at a high 6.5 percent. In the second wave in May-Jul 2011, annual equivalent inflation fell to only 0.4 percent. In the third wave in Aug-Nov 2011, annual equivalent inflation returned at 4.6 percent. In the fourth wave in Dec 2011 to Jan 2012, annual equivalent inflation was minus 0.6 percent because of decline of 0.5 percent in Jan 2012. In the fifth wave, annual equivalent inflation increased to 6.2 percent in Feb-Apr 2012. In the seventh wave, annual equivalent inflation was minus 3.0 percent in May-Jun 2012. In the eighth wave, annual equivalent inflation in Jul-Dec 2012 was 4.5 percent and 6.2 percent in Oct 2012 with the rate in Oct caused mostly by increases in university tuition payments. In the ninth wave, annual equivalent inflation was minus 5.8 percent in Jan 2013. In the tenth wave, annual equivalent inflation jumped to 8.7 percent in Feb 2013.
Table IV-14, UK, Consumer Price Index All Items, Month and 12-Month ∆%
| Month ∆% | 12 Months ∆% | |
| Feb 2013 | 0.7 | 2.8 |
| AE ∆% Feb | 8.7 | |
| Jan 2013 | -0.5 | 2.7 |
| AE ∆% Jan | -5.8 | |
| Dec 2012 | 0.5 | 2.7 |
| Nov | 0.2 | 2.7 |
| Oct | 0.5 | 2.7 |
| Sep | 0.4 | 2.2 |
| Aug | 0.5 | 2.5 |
| Jul | 0.1 | 2.6 |
| AE ∆% Jul-Dec | 4.5 | |
| Jun | -0.4 | 2.4 |
| May | -0.1 | 2.8 |
| AE ∆% May-Jun | -3.0 | |
| Apr | 0.6 | 3.0 |
| Mar | 0.3 | 3.5 |
| Feb | 0.6 | 3.4 |
| AE ∆% Feb-Apr | 6.2 | |
| Jan | -0.5 | 3.6 |
| Dec 2011 | 0.4 | 4.2 |
| AE ∆% Dec-Jan | -0.6 | |
| Nov | 0.2 | 4.8 |
| Oct | 0.1 | 5.0 |
| Sep | 0.6 | 5.2 |
| Aug | 0.6 | 4.5 |
| AE ∆% Aug-Nov | 4.6 | |
| Jul | 0.0 | 4.4 |
| Jun | -0.1 | 4.2 |
| May | 0.2 | 4.5 |
| May-Jul | 0.4 | |
| Apr | 1.0 | 4.5 |
| Mar | 0.3 | 4.0 |
| Feb | 0.7 | 4.4 |
| Jan | 0.1 | 4.0 |
| AE ∆% Jan-Apr | 6.5 | |
| Dec 2010 | 1.0 | 3.7 |
| Nov | 0.4 | 3.3 |
| Oct | 0.3 | 3.2 |
| Sep | 0.0 | 3.1 |
| Aug | 0.5 | 3.1 |
| Jul | -0.2 | 3.1 |
| Jun | 0.1 | 3.2 |
| May | 0.2 | 3.4 |
| Apr | 0.6 | 3.7 |
| Mar | 0.6 | 3.4 |
| Feb | 0.4 | 3.0 |
| Jan | -0.2 | 3.5 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/february-2013/index.html
Inflation has been unusually high in the UK since 2006, as shown in Table IV-15. There were no rates of inflation close to 2.0 percent in the period from 1997 to 2004. Inflation has exceeded 2 percent since 2005, reaching 3.6 percent in 2008, 3.3 percent in 2010, 4.5 percent in 2011 and 2.8 percent in 2012.
Table IV-15, UK, Consumer Price Index, Annual ∆%
| 1997 | 1.8 |
| 1998 | 1.6 |
| 1999 | 1.3 |
| 2000 | 0.8 |
| 2001 | 1.2 |
| 2002 | 1.3 |
| 2003 | 1.4 |
| 2004 | 1.3 |
| 2005 | 2.1 |
| 2006 | 2.3 |
| 2007 | 2.3 |
| 2008 | 3.6 |
| 2009 | 2.2 |
| 2010 | 3.3 |
| 2011 | 4.5 |
| 2012 | 2.8 |
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/february-2013/index.html
Table IV-17 provides the analysis of inflation in Feb 2013 by the UK Office for National Statistics. The drivers of monthly inflation of 0.7 percent are increase of 2.0 percent in clothing and footwear, adding 0.14 percentage points and transportation adding 0.18 percentage points. Food & nonalcoholic beverages increased 0.6 percent, contributing 0.07 percentage points and furniture and household goods increased 1.5 percent, adding 0.09 percentage points. Contributions of percentage points to the 12-month rate of consumer price inflation of 2.8 percent are provided by the final two columns in Table IV-16. Food and nonalcoholic beverages increased 3.7 percent in 12 months, adding 0.41 percentage points. Education increased 19.7 percent, adding 0.37 percentage points. The UK Office for National Statistics explains as follows (http://www.ons.gov.uk/ons/dcp171778_286398.pdf pages 3-4):
“The CPI rose by 0.5 per cent between September and October this year. By far the largest upward contribution to the 1-month change came from: education: prices, overall, rose by 19.1 per cent between September and October. This is more than twice the size of the next biggest monthly increase for education prices since CPI records began in 1996. The increase was due predominantly to a significant rise in undergraduate tuition fees, where the maximum annual tuition fees for new UK and EU students in England rose to £9,000.”
Table IV-16, UK, Consumer Price Index Month and Twelve-month ∆% and Percentage Point Contributions to Change by Components
| Feb 2013 | Month ∆% | Percentage Point Contribution | 12 Months ∆% | Percentage Point Contribution |
| CPI All Items | 0.7 | 2.8 | ||
| Food & Non-Alcoholic Beverages | 0.6 | 0.07 | 3.7 | 0.41 |
| Alcohol & Tobacco | -0.5 | -0.02 | 7.1 | 0.31 |
| Clothing & Footwear | 2.0 | 0.14 | -0.6 | -0.04 |
| Housing & Household Services | 0.5 | 0.07 | 4.4 | 0.62 |
| Furniture & Household Goods | 1.5 | 0.09 | 0.7 | 0.05 |
| Health | 0.0 | 0.00 | 2.1 | 0.05 |
| Transport | 1.3 | 0.18 | 1.9 | 0.30 |
| Communication | 1.0 | 0.03 | 4.0 | 0.12 |
| Recreation & Culture | 0.5 | 0.07 | 1.2 | 0.17 |
| Education | 0.0 | 0.00 | 19.7 | 0.37 |
| Restaurants & Hotels | 0.2 | 0.03 | 3.1 | 0.36 |
| Miscellaneous Goods & Services | 0.1 | 0.01 | 0.9 | 0.08 |
Note: there are rounding effects in contributions
Source: UK Office for National Statistics http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/february-2013/index.html
V World Economic Slowdown. Table V-1 is constructed with the database of the IMF (http://www.imf.org/external/datamapper/index.php?db=WEO) and the update of Jan 2013 (http://www.imf.org/external/pubs/ft/weo/2013/update/01/index.htm) to show GDP in dollars in 2011 and the growth rate of real GDP of the world and selected regional countries from 2012 to 2015. The data illustrate the concept often repeated of “two-speed recovery” of the world economy from the recession of 2007 to 2009. The IMF has lowered its forecast of the world economy to 3.2 percent in 2012 but accelerating to 3.5 percent in 2013, 4.1 percent in 2014 and 4.4 percent in 2015. Slow-speed recovery occurs in the “major advanced economies” of the G7 that account for $33,697 billion of world output of $69,899 billion, or 48.2 percent, but are projected to grow at much lower rates than world output, 1.9 percent on average from 2012 to 2015 in contrast with 3.8 percent for the world as a whole. While the world would grow 16.1 percent in the four years from 2012 to 2015, the G7 as a whole would grow 7.6 percent. The difference in dollars of 2011 is rather high: growing by 16.1 percent would add $11.5 trillion of output to the world economy, or roughly two times the output of the economy of Japan of $5,867 but growing by 7.6 percent would add $5.3 trillion of output to the world, or somewhat below the output of Japan in 2011. The “two speed” concept is in reference to the growth of the 150 countries labeled as emerging and developing economies (EMDE) with joint output in 2011 of $25,438 billion, or 36.4 percent of world output. The EMDEs would grow cumulatively 24.6 percent or at the average yearly rate of 5.7 percent, contributing $6.3 trillion from 2012 to 2015 or the equivalent of 86.3 percent of $7,298 billion of China in 2011. The final four countries in Table V-1 often referred as BRIC (Brazil, Russia, India, China), are large, rapidly growing emerging economies. Their combined output adds to $13,468 billion, or 19.3 percent of world output, which is equivalent to 39.9 percent of the combined output of the major advanced economies of the G7.
Table V-1, IMF World Economic Outlook Database Projections of Real GDP Growth
| GDP USD 2011 | Real GDP ∆% | Real GDP ∆% | Real GDP ∆% | Real GDP ∆% | |
| World | 69,899 | 3.3 | 3.6 | 4.2 | 4.4 |
| G7 | 33,697 | 1.4 | 1.5 | 2.2 | 2.5 |
| Canada | 1,739 | 1.9 | 2.0 | 2.4 | 2.4 |
| France | 2,778 | 0.1 | 0.4 | 1.1 | 1.5 |
| DE | 3,607 | 0.9 | 0.9 | 1.4 | 1.4 |
| Italy | 2,199 | -2.3 | -0.7 | 0.5 | 1.2 |
| Japan | 5,867 | 2.2 | 1.2 | 1.1 | 1.2 |
| UK | 2,431 | -0.4 | 1.1 | 2.2 | 2.6 |
| US | 15,076 | 2.2 | 2.1 | 2.9 | 3.4 |
| Euro Area | 13,114 | -0.4 | 0.2 | 1.2 | 1.5 |
| DE | 3,607 | 0.9 | 0.9 | 1.4 | 1.4 |
| France | 2,778 | 0.1 | 0.4 | 1.1 | 1.5 |
| Italy | 2,199 | -2.3 | -0.7 | 0.5 | 1.2 |
| POT | 238 | -3.0 | -1.0 | 1.2 | 1.9 |
| Ireland | 221 | 0.4 | 1.4 | 2.5 | 2.9 |
| Greece | 299 | -6.0 | -4.0 | 0.0 | 2.8 |
| Spain | 1,480 | -1.5 | -1.3 | 1.0 | 1.6 |
| EMDE | 25,438 | 5.3 | 5.6 | 5.9 | 6.1 |
| Brazil | 2,493 | 1.5 | 3.9 | 4.2 | 4.2 |
| Russia | 1,850 | 3.7 | 3.8 | 3.9 | 3.9 |
| India | 1,827 | 4.9 | 6.0 | 6.4 | 6.7 |
| China | 7,298 | 7.8 | 8.2 | 8.5 | 8.5 |
Notes; DE: Germany; EMDE: Emerging and Developing Economies (150 countries); POT: Portugal
Source: IMF World Economic Outlook databank http://www.imf.org/external/datamapper/index.php?db=WEO
Table V-2 is constructed with the WEO database to provide rates of unemployment from 2011 to 2015 for major countries and regions. In fact, unemployment rates for 2011 in Table V-2 are high for all countries: unusually high for countries with high rates most of the time and unusually high for countries with low rates most of the time. Estimated rates of unemployment for 2012 are particularly high for the countries with sovereign debt difficulties in Europe: 15.5 percent for Portugal (POT), 14.8 percent for Ireland, 23.8 percent for Greece, 24.9 percent for Spain and 10.6 percent for Italy, which is lower but still high. The G7 rate of unemployment is estimated at 7.5 percent. Unemployment rates are not likely to decrease substantially if slow growth persists in advanced economies.
Table V-2, IMF World Economic Outlook Database Projections of Unemployment Rate as Percent of Labor Force
| % Labor Force 2011 | % Labor Force 2012 | % Labor Force 2013 | % Labor Force 2014 | % Labor Force 2015 | |
| World | NA | NA | NA | NA | NA |
| G7 | 7.7 | 7.5 | 7.5 | 7.3 | 6.9 |
| Canada | 7.5 | 7.3 | 7.3 | 7.1 | 6.9 |
| France | 9.6 | 10.1 | 10.5 | 10.3 | 9.8 |
| DE | 6.0 | 5.2 | 5.3 | 5.2 | 5.2 |
| Italy | 8.4 | 10.6 | 11.1 | 11.3 | 11.0 |
| Japan | 4.6 | 4.5 | 4.4 | 4.5 | 4.4 |
| UK | 8.0 | 8.1 | 8.1 | 7.9 | 7.6 |
| US | 8.9 | 8.2 | 8.1 | 7.7 | 7.1 |
| Euro Area | 10.2 | 11.2 | 11.5 | 11.2 | 10.8 |
| DE | 6.0 | 5.2 | 5.3 | 5.2 | 5.2 |
| France | 9.6 | 10.1 | 10.5 | 10.3 | 9.8 |
| Italy | 8.4 | 10.6 | 11.1 | 11.3 | 11.0 |
| POT | 12.7 | 15.5 | 16.0 | 15.3 | 14.7 |
| Ireland | 14.4 | 14.8 | 14.4 | 13.7 | 13.1 |
| Greece | 17.3 | 23.8 | 25.4 | 24.5 | 22.4 |
| Spain | 21.7 | 24.9 | 25.1 | 24.1 | 23.2 |
| EMDE | NA | NA | NA | NA | NA |
| Brazil | 6.0 | 6.0 | 6.5 | 7.0 | 7.0 |
| Russia | 6.5 | 6.0 | 6.0 | 6.0 | 6.0 |
| India | NA | NA | NA | NA | NA |
| China | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 |
Notes: DE: Germany; EMDE: Emerging and Developing Economies (150 countries)
Source: IMF World Economic Outlook databank http://www.imf.org/external/datamapper/index.php?db=WEO
Table V-3 provides the latest available estimates of GDP for the regions and countries followed in this blog for IQ2012, IIQ2012 and IVQ2012 available now for all countries. Growth is weak throughout most of the world. Japan’s GDP increased 1.5 percent in IQ2012 and 3.4 percent relative to a year earlier but part of the jump could be the low level a year earlier because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Japan is experiencing difficulties with the overvalued yen because of worldwide capital flight originating in zero interest rates with risk aversion in an environment of softer growth of world trade. Japan’s GDP fell 0.2 percent in IIQ2012 at the seasonally adjusted annual rate (SAAR) of minus 0.9 percent, which is much lower than 6.1 percent in IQ2012. Growth of 3.9 percent in IIQ2012 in Japan relative to IIQ2011 has effects of the low level of output because of Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Japan’s GDP contracted 0.9 percent in IIIQ2012 at the SAAR of minus 3.7 percent and increased 0.4 percent relative to a year earlier. Japan’s GDP grew 0.0 percent in IVQ2012 at the SAAR of 0.2 percent and increased 0.5 percent relative to a year earlier. China grew at 1.8 percent in IIQ2012, which annualizes to 7.4 percent relative to a year earlier. China grew at 2.2 percent in IIIQ2012, which annualizes at 9.1 percent and 7.4 percent relative to a year earlier. In IVQ2012, China grew at 2.0 percent, which annualizes at 8.2 percent, and 7.9 percent in IVQ2012 relative to IVQ2011. Xinhuanet informs that Premier Wen Jiabao considers the need for macroeconomic stimulus, arguing that “we should continue to implement proactive fiscal policy and a prudent monetary policy, while giving more priority to maintaining growth” (http://news.xinhuanet.com/english/china/2012-05/20/c_131599662.htm). Premier Wen elaborates that “the country should properly handle the relationship between maintaining growth, adjusting economic structures and managing inflationary expectations” (http://news.xinhuanet.com/english/china/2012-05/20/c_131599662.htm). There is decennial change in leadership in China (http://www.xinhuanet.com/english/special/18cpcnc/index.htm). China’s GDP grew 7.9 percent in IVQ2012 relative to IVQ2011. Growth rates of GDP of China in a quarter relative to the same quarter a year earlier have been declining from 2011 to 2012. China’s GDP grew 8.1 percent in IQ2012 relative to a year earlier but only 7.6 percent in IIQ2012 relative to a year earlier, 7.4 percent in IIIQ2012 relative to IIIQ2011 and 7.9 percent in IVQ2012 relative to year earlier. GDP fell 0.1 percent in the euro area in IQ2012 and increased 0.3 in IQ2012 relative to a year earlier. Euro area GDP contracted 0.2 percent IIQ2012 and fell 0.8 percent relative to a year earlier. In IIIQ2012, euro area GDP fell 0.1 percent and declined 0.8 percent relative to a year earlier. In IVQ2012, euro area GDP fell 0.6 percent relative to the prior quarter and fell 0.9 percent relative to a year earlier. Germany’s GDP increased 0.5 percent in IQ2012 and 1.7 percent relative to a year earlier. In IIQ2012, Germany’s GDP increased 0.3 percent and 0.5 percent relative to a year earlier but 1.0 percent relative to a year earlier when adjusted for calendar (CA) effects. In IIIQ2012, Germany’s GDP increased 0.2 percent and 0.4 percent relative to a year earlier. Germany’s GDP contracted 0.6 percent in IVQ2012 and increased 0.1 percent relative to a year earlier. Growth of US GDP in IQ2012 was 0.5 percent, at SAAR of 2.0 percent and higher by 2.4 percent relative to IQ2011. US GDP increased 0.5 percent in IQ2012 at the SAAR of 2.0 percent and grew 5.4 percent relative to a year earlier. US GDP increased 0.3 percent in IIQ2012, 1.3 percent at SAAR and 2.1 percent relative to a year earlier. In IIIQ2012, GDP grew 0.8 percent, 3.1 percent at SAAR and 2.6 percent relative to IIIQ2011. In IVQ2012, GDP grew 0.0 percent,
0.1 percent at SAAR and 1.6 percent relative to IVQ2011 (Section I at http://cmpassocregulationblog.blogspot.com/2013/03/mediocre-gdp-growth-at-16-to-20-percent.html and earlier http://cmpassocregulationblog.blogspot.com/2013/02/thirty-one-million-unemployed-or.html) and weak hiring (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/02/recovery-without-hiring-united-states.html). In IQ2012, UK GDP fell 0.1 percent, increasing 0.3 percent relative to a year earlier. UK GDP fell 0.4 percent in IIQ2012 and decreased 0.2 percent relative to a year earlier. UK GDP increased 1.0 percent in IIIQ2012 and increased 0.2 percent relative to a year earlier. UK GDP fell 0.3 percent in IVQ2012 relative to IIIQ2012 and increased 0.3 percent relative to a year earlier. Italy has experienced decline of GDP in six consecutive quarters from IIIQ2011 to IVQ2012. Italy’s GDP fell 0.9 percent in IQ2012 and declined 1.6 percent relative to IQ2011. Italy’s GDP fell 0.7 percent in IIQ2012 and declined 2.6 percent relative to a year earlier. In IIIQ2012, Italy’s GDP fell 0.2 percent and declined 2.6 percent relative to a year earlier. The GDP of Italy contracted 0.9 percent in IVQ2012 and fell 2.8 percent relative to a year earlier. France’s GDP stagnated in IQ2012 and increased 0.2 percent relative to a year earlier. France’s GDP decreased 0.1 percent in IIQ2012 and increased 0.1 percent relative to a year earlier. In IIIQ2012, France’s GDP increased 0.1 percent and increased 0.0 percent relative to a year earlier. France’s GDP fell 0.3 percent in IVQ2012 and declined 0.3 percent relative to a year earlier.
Table V-3, Percentage Changes of GDP Quarter on Prior Quarter and on Same Quarter Year Earlier, ∆%
| IQ2012/IVQ2011 | IQ2012/IQ2011 | |
| United States | QOQ: 0.5 SAAR: 2.0 | 2.4 |
| Japan | QOQ: 1.5 SAAR: 6.1 | 3.4 |
| China | 1.8 | 8.1 |
| Euro Area | -0.1 | 0.3 |
| Germany | 0.5 | 1.7 |
| France | 0.0 | 0.2 |
| Italy | -0.9 | -1.6 |
| United Kingdom | -0.1 | 0.3 |
| IIQ2012/IQ2012 | IIQ2012/IIQ2011 | |
| United States | QOQ: 0.3 SAAR: 1.3 | 2.1 |
| Japan | QOQ: -0.2 | 3.9 |
| China | 1.8 | 7.6 |
| Euro Area | -0.2 | -0.8 |
| Germany | 0.3 | 0.5 1.0 CA |
| France | -0.1 | 0.1 |
| Italy | -0.7 | -2.6 |
| United Kingdom | -0.4 | -0.2 |
| IIIQ2012/ IIQ2012 | IIIQ2012/ IIIQ2011 | |
| United States | QOQ: 0.8 | 2.6 |
| Japan | QOQ: –0.9 | 0.4 |
| China | 2.2 | 7.4 |
| Euro Area | -0.1 | -0.8 |
| Germany | 0.2 | 0.4 |
| France | 0.1 | 0.0 |
| Italy | -0.2 | -2.6 |
| United Kingdom | 1.0 | 0.2 |
| IVQ2012/IIIQ2012 | IVQ2012/IVQ2011 | |
| United States | QOQ: 0.0 | 1.6 |
| Japan | QOQ: 0.0 SAAR: 0.2 | 0.5 |
| China | 2.0 | 7.9 |
| Euro Area | -0.6 | -0.9 |
| Germany | -0.6 | 0.1 |
| France | -0.3 | -0.3 |
| Italy | -0.9 | -2.8 |
| United Kingdom | -0.3 | 0.3 |
QOQ: Quarter relative to prior quarter; SAAR: seasonally adjusted annual rate
Source: Country Statistical Agencies http://www.bea.gov/national/index.htm#gdp
There is evidence of deceleration of growth of world trade and even contraction in more recent data. Table V-4 provides two types of data: growth of exports and imports in the latest available months and in the past 12 months; and contributions of net trade (exports less imports) to growth of real GDP. Japan provides the most worrisome data (Section VB and earlier at http://cmpassocregulationblog.blogspot.com/2013/02/world-inflation-waves-united-states.html and earlier at http://cmpassocregulationblog.blogspot.com/2013/02/thirty-one-million-unemployed-or.html and earlier http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html and earlier http://cmpassocregulationblog.blogspot.com/2012/11/contraction-of-united-states-real_25.html and for GDP Section VB http://cmpassocregulationblog.blogspot.com/2013/02/recovery-without-hiring-united-states.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/12/recovery-without-hiring-forecast-growth.html). In Feb 2013, Japan’s exports increased 2.9 percent in 12 months and imports increased 11.9 percent. The second part of Table V-4 shows that net trade deducted 1.1 percentage points from Japan’s growth of GDP in IIQ2012, deducted 2.8 percentage points from GDP growth in IIIQ2012 and deducted 0.6 percentage points from GDP growth in IVQ2012. China’s exports fell 1.8 percent in the month of Jul and increased 1.0 percent in 12 months. In Aug 2012, China’s exports increased 0.6 percent and increased 2.7 percent in 12 months. Trade rebounded in China in Sep with growth of exports of 9.9 percent in the 12 months ending in Sep and 2.4 percent for imports. There was further growth in China’s exports of 11.6 percent in the 12 months ending in Oct while imports increased 2.4 percent. In Nov 2012, China’s exports increased 2.9 percent in 12 months and 7.3 percent in Jan-Nov 2012 while imports were unchanged in Nov 2012 and increased 4.1 percent in Jan-Nov 2012. In the 12 months ending in Dec 2012, China’s exports increased 14.1 percent and imports 6.0 while in Jan-Dec 2012 exports increased 7.9 percent and imports increased 4.3 percent. In Jan 2013, China exports increased 17.3 percent relative to a year earlier and imports 19.6 percent. Germany’s exports increased 1.4 percent in the month of Jan 2013 and increased 3.1 percent in the 12 months ending in Jan 2013 while imports increased 3.3 percent in the month of Jan and increased 3.3 percent in the 12 months ending in Jan. Net trade contributed 0.4 percentage points to growth of GDP in IQ2012, contributed 1.4 percentage points in IIQ2012, contributed 1.6 percentage points in IIIQ2012, contributed 0.8 percentage points in IVQ2012 and contributed 1.0 percentage points in 2012. Net trade deducted 0.5 percentage points from UK value added in IQ2012, deducted 0.8 percentage points in IIQ2012, added 0.4 percentage points in IIIQ2012 and subtracted 0.1 percentage points in IVQ2012. France’s exports decreased 2.4 percent in Jan while imports decreased 1.0 percent and net trade deducted 0.3 percentage points from GDP growth in IIQ2012, adding 0.3 percentage points in IIIQ2012 and 0.1 percentage points in IVQ2012. US exports decreased 1.2 percent in Jan 2013 and goods exports increased 4.3 percent in Jan relative to a year earlier but net trade added 0.38 percentage points to GDP growth in IIIQ2012 and deducted 0.25 percentage points in IVQ2012. US imports increased 1.8 percent in Jan 2013 and goods imports increased 0.9 percent in Jan 2013 relative to a year earlier. In the six months ending in Feb 2013, United States national industrial production accumulated increase of 2.5 percent at the annual equivalent rate of 5.1 percent, which is higher than 2.5 percent growth in 12 months. Business equipment decreased 0.4 percent in Sep, decreased 1.2 percent in Oct, increased 3.1 percent in Nov, increased 0.5 percent in Dec, fell 1.3 percent in Jan, and increased 2.5 percent in Feb 2013, growing 3.2 percent in the 12 months ending in Feb 2013 and at the annual equivalent rate of 6.4 percent in the six months ending in Feb 2013. Capacity utilization of total industry is analyzed by the Fed in its report (http://www.federalreserve.gov/releases/g17/current/): “The capacity utilization rate for total industry increased to 79.6 percent [in Feb 2013], a rate that is 0.6 percentage points below its long-run (1972--2012) average.” United States industry is apparently decelerating with some strength at the margin. Manufacturing increased 0.8 percent in Feb 2013 seasonally adjusted, increasing 2.2 percent not seasonally adjusted in 12 months, and increased 3.0 percent in the six months ending in Feb 2013 or at the annual equivalent rate of 6.1 percent. Trade values incorporate both price and quantity effects that are difficult to separate. Data do suggest that world trade slowdown is accompanying world economic slowdown.
Table V-4, Growth of Trade and Contributions of Net Trade to GDP Growth, ∆% and % Points
| Exports | Exports 12 M ∆% | Imports | Imports 12 M ∆% | |
| USA | -1.2 Jan | 4.3 Jan | 1.8 Jan | 0.9 Jan |
| Japan | Feb 2013 -2.9 Jan 2013 6.4 Dec -5.8 Nov -4.1 Oct -6.5 Sep -10.3 Aug -5.8 Jul -8.1 | Feb 2013 11.9 Jan 2013 7.3 Dec 1.9 Nov 0.8 Oct -1.6 Sep 4.1 Aug -5.4 Jul 2.1 | ||
| China | -1.8 Jul 0.6 Aug 4.7 Sep -5.7 Oct 2.2 Nov 11.1 Dec -11.7 Jan 13 -25.6 Feb | 1.0 Jul 7.8 Jan-Jul 2.7 Aug 7.1 Jan-Aug 9.9 Sep Jan-Sep 7.4 11.6 Oct 7.8 Jan-Oct 2.9 Nov 7.3 Jan-Nov 14.1 Dec 17.3 Jan 13 7.9 Jan-Dec 23.6 Jan-Feb | 2.2 Jul -0.3 Aug 4.9 Sep -9.4 Oct 11.3 Oct 4.9 Dec -12.5 Jan 13 -21.6 Feb | 4.7 Jul 6.5 Jan-Jul -2.6 Aug 5.2 Jan-Aug 2.4 Sep 4.8 Jan-Sep 2.4 Oct 4.6 Jan-Oct 0.0 Nov 4.1 Jan-Nov 6.0 Dec 19.6 Jan 13 4.3 Jan-Dec 5.1 Jan-Feb |
| Euro Area | 5.2 12-M Jan | 7.4 Jan-Dec | 1.4 12-M Jan | 1.8 Jan-Dec |
| Germany | 1.4 Jan CSA | 3.1 Jan | 3.3 Jan CSA | 3.3 Jan |
| France Jan | -2.4 | 0.0 | -1.0 | 0.7 |
| Italy Jan | 1.4 | 8.7 | 0.4 | -1.8 |
| UK | 1.9 Dec | -3.9 Oct-Dec 12/Oct-Dec 11 | 0.9 Dec | -0.4 Oct-Dec 12/Oct-Dec 11 |
| Net Trade % Points GDP Growth | % Points | |||
| USA | IVQ2012 -0.25 IIIQ2012 +0.38 | |||
| Japan | -1.1 IIQ2012 -2.8 IIIQ2012 -0.6 IVQ2012 | |||
| Germany | 0.4 IQ2012 1.4 IIQ2012 1.6 IIIQ2012 0.8 IVQ2012 1.0 2012 | |||
| France | -0.3 IIQ2012 0.3 IIIQ2012 0.1 IVQ2012 | |||
| UK | -0.5 IQ2012 -0.8 IIQ2012 0.4 IIIQ2012 -0.1 IVQ2012 |
Sources: http://www.census.gov/foreign-trade/ http://www.bea.gov/iTable/index_nipa.cfm
http://www.customs.go.jp/toukei/latest/index_e.htm http://www.esri.cao.go.jp/en/sna/sokuhou/sokuhou_top.html
http://english.customs.gov.cn/publish/portal191/ http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home
https://www.destatis.de/EN/PressServices/Press/pr/2012/08/PE12_287_811.html;jsessionid=A761BC574543A771416A9CF81034F7BA.cae1 http://lekiosque.finances.gouv.fr/AppChiffre/Portail_default.asp
http://www.statistics.gov.uk/hub/index.html
The geographical breakdown of exports and imports of Japan with selected regions and countries is provided in Table V-5 for Feb 2013. The share of Asia in Japan’s trade is more than one half, 52.2 percent of exports and 42.1 percent of imports. Within Asia, exports to China are 15.9 percent of total exports and imports from China 18.5 percent of total imports. While exports to China fell 15.8 percent in the 12 months ending in Feb 2013, imports from China increased 22.0 percent. The second largest export market for Japan in Feb 2013 is the US with share of 19.1 percent of total exports and share of imports from the US of 7.9 percent in total imports. Western Europe has share of 10.6 percent in Japan’s exports and of 9.9 percent in imports. Rates of growth of exports of Japan in Feb 2013 are sharply negative for all countries and regions with the exception of growth of 5.7 percent for exports to the US and 1.3 percent for exports to Australia. Comparisons relative to 2011 may have some bias because of the effects of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Deceleration of growth in China and the US and threat of recession in Europe can reduce world trade and economic activity, which could be part of the explanation for the decline of Japan’s exports by 2.9 percent in Feb 2013 while imports increased 11.9 percent but higher levels after the earthquake and declining prices may be another factor. Growth rates of imports in the 12 months ending in Feb 2013 are positive for all trading partners. Imports from Asia increased 14.0 percent in the 12 months ending in Feb 2013 while imports from China increased 22.0 percent. Data are in millions of yen, which has effects of recent depreciation of the yen relative to the United States dollar (USD).
Table V-5, Japan, Value and 12-Month Percentage Changes of Exports and Imports by Regions and Countries, ∆% and Millions of Yens
| Feb 2013 | Exports | 12 months ∆% | Imports Millions Yen | 12 months ∆% |
| Total | 5,284,067 | -2.9 | 6,061,534 | 11.9 |
| Asia | 2,757,508 | -5.2 | 2,551,827 | 14.0 |
| China | 842,260 | -15.8 | 1,119,981 | 22.0 |
| USA | 1,007,389 | 5.7 | 479,214 | 0.6 |
| Canada | 72,975 | -17.2 | 77,539 | 22.2 |
| Brazil | 39,131 | -1.8 | 97,131 | 15.1 |
| Mexico | 71,309 | 4.7 | 29,109 | 32.3 |
| Western Europe | 558,641 | -9.0 | 600,914 | 11.3 |
| Germany | 136,919 | -2.5 | 160,801 | 7.8 |
| France | 44,677 | -15.1 | 80,966 | 8.9 |
| UK | 88,406 | -16.7 | 49,949 | 19.9 |
| Middle East | 194,606 | -6.9 | 1,358,008 | 14.4 |
| Australia | 136,255 | 1.3 | 352,350 | 1.9 |
Source: Japan, Ministry of Finance http://www.customs.go.jp/toukei/info/index_e.htm
World trade projections of the IMF are in Table V-6. There is significantly slower growth of the volume of world trade of goods and services from 5.9 percent in 2011 to 2.8 percent in 2012 and 3.8 percent in 2013, increasing to 5.5 percent in 2014. World trade would slow sharply for advanced economies while emerging and developing economies (EMDE) experience slower growth. World economic slowdown is more challenging with lower growth of world trade.
Table V-6, IMF, Projections of World Trade, ∆%
| 2011 | 2012 | 2013 | 2014 | |
| World Trade Volume (Goods and Services) | 5.9 | 2.8 | 3.8 | 5.5 |
| Imports | ||||
| AE | 4.6 | 1.2 | 2.2 | 4.1 |
| EMDE | 8.4 | 6.1 | 6.5 | 7.8 |
| Exports | ||||
| AE | 5.6 | 2.1 | 2.8 | 4.5 |
| EMDE | 6.6 | 3.6 | 5.5 | 6.9 |
Source: International Monetary Fund World Economic Outlook databank update http://www.imf.org/external/pubs/ft/weo/2012/02/weodata/index.aspx http://www.imf.org/external/pubs/ft/survey/so/2013/NEW012313A.htm http://www.imf.org/external/pubs/ft/weo/2013/update/01/index.htm
The JP Morgan Global All-Industry Output Index of the JP Morgan Manufacturing and Services PMI™, produced by JP Morgan and Markit in association with ISM and IFPSM, with high association with world GDP, decreased to 53.0 in Feb from 53.2 in Jan, indicating expansion at a moderate rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10838).This index has remained above the contraction territory of 50.0 during 43 consecutive months and the average for IQ2013 in the first two months is slightly higher than 52.9 in IVQ2012. The employment index was unchanged at 52.3 in Feb relative to 52.3 in Jan with input prices rising at a faster rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10838) David Hensley, Director of Global Economic Coordination at JP Morgan, finds finds that increasing new business could signal improvement in the index (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10838). The JP Morgan Global Manufacturing PMI™, produced by JP Morgan and Markit in association with ISM and IFPSM, decreased to 50.8 in Feb from 51.4 in Dec, which is the fourth consecutive reading above 50 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10802). New export business declined for the eleventh consecutive month in Jan, but at a marginal rate of contraction. The HSBC Brazil Composite Output Index, compiled by Markit, decreased from 54.9 in Jan to 52.9 in Feb, indicating solid expansion but at a four-month low (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10833). The HSBC Brazil Services Business Activity index, compiled by Markit, decreased from 54.5 in Jan to 52.1 in Feb (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10833). Andre Loes, Chief Economist, Brazil, at HSBC, finds recovering economy but within a modest forecast for 2013 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10833). The HSBC Brazil Purchasing Managers’ IndexTM (PMI™) decreased from a 22-month high in Jan 2012 at 53.2 to 52.5 in Feb 2013 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10766). Andre Loes, Chief Economist, Brazil at HSBC, finds continuing expansion in Brazil’s manufacturing with greater strength in IQ2013 than in IVQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10766).
VA United States. The Markit Flash US Manufacturing Purchasing Managers’ Index™ (PMI™) seasonally adjusted increased to 54.9 in Mar from 54.3 in Feb, continuing to suggest strengthening US manufacturing activity (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10868).
New export orders registered 51.2 in Mar from 48.5 in Feb, indicating expansion at a moderate rate while output continued growth after a high of eleven months in Feb. Chris Williams, Chief Economist at Markit, finds that the survey data are consistent with growth at 2.0 percent in IQ2013 that can provide impulse to US economic growth (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10868). The Markit US Manufacturing Purchasing Managers’ Index™ (PMI™) decreased to 54.3 in Feb from 55.8 in Jan (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10792). The index of new exports orders decreased from 51.5 in Jan 2013 to 48.5 in Feb 2013 while total new orders decreased from 57.4 in Jan to 55.4 in Feb. Chris Williamson, Chief Economist at Markit, finds that manufacturing in the US is moving to growth of 2 percent in IQ2013 and could support growth of the US economy (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10792). The purchasing managers’ index (PMI) of the Institute for Supply Management (ISM) Report on Business® increased 1.1 percentage points from 53.1 in Jan to 54.2 in Feb (http://www.ism.ws/ISMReport/MfgROB.cfm?navItemNumber=12942). The index of new orders increased 4.5 percentage points from 53.3 in Jan to 57.8 in Feb. The index of exports increased 3.0 percentage points from 50.5 in Jan to 53.5 in Feb, remaining in expansion territory. The Non-Manufacturing ISM Report on Business® PMI increased 0.8 percentage points from 55.2 in Jan to 56.0 in Feb, indicating production growth during 43 consecutive months, while the index of new orders increased 3.8 percentage points from 54.4 in Jan to 58.2 in Feb (http://www.ism.ws/ISMReport/NonMfgROB.cfm?navItemNumber=12943). Table USA provides the country economic indicators for the US.
Table USA, US Economic Indicators
| Consumer Price Index | Feb 12 months NSA ∆%: 2.0; ex food and energy ∆%: 2.0 Feb month SA ∆%: 0.7; ex food and energy ∆%: 0.2 |
| Producer Price Index | Feb 12-month NSA ∆%: 1.7; ex food and energy ∆% 1.7 |
| PCE Inflation | Jan 12-month NSA ∆%: headline 1.2; ex food and energy ∆% 1.3 |
| Employment Situation | Household Survey: Feb Unemployment Rate SA 7.7% |
| Nonfarm Hiring | Nonfarm Hiring fell from 63.8 million in 2006 to 52.0 million in 2012 or by 11.8 million |
| GDP Growth | BEA Revised National Income Accounts IIQ2012/IIQ2011 2.1 IIIQ2012/IIIQ2011 2.6 IVQ2012/IVQ2011 1.6 IQ2012 SAAR 2.0 IIQ2012 SAAR 1.3 IIIQ2012 SAAR 3.1 IVQ2012 SAAR 0.1 |
| Real Private Fixed Investment | SAAR IVQ2012 9.7 ∆% IVQ2007 to IIIQ2012: minus 11.2% Blog 3/3/13 |
| Personal Income and Consumption | Jan month ∆% SA Real Disposable Personal Income (RDPI) SA ∆% -4.0 |
| Quarterly Services Report | IVQ12/IVQ11 SA ∆%: Financial & Insurance 6.2 |
| Employment Cost Index | Compensation Private IVQ2012 SA ∆%: 0.5 |
| Industrial Production | Feb month SA ∆%: 0.7 Manufacturing Feb SA ∆% 0.8 Feb 12 months SA ∆% 2.0, NSA 2.2 |
| Productivity and Costs | Nonfarm Business Productivity IVQ2012∆% SAAE -1.9; IVQ2012/IVQ2011 ∆% 0.5; Unit Labor Costs SAAE IVQ2012 ∆% 4.6; IVQ2012/IVQ2011 ∆%: 2.1 Blog 3/10/2013 |
| New York Fed Manufacturing Index | General Business Conditions From Feb 10.04 to Mar 9.24 |
| Philadelphia Fed Business Outlook Index | General Index from Feb -12.5 to Mar 2.0 |
| Manufacturing Shipments and Orders | New Orders SA Jan ∆% -2.0 Ex Transport 1.3 Jan NSA New Orders 1.2 Ex transport 3.0 |
| Durable Goods | Jan New Orders SA ∆%: -5.2; ex transport ∆%: 1.9 |
| Sales of New Motor Vehicles | Jan-Feb 2013 2,235,352; Jan-Feb 2012 2,062,722. Jan 13 SAAR 15.29 million, Feb 13 SAAR 15.38 million, Feb 2012 SAAR 14.50 million Blog 3/10/13 |
| Sales of Merchant Wholesalers | Jan 2013/Jan 2012 NSA ∆%: Total 5.9; Durable Goods: 5.4; Nondurable |
| Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers | Jan 13/Jan 12 NSA ∆%: Sales Total Business 4.9; Manufacturers 3.1 |
| Sales for Retail and Food Services | Feb 2013/Feb 2012 ∆%: Retail and Food Services 3.6; Retail ∆% 3.6 |
| Value of Construction Put in Place | Jan SAAR month SA ∆%: -2.1 Jan 12-month NSA: 7.6 Jan-Dec 2012 ∆% 9.2 |
| Case-Shiller Home Prices | Dec 2012/Dec 2011 ∆% NSA: 10 Cities 5.9; 20 Cities: 6.8 |
| FHFA House Price Index Purchases Only | Dec SA ∆% 0.6; |
| New House Sales | Jan 2013 month SAAR ∆%: 15.6 |
| Housing Starts and Permits | Feb Starts month SA ∆%: 0.8 ; Permits ∆%: 4.6 |
| Trade Balance | Balance Jan SA -$44,448 million versus Dec -$18144 million |
| Export and Import Prices | Feb 12-month NSA ∆%: Imports -0.3; Exports 1.5 |
| Consumer Credit | Jan ∆% annual rate: 7.0 |
| Net Foreign Purchases of Long-term Treasury Securities | Jan Net Foreign Purchases of Long-term Treasury Securities: $25.7 billion |
| Treasury Budget | Fiscal Year 2013/2012 ∆% Feb: Receipts 13.1; Outlays 2.1; Individual Income Taxes 17.7 Deficit Fiscal Year 2012 $1,089,353 million Blog 3/17/2013 |
| CBO Budget and Economic Outlook | 2012 Deficit $1089 B 7.0% GDP Debt 11,280 B 72.5% GDP 2013 Deficit $845 B, Debt 12,229 B 76.3% GDP Blog 8/26/12 11/18/12 2/10/13 |
| Commercial Banks Assets and Liabilities | Feb 2013 SAAR ∆%: Securities -3.2 Loans 2.1 Cash Assets 66.6 Deposits 4.5 Blog 3/24/13 |
| Flow of Funds | 2012 ∆ since 2007 Assets -$868.9 MM Real estate -$3562.7 MM Financial +$2204.3 MM Net Worth -$46.6 MM Blog 3/17/13 |
| Current Account Balance of Payments | IVQ2012 +$6793 MM %GDP 2.8 Blog 3/17/13 |
Links to blog comments in Table USA:
3/17/13 http://cmpassocregulationblog.blogspot.com/2013/03/recovery-without-hiring-ten-million.html
3/10/13 http://cmpassocregulationblog.blogspot.com/2013/03/thirty-one-million-unemployed-or.html
3/3/13 http://cmpassocregulationblog.blogspot.com/2013/03/mediocre-gdp-growth-at-16-to-20-percent.html
2/10/13 http://cmpassocregulationblog.blogspot.com/2013/02/united-states-unsustainable-fiscal.html
12/23-24/12 http://cmpassocregulationblog.blogspot.com/2012/12/mediocre-and-decelerating-united-states_24.html
11/18/12 http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html
8/26/12 http://cmpassocregulationblog.blogspot.com/2012/08/expanding-bank-cash-and-deposits-with_26.html
Seasonally-adjusted annual rates (SAAR) of housing starts and permits are shown in Table VA-1. Housing starts increased 0.8 percent in Feb 2013 but declined 7.3 percent in Jan 2013 and had jumped 16.8 percent in Dec 2012 after decreasing 5.4 percent in Nov 2012 and increasing 12.4 percent in Sep 2012. Housing permits, indicating future activity, increased 4.6 percent in Feb 2013 after decrease of 0.6 percent in Jan 2013 following increases of 1.0 percent in Dec and 3.7 percent in Nov 2012 but decreased 2.5 percent in Oct 2012 and increased 11.1 percent in Sep 2012. Monthly rates in starts and permits fluctuate significantly as shown in Table VA-1.
Table VA-1, US, Housing Starts and Permits SSAR Month ∆%
| Housing | Month ∆% | Housing | Month ∆% | |
| Feb 2013 | 917 | 0.8 | 946 | 4.6 |
| Jan | 910 | -7.3 | 904 | -0.6 |
| Dec 2012 | 982 | 16.8 | 909 | 1.0 |
| Nov | 841 | -5.4 | 900 | 3.7 |
| Oct | 889 | 5.5 | 868 | -2.5 |
| Sep | 843 | 12.4 | 890 | 11.1 |
| Aug | 750 | 3.0 | 801 | -1.2 |
| Jul | 728 | -3.4 | 811 | 6.7 |
| Jun | 754 | 6.8 | 760 | -3.1 |
| May | 706 | -5.5 | 784 | 8.4 |
| Apr | 747 | 5.8 | 723 | -6.0 |
| Mar | 706 | -1.7 | 769 | 8.8 |
| Feb | 718 | -0.3 | 707 | 3.4 |
| Jan | 720 | 3.3 | 684 | -2.4 |
| Dec 2011 | 697 | -1.6 | 701 | -1.1 |
| Nov | 708 | 12.4 | 709 | 6.3 |
| Oct | 630 | -2.6 | 667 | 8.3 |
| Sep | 647 | 11.4 | 616 | -4.5 |
| Aug | 581 | -5.4 | 645 | 2.9 |
| Jul | 614 | -0.2 | 627 | -0.9 |
| Jun | 615 | 11.6 | 633 | 1.4 |
| May | 551 | -0.2 | 624 | 7.9 |
| Apr | 552 | -8.0 | 578 | -2.0 |
| Mar | 600 | 15.8 | 590 | 10.1 |
| Feb | 518 | -18.0 | 536 | -5.3 |
| Jan | 632 | 17.3 | 566 | -10.4 |
| Dec 2010 | 539 | -1.1 | 632 | 12.9 |
| Nov | 545 | 0.4 | 560 | 0.4 |
| Oct | 543 | -8.6 | 558 | -0.9 |
| Sep | 594 | -0.8 | 563 | -2.9 |
SAAR: Seasonally Adjusted Annual Rate
Source: US Census Bureau http://www.census.gov/construction/nrc/
Housing starts and permits in Jan-Nov not-seasonally adjusted are provided in Table VA-2. Housing starts increased 28.1 percent in Jan-Dec 2012 relative to Jan-Dec 2011 and in the same period new permits increased 30.7 percent. Construction of new houses in the US remains at very depressed levels. Housing starts fell 56.7 percent in Jan-Dec 2012 relative to Jan-Dec 2006 and fell 62.3 percent relative to Jan-Dec 2005. Housing permits fell 55.7 percent in Jan-Dec 2012 relative to Jan-Dec 2006 and fell 62.2 percent in Jan-Dec 2012 from Jan-Dec 2005.
Table VA-2, US, Housing Starts and New Permits, Thousands of Units, NSA, and %
| Housing Starts | New Permits | |
| Jan-Feb 2013 | 122.1 | 130.4 |
| Jan-Feb 2012 | 96.9 | 98.2 |
| ∆% Jan-Feb 2013/Jan-Feb 2012 | 26.0 | 32.8 |
| Jan-Feb 2006 | 298.1 | 303.6 |
| ∆% Jan to Feb 2013 | -59.0 | -57.0 |
| Jan-Feb 2005 | 292.0 | 289.1 |
| ∆% Jan to Feb 2013 | -58.2 | -54.9 |
Source: US Census Bureau http://www.census.gov/construction/nrc/
Chart VA-1 of the US Census Bureau shows the sharp increase in construction of new houses from 2000 to 2006. Housing construction fell sharply through the recession, recovering from the trough around IIQ2009. The right-hand side of Chart VA-3 shows a mild downward trend or stagnation from mid 2010 to the present in single-family houses with a recent mild upward trend in recent months in the category of two or more units but marginal decline in recent months.
Chart VA-1, US, New Housing Units Started in the US, SAAR (Seasonally Adjusted Annual Rate)
Source: US Census Bureau
http://www.census.gov/briefrm/esbr/www/esbr020.html
Table VA-3 provides new housing units started in the US at seasonally adjusted annual rates (SAAR) from Jan-Apr and Nov-Dec of the year from 2000 to 2013. SAARs have dropped from high levels around 2 million in 2005-2006 to the range of 706,000 in Mar 2012 to 982,000 in Dec 2012 and 917,000 in Feb 2013, which is an improvement over the range of 518,000 in Feb 2011 to 708,000 in Nov 2011.
Table VA-3, New Housing Units Started in the US, Seasonally Adjusted Annual Rates, Thousands of Units
| Jan | Feb | Mar | Apr | Nov | Dec | |
| 2000 | 1,636 | 1,737 | 1,604 | 1,626 | 1,551 | 1,532 |
| 2001 | 1,600 | 1,625 | 1,590 | 1,649 | 1,602 | 1,568 |
| 2002 | 1,698 | 1,829 | 1,642 | 1,592 | 1,753 | 1,788 |
| 2003 | 1,853 | 1,629 | 1,726 | 1,643 | 2,083 | 2,057 |
| 2004 | 1,911 | 1,846 | 1,998 | 2,003 | 1,782 | 2,042 |
| 2005 | 2,144 | 2,207 | 1,864 | 2,061 | 2,147 | 1,994 |
| 2006 | 2,273 | 2,119 | 1,969 | 1,821 | 1,570 | 1,649 |
| 2007 | 1,409 | 1,480 | 1,495 | 1,490 | 1,197 | 1,037 |
| 2008 | 1,084 | 1,103 | 1,005 | 1,013 | 652 | 560 |
| 2009 | 490 | 582 | 505 | 478 | 588 | 581 |
| 2010 | 614 | 604 | 636 | 687 | 545 | 539 |
| 2011 | 632 | 518 | 600 | 552 | 708 | 697 |
| 2012 | 720 | 718 | 706 | 747 | 841 | 982 |
| 2013 | 910 | 917 | NA | NA | NA | NA |
Source: US Census Bureau http://www.census.gov/construction/nrc/
Chart VA-2 of the US Census Bureau provides construction of new housing units started in the US at seasonally adjusted annual rate (SAAR) from Jan 1959 to Feb 2013 that help to analyze in historical perspective the debacle of US new house construction. There are three periods in the series. (1) There is stationary behavior with wide fluctuations from 1959 to the beginning of the decade of the 1970s. (2) There is sharp upward trend from the 1990s to 2006 propelled by the US housing subsidy, politics of Fannie Mae and Freddie Mac and unconventional monetary policy of near zero interest rates from Jun 2003 to Jun 2004 and suspension of the auction of 30-year Treasury bonds intended to lower mortgage rates. The financial crisis and global recession were caused by interest rate and housing subsidies and affordability policies that encouraged high leverage and risks, low liquidity and unsound credit (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-66, Regulation of Banks and Finance (2009b), 217-27, International Financial Architecture (2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization and the State Vol. II (2008b), 197-213, Government Intervention in Globalization (2008c), 182-4). Several past comments of this blog elaborate on these arguments, among which: http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/professor-mckinnons-bubble-economy.html http://cmpassocregulationblog.blogspot.com/2011/01/world-inflation-quantitative-easing.html http://cmpassocregulationblog.blogspot.com/2011/01/treasury-yields-valuation-of-risk.html http://cmpassocregulationblog.blogspot.com/2010/11/quantitative-easing-theory-evidence-and.html http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html . (3) Housing construction dropped vertically during the global recession. There was initial stability followed by some recovery in recent months.
Chart VA-2, US, New Housing Units Started in the US, SAAR (Seasonally Adjusted Annual Rate), Thousands of Units, Jan 1959-Feb 2013
Source: US Census Bureau
http://www.census.gov/construction/nrc/
Table VA-4 provides actual new housing units started in the US, or not seasonally adjusted, in Jan-Apr and Nov-Dec 2012 from 2000 to 2012 and Feb 2013. The number of housing units started fell from the peak of 192.8 thousand in Jun 2005 to 62.4 thousand in Feb 2013 or 67.6 percent. The number of housing units started fell from 149.1 thousand in Feb 2005 to 62.4 thousand in Feb 2013 or by 58.1 percent. The number of housing units started jumped from 35.4 thousand in Feb 2011 to 62.4 thousand in Feb 2013 or by 76.3 percent.
Table VA-4, New Housing Units Started in the US, Not Seasonally Adjusted, Thousands of Units
| Jan | Feb | Mar | Apr | Nov | Dec | |
| 2000 | 104.0 | 119.7 | 133.4 | 149.5 | 117.1 | 100.7 |
| 2001 | 106.4 | 108.2 | 133.2 | 151.3 | 121.0 | 104.6 |
| 2002 | 110.4 | 120.4 | 138.2 | 148.8 | 133.0 | 123.1 |
| 2003 | 117.8 | 109.7 | 147.2 | 151.2 | 153.7 | 144.2 |
| 2004 | 124.5 | 126.4 | 173.8 | 179.5 | 138.1 | 140.2 |
| 2005 | 142.9 | 149.1 | 156.2 | 184.6 | 160.7 | 136.0 |
| 2006 | 153.0 | 145.1 | 165.9 | 160.5 | 115.2 | 112.4 |
| 2007 | 95.0 | 103.1 | 123.8 | 135.6 | 88.8 | 68.9 |
| 2008 | 70.8 | 78.4 | 82.2 | 89.5 | 47.5 | 37.7 |
| 2009 | 31.9 | 39.8 | 42.7 | 42.5 | 42.3 | 36.6 |
| 2010 | 38.9 | 40.7 | 54.7 | 62.0 | 40.6 | 33.8 |
| 2011 | 40.2 | 35.4 | 49.9 | 49.0 | 53.0 | 42.7 |
| 2012 | 47.2 | 49.7 | 58.0 | 66.8 | 62.2 | 63.2 |
| 2013 | 59.7 | 62.4 | NA | NA | NA | NA |
Source: US Census Bureau http://www.census.gov/construction/nrc/
Chart VA-3 of the US Census Bureau provides new housing units started in the US not seasonally adjusted (NSA) from Jan 1959 to Feb 2013. There is the same behavior as in Chart VA-2 SA but with sharper fluctuations in the original series without seasonal adjustment. There are the same three periods. (1) The series is virtually stationary with wide fluctuations from 1959 to the late 1980s. (2) There is downward trend during the savings and loans crisis of the 1980s. Benston and Kaufman (1997, 139) find that there was failure of 1150 US commercial and savings banks between 1983 and 1990, or about 8 percent of the industry in 1980, which is nearly twice more than between the establishment of the Federal Deposit Insurance Corporation in 1934 through 1983. More than 900 savings and loans associations, representing 25 percent of the industry, were closed, merged or placed in conservatorships (see Pelaez and Pelaez, Regulation of Banks and Finance (2008b), 74-7). The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) created the Resolution Trust Corporation (RTC) and the Savings Association Insurance Fund (SAIF) that received $150 billion of taxpayer funds to resolve insolvent savings and loans. The GDP of the US in 1989 was $5482.1 billion (http://www.bea.gov/iTable/index_nipa.cfm), such that the partial cost to taxpayers of that bailout was around 2.74 percent of GDP in a year. US GDP in 2012 is estimated at $15,681.5 billion, such that the bailout would be equivalent to cost to taxpayers of about $429.7 billion in current GDP terms. A major difference with the Troubled Asset Relief Program (TARP) for private-sector banks is that most of the costs were recovered with interest gains whereas in the case of savings and loans there was no recovery. (3) There is vertical drop of new housing construction in the US during the global recession from (Dec) IVQ2007 to (Jun) IIQ2009 (http://www.nber.org/cycles/cyclesmain.html). The final segment shows upward trend but it could be simply part of yet another fluctuation. Marginal improvement in housing in the US should not obscure the current depressed levels relative to earlier periods.
Chart VA-3, US, New Housing Units Started in the US, Not Seasonally Adjusted, Thousands of Units, Jan 1959-Feb 2013
Source: US Census Bureau http://www.census.gov/construction/nrc/
A longer perspective on residential construction in the US is provided by Table VA-5 with annual data from 1960 to 2012. Housing starts fell 62.3 percent from 2005 to 2012, 50.2 percent from 2000 to 2012 and 45.4 percent relative to the average from 1959 to 1963. Housing permits fell 62.2 percent from 2005 to 2012, 48.8 percent from 2000 to 2011 and 29.6 percent from the average of 1969-1963 to 2012. Housing starts rose 31.8 from 2000 to 2005 while housing permits grew 35.4 percent. From 1990 to 2000 housing starts increased 31.5 percent while permits increased 43.3 percent.
Table VA-5, US, Annual New Privately Owned Housing Units Authorized by Building Permits in Permit-Issuing Places and New Privately Owned Housing Units Started, Thousands
| Starts | Permits | |
| 2012 | 780.6 | 815.5 |
| ∆% 2012/2011 | 28.2 | 30.7 |
| ∆% 2012/2010 | 33.0 | 34.9 |
| ∆% 2012/2005 | -62.3 | -62.2 |
| ∆% 2012/2000 | -50.2 | -48.8 |
| ∆% 2012/Av 1959-1963 | -45.4 | -29.6 |
| 2011 | 608.8 | 624.1 |
| ∆% 2011/2005 | -70.6 | -71.9 |
| ∆% 2011/2000 | -61.2 | -62.0 |
| ∆% 2011/Av 1959-1963 | -57.4 | -46.1 |
| 2010 | 586.9 | 604.6 |
| 2009 | 554.0 | 583.0 |
| 2008 | 905.5 | 905.4 |
| 2007 | 1,355,0 | 1,398.4 |
| 2006 | 1,800.9 | 1,838.9 |
| 2005 | 2,068.3 | 2,155.3 |
| ∆% 2005/2000 | 31.8 | 35.4 |
| 2004 | 1,955.8 | 2,070.1 |
| 2003 | 1,847.7 | 1,889.2 |
| 2002 | 1,704.9 | 1,747.2 |
| 2001 | 1,602.7 | 1,636.7 |
| 2000 | 1,568.7 | 1,592.3 |
| ∆% 2000/1990 | 31.5 | 43.3 |
| 1990 | 1,192,7 | 1,110.8 |
| 1980 | 1,292.2 | 1,190.6 |
| 1970 | 1,433.6 | 1,351.5 |
| Average 1959-63 | 1,429.7 | 1158.2 |
Source: US Census Bureau http://www.census.gov/construction/nrc/
VB Japan. Table VB-BOJF provides the forecasts of economic activity and inflation in Japan by the majority of members of the Policy Board of the Bank of Japan, which is part of their Outlook for Economic Activity and Prices (http://www.boj.or.jp/en/mopo/outlook/gor1210a.pdf). For fiscal 2013, the forecast is of growth of GDP between 1.3 and 1.8 percent, with domestic producer price inflation (Corporate Goods Price Index, CGPI) in the range of 0.1 to 0.7 percent and the all items CPI less fresh food of 0.2 to 0.6 percent. These forecasts are biannual in Apr and Oct. The Cabinet Office, Ministry of Finance and Bank of Japan released on Jan 22, 2013, a “Joint Statement of the Government and the Bank of Japan on Overcoming Deflation and Achieving Sustainable Economic Growth” (http://www.boj.or.jp/en/announcements/release_2013/k130122c.pdf) with the important change of increasing the inflation target of monetary policy from 1 percent to 2 percent:
“The Bank of Japan conducts monetary policy based on the principle that the policy shall be aimed at achieving price stability, thereby contributing to the sound development of the national economy, and is responsible for maintaining financial system stability. The Bank aims to achieve price stability on a sustainable basis, given that there are various factors that affect prices in the short run.
The Bank recognizes that the inflation rate consistent with price stability on a sustainable basis will rise as efforts by a wide range of entities toward strengthening competitiveness and growth potential of Japan's economy make progress. Based on this recognition, the Bank sets the price stability target at 2 percent in terms of the year-on-year rate of change in the consumer price index.
Under the price stability target specified above, the Bank will pursue monetary easing and aim to achieve this target at the earliest possible time. Taking into consideration that it will take considerable time before the effects of monetary policy permeate the economy, the Bank will ascertain whether there is any significant risk to the sustainability of economic growth, including from the accumulation of financial imbalances.”
The Bank of Japan also provided explicit analysis of its view on price stability in a “Background note regarding the Bank’s thinking on price stability” (http://www.boj.or.jp/en/announcements/release_2013/data/rel130123a1.pdf http://www.boj.or.jp/en/announcements/release_2013/rel130123a.htm/). The Bank of Japan also amended “Principal terms and conditions for the Asset Purchase Program” (http://www.boj.or.jp/en/announcements/release_2013/rel130122a.pdf): “Asset purchases and loan provision shall be conducted up to the maximum outstanding amounts by the end of 2013. From January 2014, the Bank shall purchase financial assets and provide loans every month, the amount of which shall be determined pursuant to the relevant rules of the Bank.”
Table VB-BOJF, Bank of Japan, Forecasts of the Majority of Members of the Policy Board, % Year on Year
| Fiscal Year | Real GDP | Domestic CGPI | CPI All Items Less Fresh Food |
| 2011 | |||
| Apr 2012 | -0.2 to –0.2 | +1.7 | 0.0 |
| Jan 2012 | -0.4 to –0.3 | +1.8 to +1.9 | -0.1 to 0.0 |
| 2012 | |||
| Oct 2012 | +1.4 to +1.6 [+1.5] | -1.2 to -0.9 [-1.1] | -0.1 to -0.1 [-0.1] |
| Jul 2012 | +2.2 to +2.4 [+2.2] | -0.3 to 0.0 [-0.2] | +0.1 to +0.3 [+0.2] |
| Apr 2012 | +2.1 to +2.4 | +0.4 to +0.7 | +0.1 to +0.4 |
| Jan 2012 | +1.8 to +2.1 | -0.1 to +0.2 | 0.0 to +0.2 |
| 2013 | |||
| Oct 2012 | +1.3 to +1.8 [+1.6] | +0.1 to +0.7 [+0.5] | +0.2 to +0.6 [+0.4] |
| Jul 2012 | +1.6 to +1.8 [+1.7] | +0.6 to +0.8 [+0.6] | +0.5 to +0.7 [+0.7] |
| Apr 2012 | +1.6 to +1.8 | +0.7 to +0.9 | +0.5 to +0.7 |
| Jan 2012 | +1.4 to +1.7 | +0.6 to 1.0 | +0.4 to +0.5 |
| 2014 | |||
| Oct 2012 | +0.2 to +0.7] [+0.6] | +3.7 to +4.4 [+4.2] | +2.4 to +3.0 [+2.8] |
Figures in brackets are the median of forecasts of Policy Board members
Source: Policy Board, Bank of Japan
http://www.boj.or.jp/en/mopo/outlook/gor1210a.pdf
Private-sector activity in Japan expanded at a marginal rate with the Markit Composite Output PMI™ Index decreasing marginally from 50.4 in Jan to 50.2 in Feb, which is the second consecutive reading above the no-change 50.0 since May 2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10824). Paul Smith, economist at Markit and author of the report, finds that growth in services but with weakness in manufacturing could provide some support for marginal growth in the first quarter of 2013 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10824). The Markit Business Activity Index of Services decreased marginally from 51.5 in Jan to 51.1 in Feb, indicating moderate growth of the private services (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10824). Paul Smith, Senior Economist at Markit and author of the report, finds signs of growth in the beginning of 2013 with confidence in demand for services (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10632). Markit/JMMA Purchasing Managers’ Index™ (PMI™), seasonally adjusted, increased from 47.7 in Jan to 48.5 in Feb for the ninth consecutive month of contraction below 50.0 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10739). Foreign orders fell for the eleventh consecutive. Paul Smith, economist at Markit and author of the report, finds probable decline of manufacturing of 1 percent in IQ2013 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10739).Table JPY provides the country data table for Japan.
Table JPY, Japan, Economic Indicators
| Historical GDP and CPI | 1981-2010 Real GDP Growth and CPI Inflation 1981-2010 |
| Corporate Goods Prices | Feb ∆% +0.4 |
| Consumer Price Index | Jan NSA ∆% 0.0; Jan 12 months NSA ∆% -0.3 |
| Real GDP Growth | IVQ2012 ∆%: 0.0 on IIIQ2012; IVQ2012 SAAR 0.2; |
| Employment Report | Jan Unemployed 2.73 million Change in unemployed since last year: minus 100 thousand |
| All Industry Indices | Jan month SA ∆% -1.4 Blog 3/24/13 |
| Industrial Production | Jan SA month ∆%: 1.0 |
| Machine Orders | Total Dec ∆% -1.6 Private ∆%: -9.8 Dec ∆% Excluding Volatile Orders 2.8 |
| Tertiary Index | Jan month SA ∆% -1.1 |
| Wholesale and Retail Sales | Jan 12 months: |
| Family Income and Expenditure Survey | Jan 12-month ∆% total nominal consumption 2.1, real 2.4 Blog 3/3/13 |
| Trade Balance | Exports Feb 12 months ∆%: -2.9 Imports Feb 12 months ∆% 11.9 Blog 3/24/13 |
Links to blog comments in Table JPY:
3/17/13 http://cmpassocregulationblog.blogspot.com/2013/03/recovery-without-hiring-ten-million.html
3/10/13 http://cmpassocregulationblog.blogspot.com/2013/03/thirty-one-million-unemployed-or.html
3/3/13 http://cmpassocregulationblog.blogspot.com/2013/03/mediocre-gdp-growth-at-16-to-20-percent.html
2/10/13 http://cmpassocregulationblog.blogspot.com/2013/02/united-states-unsustainable-fiscal.html
8/9/11 http://cmpassocregulationblog.blogspot.com/2011/08/turbulence-in-world-financial-markets.html
The indices of all industry activity of Japan, which is an approximation of GDP or economic activity, fell to levels close to the worst point of the recession, showing the brutal impact of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Table VB-1 with the latest revisions shows the quarterly index which permits comparison with the movement of real GDP. The first row provides weights of the various components of the index: AG (agriculture) 1.4 percent (not shown), CON (construction) 5.7 percent, IND (industrial production) 18.3 percent, TERT (services) 63.2 percent, and GOVT (government) 11.4 percent. GDP changed 0.0 percent in IVQ2012 (Table VB-1 http://cmpassocregulationblog.blogspot.com/2013/03/thirty-one-million-unemployed-or_11.html), industry decreased 1.9 percent, the tertiary sector increased 0.4 percent, government changed 0.0 percent and construction increased 2.1 percent. The report shows that the all industry index increased 0.2 percent in IVQ2012. Industry deducted 0.33 percentage points from growth of the all industry index and the tertiary index contributed 0.27 percentage points. Japan had already experienced a very weak quarter in IVQ2010, with decline of the all industry index of 0.2 percent and decline of GDP of 0.4 percent (Table VB-1 http://cmpassocregulationblog.blogspot.com/2013/02/recovery-without-hiring-united-states.html), when it was unexpectedly hit by the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. The worst impact of the natural disaster was on construction with drop of 7.5 percent in IIQ2011 relative to IQ2011 but recovery at 3.3 percent in IIIQ2011. Industrial production fell 4.2 percent from IQ2011 into IIQ2011 but grew 5.4 percent in IIIQ2011. Many accounts had already been closed when the earthquake occurred, but there is visible decline of the index of all industry by 1.3 percent in IQ2011 caused by decline of industrial production by 1.5 percent and services by 1.0 percent with GDP falling revised 1.8 percent (Table VB-1 http://cmpassocregulationblog.blogspot.com/2013/03/thirty-one-million-unemployed-or_11.html).
Table VB-1, Japan, Indices of All Industry Activity Percentage Change from Prior Quarter SA ∆%
| CON | IND | TERT | GOVT | ALL IND | REAL | |
| Weight | 5.7 | 18.3 | 63.2 | 11.4 | 100.0 | |
| 2012 | ||||||
| IVQ2012 | 2.1 | -1.9 | 0.4 | 0.0 | 0.2 | 0.0 |
| Cont to IVQ % Change | 0.10 | -0.33 | 0.27 | 0.00 | ||
| IIIQ | 1.6 | -4.2 | 0.1 | 0.0 | -0.5 | -0.9 |
| IIQ | -1.5 | -2.0 | 0.0 | -0.1 | -0.1 | -0.2 |
| IQ | 5.7 | 1.3 | 0.0 | 0.1 | -0.1 | 1.5 |
| 2011 | ||||||
| IVQ | -1.5 | 0.4 | 0.5 | 0.2 | 0.5 | 0.1 |
| IIIQ | 3.3 | 5.4 | 1.5 | 0.2 | 2.1 | 2.5 |
| IIQ | -7.5 | -4.2 | -0.5 | 0.1 | -0.9 | -0.9 |
AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity
Source: http://www.meti.go.jp/english/statistics/index.html http://www.esri.cao.go.jp/en/sna/sokuhou/sokuhou_top.html
There are more details in Table VB-2. The all industry activity decreased 1.4 percent in Jan 2013 relative to Dec 2012 with decrease of 1.1 percent of the tertiary or services sector and increase of industry of 0.6 percent while construction increased 3.5 percent and government increased 0.9 percent. Industry added 0.06 percentage points to growth in Jan while the tertiary sector deducted 0.73 percentage points, construction added 0.17 percentage points and government added 0.11 percentage points. Weakness in Sep and Aug 2011 had interrupted the sharp recovery from Apr to Jul with renewed strength in Oct but weakness again in Nov followed by strong rebound in Dec 2011 that was interrupted in Jan-Mar 2012 with modest growth in Apr, new decline in May 2012, moderate increase in Jun 2012 and new decline of 0.5 percent in Jul 2012, nil growth in Aug 2012, decline of 0.4 percent in Sep 2012 and increase of 0.3 percent in Oct 2012 interrupted by decline of 0.4 percent in Nov 2012 with increase of 1.6 percent in Dec 2012 followed by decline of 1.4 percent in Jan 2013. The highest risk to Japan is if weakening world growth would affect Japanese exports.
Table VB-2, Japan, Indices of All Industry Activity Percentage Change from Prior Month SA ∆%
| CON | IND | TERT | GOVT | ALL IND | |
| Jan 2013 | 3.5 | 0.3 | -1.1 | 0.9 | -1.4 |
| Cont to Jan % Change | 0.17 | 0.06 | -0.73 | 0.11 | |
| Dec 2012 | -0.4 | 2.4 | 1.1 | -0.2 | 1.6 |
| Nov | 4.8 | -1.4 | -0.5 | 0.2 | -0.4 |
| Oct | -2.7 | 1.6 | 0.2 | 0.6 | 0.3 |
| Sep | 2.6 | -4.1 | 0.2 | -1.2 | -0.4 |
| Aug | -0.3 | -1.6 | 0.3 | 0.4 | 0.0 |
| Jul | -2.7 | -1.0 | -0.6 | 0.0 | -0.5 |
| Jun | 1.0 | 0.4 | 0.1 | 0.2 | 0.3 |
| May | 9.5 | -3.4 | 0.9 | -0.1 | -0.2 |
| Apr | -5.5 | -0.2 | -0.2 | 0.1 | 0.1 |
| Mar | -5.4 | 1.3 | -0.6 | -0.1 | -0.3 |
| Feb | 4.2 | -1.6 | 0.0 | -0.4 | -0.1 |
| Jan | 5.6 | 0.9 | -0.6 | 0.5 | -0.7 |
| Dec 2011 | -1.4 | 2.3 | 1.6 | -0.2 | 1.7 |
| Nov | 0.3 | -1.7 | -0.8 | 0.1 | -0.9 |
| Oct | -2.6 | 1.8 | 0.6 | 0.1 | 0.6 |
| Sep | 1.6 | -1.9 | -0.2 | 0.2 | -0.1 |
| Aug | 1.1 | 0.9 | 0.1 | -0.1 | 0.2 |
| Jul | 0.1 | 1.1 | 0.4 | -0.2 | 0.5 |
| Jun | -0.1 | 3.8 | 1.2 | 0.2 | 1.5 |
| May | 6.5 | 5.8 | 0.9 | 0.7 | 1.6 |
| Apr | -5.1 | 2.4 | 2.1 | -0.9 | 2.0 |
| Mar | -10.6 | -16.2 | -5.4 | 0.7 | -6.6 |
| Feb | 2.3 | 1.1 | 0.3 | 0.0 | 0.1 |
| Jan | 6.3 | 1.2 | 0.5 | -0.5 | 0.6 |
| Dec 2010 | -0.5 | 2.4 | -0.2 | 0.3 | 0.1 |
| Nov | -1.4 | 1.6 | 0.6 | -0.4 | 0.3 |
| Oct | 0.1 | -1.4 | 0.2 | -0.1 | 0.0 |
| Sep | -1.9 | -0.8 | -0.4 | -0.1 | -0.4 |
| Aug | 1.6 | -0.1 | 0.1 | 0.1 | -0.5 |
| Jul | 0.8 | 0.3 | 0.7 | 0.1 | 1.1 |
| Jun | -2.1 | -1.5 | 0.1 | -0.1 | 0.2 |
| May | 6.3 | -0.1 | -0.3 | 0.0 | 0.0 |
| Apr | -3.1 | 0.6 | 1.6 | -0.2 | 0.9 |
AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity
Sources: http://www.meti.go.jp/english/statistics/index.html
Percentage changes from a year earlier in calendar years and relative to the same quarter a year earlier of the all industry activity indices are provided in Table VB-3. The first row shows that services contribute 63.2 percent of the total index and industry contributes 18.3 percent for joint contribution of 81.5 percent. The all industry activity index decreased 0.3 percent in IVQ2012 and GDP increased 0.5 percent relative to a year earlier (Table VB-4 http://cmpassocregulationblog.blogspot.com/2013/03/thirty-one-million-unemployed-or_11.html). Industry decreased 5.9 percent relative to a year earlier while the tertiary sector increased 0.7 percent, deducting combined 0.60 percentage points to growth of the all industry activity index of minus 0.3 percent while construction added 0.38 percentage points and government deducted 0.02 percentage points. The fall of industrial production in 2009 was by a catastrophic 21.9 percent. Japan emerged from the crisis with industrial growth of 16.4 percent in 2010. Quarterly data show that industry is the most dynamic sector of the Japanese economy. The all-industry index increased 1.2 percent in 2012 and real GDP increased 2.0 percent. Industry fell 0.3 percent, deducting 0.06 percentage points, while the tertiary sector increased 1.4 percent, adding 0.94 percentage points. The Tōhoku or Great East Earthquake and Tsunami of Mar 11, 201, declining world trade and revaluation of the yen in fear of world financial risks interrupted the recovery of the Japanese economy from the global recession.
Table VB-3, Japan, Indices of All Industry Activity Percentage Change from Earlier Calendar Year and Same Quarter Year Earlier NSA ∆%
| CON | IND | TERT | GOVT | ALL IND | REAL | |
| Weight | 5.7 | 18.3 | 63.2 | 11.4 | 100.0 | |
| Calendar Year | ||||||
| 2012 | 4.3 | -0.3 | 1.4 | 0.2 | 1.2 | 2.0 |
| Cont to 2012 % Change | 0.19 | -0.06 | 0.94 | 0.02 | ||
| 2011 | -2.0 | -2.3 | 0.1 | -0.2 | -0.5 | -0.6 |
| 2010 | -7.0 | 16.4 | 1.3 | -0.7 | 3.1 | 4.7 |
| 2009 | -5.6 | -21.9 | -5.2 | 0.1 | -7.7 | -5.5 |
| 2008 | -7.6 | -3.4 | -1.0 | -1.4 | -1.9 | -1.0 |
| 2012 | ||||||
| IVQ | 7.8 | -5.9 | 0.7 | -0.2 | -0.3 | 0.5 |
| Cont to IVQ % Change | 0.38 | -1.06 | 0.46 | -0.02 | ||
| IIIQ | 4.2 | -4.6 | 0.5 | 0.3 | -0.2 | 0.4 |
| IIQ | 5.8 | 5.3 | 2.2 | 0.4 | 2.6 | 3.9 |
| IQ | -0.3 | 4.8 | 2.4 | 0.1 | 2.4 | 3.4 |
| 2011 | ||||||
| IVQ | -2.8 | -1.6 | 0.6 | 0.6 | 0.0 | -0.3 |
| IIIQ | -3.2 | -0.9 | 0.3 | -0.1 | -0.1 | -0.5 |
| IIQ | -5.1 | -5.8 | -0.5 | -0.4 | -1.6 | -1.6 |
| IQ | 2.3 | -1.3 | -0.3 | -1.0 | -0.5 | 0.0 |
| 2010 | ||||||
| IVQ | -0.6 | 5.9 | 1.6 | -0.8 | 2.1 | 3.3 |
| IIIQ | -3.2 | 14.0 | 1.8 | -0.6 | 3.2 | 6.0 |
| IIQ | -11.3 | 21.3 | 1.4 | -0.7 | 3.5 | 4.4 |
| IQ | -12.4 | 28.0 | 0.8 | -0.5 | 3.9 | 4.9 |
AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity
Source: http://www.meti.go.jp/english/statistics/index.html http://www.esri.cao.go.jp/en/sna/sokuhou/sokuhou_top.html
Percentage changes of a month relative to the same month a year earlier for the indices of all industry activity of Japan are shown in Table VB-4. The all industry activity index decreased 0.5 percent in Jan 2013 relative to Jan 2012. Industry fell 5.8 percent in Jan 2013 relative to a year earlier, subtracting 1.01 percentage points to growth of the all industry activity index. The tertiary sector increased 0.3 percent, adding 0.21 percentage points. Construction added 0.35 percentage points to the index and government deducted 0.04 percentage points.
Table VB-4, Japan, Indices of All Industry Activity Percentage Change from Same Month Year Earlier NSA ∆%
| CON | IND | TERT | GOVT | ALL IND | |
| Jan 2013 | 7.9 | -5.8 | 0.3 | -0.3 | -0.5 |
| Cont to Jan % Change | 0.35 | -1.01 | 0.21 | -0.04 | |
| Dec 2012 | 9.9 | -7.9 | -0.2 | 0.7 | -1.0 |
| Nov | 8.8 | -5.5 | 1.0 | 0.0 | 0.1 |
| Oct | 4.6 | -4.5 | 1.4 | -1.4 | 0.2 |
| Sep | 4.1 | -8.1 | 0.1 | 0.6 | -1.2 |
| Aug | 3.5 | -4.6 | 0.6 | 0.8 | -0.1 |
| Jul | 4.9 | -0.8 | 0.9 | -0.3 | 0.6 |
| Jun | 7.6 | -1.5 | 0.8 | 0.8 | 0.6 |
| May | 6.4 | 6.0 | 3.2 | -0.6 | 3.3 |
| Apr | 3.7 | 12.9 | 2.6 | 0.8 | 4.1 |
| Mar | 4.1 | 14.2 | 4.2 | 0.6 | 5.5 |
| Feb | -1.6 | 1.5 | 2.4 | -0.7 | 1.6 |
| Jan | -3.4 | -1.6 | 0.4 | 0.4 | -0.1 |
| Dec 2011 | -3.0 | -3.0 | 1.2 | 0.8 | 0.2 |
| Nov | -1.2 | -2.9 | -0.3 | 0.8 | -0.7 |
| Oct | -4.0 | 0.9 | 0.9 | 0.2 | 0.5 |
| Sep | -0.4 | -2.4 | 0.1 | 0.1 | -0.3 |
| Aug | -4.3 | 1.6 | 0.8 | -1.1 | 0.4 |
| Jul | -4.8 | -1.7 | 0.1 | 0.5 | -0.4 |
| Jun | -4.6 | -0.6 | 1.0 | 0.3 | 0.4 |
| May | -6.5 | -4.6 | -0.2 | -0.8 | -1.3 |
| Apr | -4.1 | -12.7 | -2.3 | -0.6 | -4.0 |
| Mar | -2.8 | -12.4 | -3.4 | 0.0 | -4.6 |
| Feb | 4.4 | 4.5 | 2.0 | -1.4 | 2.1 |
| Jan | 5.9 | 6.1 | 1.0 | -1.4 | 1.8 |
| Dec 2010 | -0.5 | 5.9 | 1.8 | -0.7 | 2.1 |
| Nov | -0.5 | 7.0 | 2.5 | -1.9 | 2.7 |
| Oct | -1.1 | 5.0 | 0.5 | 0.3 | 1.3 |
| Sep | -2.8 | 12.1 | 1.3 | -0.6 | 2.7 |
| Aug | -1.7 | 15.5 | 2.3 | -1.1 | 3.8 |
| Jul | -5.3 | 14.6 | 1.6 | -0.1 | 3.3 |
| Jun | -8.3 | 16.6 | 1.0 | -0.7 | 3.0 |
| May | -8.1 | 20.7 | 1.2 | -0.9 | 3.4 |
| Apr | -17.0 | 27.0 | 1.9 | -0.4 | - |
AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity
Source: http://www.meti.go.jp/english/statistics/index.html
The structure of exports and imports of Japan is in Table VB-5. Japan imports all types of raw materials and fuels at rapidly increasing prices caused by the carry trade from zero interest rates to commodities, oscillating under shocks of risk aversion. Mineral fuels account for 38.9 percent of Japan’s imports and increased 8.9 percent in the 12 months ending in Feb 2013 because of alternating carry trades into commodity futures in accordance with risk aversion. Weakness of world demand depresses prices of industrial goods. Manufactured products contribute 13.5 percent of Japan’s exports with increase of 3.4 percent in the 12 months ending in Feb 2013. Machinery contributes 19.3 percent of Japan’s exports with decrease of 13.4 percent in the 12 months ending in Feb 2013. Electrical machinery contributes 16.2 percent of Japan’s exports with decrease of 7.6 percent in the 12 months ending in Feb 2013. Exports of transport equipment with share of 24.6 percent in total exports decreased 3.6 percent in the 12 months ending in Jan 2013 but had been increasing sharply largely because of the low level after the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. The breakdown of transport equipment in Table VB-5 shows decrease of the major categories of motor vehicles of 5.3 percent: cars decreased 5.2 percent with decrease of 8.1 percent in the minor category of buses and trucks, increase of 1.5 percent for parts of motor vehicles, decrease of 5.3 percent for motorcycles and decrease of 4.2 percent for ships. The result of rising commodity prices and stable or declining prices of industrial products is pressure on Japan’s terms of trade with oscillations when risk aversion causes reversal of carry trades from zero interest rates to commodity prices. Data in Table VB-5 are in millions of yen that have been affected by recent depreciation of the yen relative to the USD with invoicing of many products in dollars.
Table VB-5, Japan, Structure and Growth of Exports and Imports % and ∆% Millions Yens
| Feb 2013 | Value JPY Millions | % of Total | 12 Months ∆% | Contribution Degree % |
| Exports | 5,284,067 | 100.0 | -2.9 | -2.9 |
| Foodstuffs | 28,339 | 0.5 | 2.2 | 0.0 |
| Raw Materials | 102,452 | 1.9 | 15.1 | 0.2 |
| Mineral Fuels | 72,372 | 1.4 | 18.4 | 0.2 |
| Chemicals | 567,730 | 10.7 | 9.2 | 0.9 |
| Manufactured Goods | 711,202 | 13.5 | 3.4 | 0.4 |
| Machinery | 1,018,883 | 19.3 | -13.4 | -2.9 |
| Electrical Machinery | 855,764 | 16.2 | -7.6 | -1.3 |
| Transport Equipment | 1,299,676 | 24.6 | -3.6 | -0.9 |
| Motor Vehicles | 825,326 | 15.6 | -5.3 | -0.9 |
| Cars | 708,786 | 13.4 | -5.2 | -0.7 |
| Buses & Trucks | 106,479 | 2.0 | -8.1 | -0.2 |
| Parts of Motor Vehicles | 268,641 | 5.1 | 1.5 | 0.1 |
| Motorcycles | 29,640 | 0.6 | -5.3 | 0.0 |
| Ships | 126,677 | 2.4 | -4.2 | -0.1 |
| Other | 627,649 | 11.9 | 3.7 | 0.4 |
| Imports | 6,061,534 | 100.0 | 11.9 | 11.9 |
| Foodstuffs | 469,307 | 7.7 | 12.3 | 1.0 |
| Raw Materials | 397,110 | 6.6 | 8.9 | 0.6 |
| Mineral Fuels | 2,356,023 | 38.9 | 12.1 | 4.7 |
| Chemicals | 494,251 | 8.2 | 15.7 | 1.2 |
| Manufactured Goods | 400,935 | 6.6 | 2.2 | 0.2 |
| Machinery | 406,412 | 6.7 | 7.6 | 0.5 |
| Electrical Machinery | 688,049 | 11.4 | 9.2 | 1.1 |
| Transport Equipment | 164,300 | 2.7 | 2.9 | 0.1 |
| Other | 685,146 | 11.3 | 25.6 | 2.6 |
Source: Japan, Ministry of Finance http://www.customs.go.jp/toukei/info/index_e.htm
Table VB-6 provides Japan’s exports, imports and trade balance in five-year intervals from 1950 to 1975 and then yearly from 1979 to 2012. Exports grew at the average yearly rate of 3.2 percent while imports grew at 3.3 percent per year in the years from 1979 to 2012. Abstracting from the global recession and the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011, exports grew at the average annual rate of 4.8 percent between 1979 and 2007 and imports at 4.0 percent. The global recession had a brutal impact on Japan’s trade. Exports fell 35.5 percent from 2007 to 2009 while imports fell 29.6 percent. Japan had the first trade deficit in 2011 since 1980 and the highest deficit in 2012.
Table VB-6, Japan, Exports and Imports Calendar Year 1979-2010 Billion Yens
| Years | Exports | Imports | Balance |
| 1950 | 298 | 348 | -50 |
| 1955 | 723 | 889 | -166 |
| 1960 | 1,459 | 1,616 | -157 |
| 1965 | 3,042 | 2,940 | 102 |
| 1970 | 6,954 | 6,797 | 157 |
| 1975 | 16,545 | 17,170 | -625 |
| 1979 | 22,531 | 24,245 | -1,714 |
| 1980 | 29,382 | 31,995 | -2,613 |
| 1981 | 33,468 | 31,464 | 2,004 |
| 1982 | 34,432 | 32,656 | 1,776 |
| 1983 | 34,909 | 30,014 | 4,895 |
| 1984 | 40,325 | 32,321 | 8,004 |
| 1985 | 41,955 | 31,084 | 10,871 |
| 1986 | 35,289 | 21,550 | 13,739 |
| 1987 | 33,315 | 21,736 | 11,579 |
| 1988 | 33,939 | 24,006 | 9,933 |
| 1989 | 37,822 | 28,978 | 8,844 |
| 1990 | 41,456 | 33,855 | 7,601 |
| 1991 | 42,359 | 31,900 | 10,459 |
| 1992 | 43,012 | 29,527 | 13,485 |
| 1993 | 40,202 | 26,826 | 13,376 |
| 1994 | 40,497 | 28,104 | 12,393 |
| 1995 | 41,530 | 31,548 | 9,982 |
| 1996 | 44,731 | 37,993 | 6,738 |
| 1997 | 50,937 | 40,956 | 9,981 |
| 1998 | 50,645 | 36,653 | 13,992 |
| 1999 | 47,547 | 35,268 | 12,279 |
| 2000 | 51,654 | 40,938 | 10,716 |
| 2001 | 48,979 | 42,415 | 6,564 |
| 2002 | 52,108 | 42,227 | 9,881 |
| 2003 | 54,548 | 44,362 | 10,186 |
| 2004 | 61,169 | 49,216 | 11,953 |
| 2005 | 65,656 | 56,949 | 8,707 |
| 2006 | 75,246 | 67,344 | 7,902 |
| 2007 | 83,931 | 73,135 | 10,796 |
| 2008 | 81,018 | 78,955 | 2,063 |
| 2009 | 54,170 | 51,499 | 2,671 |
| 2010 | 67,399 | 60,764 | 6,635 |
| 2011 | 65,546 | 68,111 | -2,565 |
| 2012 | 63,748 | 70,689 | -6,941 |
Source: Japan, Ministry of Finance http://www.customs.go.jp/toukei/info/index_e.htm
The geographical breakdown of exports and imports of Japan with selected regions and countries is provided in Table VB-7 for Feb 2013. The share of Asia in Japan’s trade is more than one half, 52.2 percent of exports and 42.1 percent of imports. Within Asia, exports to China are 15.9 percent of total exports and imports from China 18.5 percent of total imports. While exports to China fell 15.8 percent in the 12 months ending in Feb 2013, imports from China increased 22.0 percent. The second largest export market for Japan in Feb 2013 is the US with share of 19.1 percent of total exports and share of imports from the US of 7.9 percent in total imports. Western Europe has share of 10.6 percent in Japan’s exports and of 9.9 percent in imports. Rates of growth of exports of Japan in Feb 2013 are sharply negative for all countries and regions with the exception of growth of 5.7 percent for exports to the US and 1.3 percent for exports to Australia. Comparisons relative to 2011 may have some bias because of the effects of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Deceleration of growth in China and the US and threat of recession in Europe can reduce world trade and economic activity, which could be part of the explanation for the decline of Japan’s exports by 2.9 percent in Feb 2013 while imports increased 11.9 percent but higher levels after the earthquake and declining prices may be another factor. Growth rates of imports in the 12 months ending in Feb 2013 are positive for all trading partners. Imports from Asia increased 14.0 percent in the 12 months ending in Feb 2013 while imports from China increased 22.0 percent. Data are in millions of yen, which has effects of recent depreciation of the yen relative to the United States dollar (USD).
Table VB-7, Japan, Value and 12-Month Percentage Changes of Exports and Imports by Regions and Countries, ∆% and Millions of Yens
| Feb 2013 | Exports | 12 months ∆% | Imports Millions Yen | 12 months ∆% |
| Total | 5,284,067 | -2.9 | 6,061,534 | 11.9 |
| Asia | 2,757,508 | -5.2 | 2,551,827 | 14.0 |
| China | 842,260 | -15.8 | 1,119,981 | 22.0 |
| USA | 1,007,389 | 5.7 | 479,214 | 0.6 |
| Canada | 72,975 | -17.2 | 77,539 | 22.2 |
| Brazil | 39,131 | -1.8 | 97,131 | 15.1 |
| Mexico | 71,309 | 4.7 | 29,109 | 32.3 |
| Western Europe | 558,641 | -9.0 | 600,914 | 11.3 |
| Germany | 136,919 | -2.5 | 160,801 | 7.8 |
| France | 44,677 | -15.1 | 80,966 | 8.9 |
| UK | 88,406 | -16.7 | 49,949 | 19.9 |
| Middle East | 194,606 | -6.9 | 1,358,008 | 14.4 |
| Australia | 136,255 | 1.3 | 352,350 | 1.9 |
Source: Japan, Ministry of Finance http://www.customs.go.jp/toukei/info/index_e.htm
Table VB-8, Japan, Trade Balance, Millions of Yen
| Feb 2013 | Millions of Yen |
| Total | -777,467 |
| Asia | 205,681 |
| China | -277,721 |
| USA | 528,175 |
| Canada | -4,564 |
| Brazil | -58,000 |
| Mexico | 42,200 |
| Western Europe | -42,273 |
| Germany | -23,882 |
| France | -36,289 |
| UK | 38,457 |
| Middle East | -1,163,402 |
| Australia | -216,095 |
Source: Japan, Ministry of Finance http://www.customs.go.jp/toukei/info/index_e.htm
There was milder increase in Japan’s export corporate goods price index during the global recession in 2008 but similar sharp decline during the bank balance sheets effect in late 2008, as shown in Chart VB-1 of the Bank of Japan. Japan exports industrial goods whose prices have been less dynamic than those of commodities and raw materials. As a result, the export CGPI on the yen basis in Chart VB-1 trends down with oscillations after a brief rise in the final part of the recession in 2009. The export corporate goods price index fell from 104.8 in Jun 2009 to 94 in Feb 2012 or minus 10.3 percent and increased to 105.9 in Feb 2013 for a gain of 12.7 percent relative to Feb 2012 and 1.0 percent relative to Jun 2009. The choice of Jun 2009 is designed to capture the reversal of risk aversion beginning in Sep 2008 with the announcement of toxic assets in banks that would be withdrawn with the Troubled Asset Relief Program (TARP) (Cochrane and Zingales 2009). Reversal of risk aversion in the form of flight to the USD and obligations of the US government opened the way to renewed carry trades from zero interest rates to exposures in risk financial assets such as commodities. Japan exports industrial products and imports commodities and raw materials.
Chart VB-1, Japan, Export Corporate Goods Price Index, Monthly, Yen Basis, 2008-2013
Source: Bank of Japan
http://www.stat-search.boj.or.jp/index_en.html
Chart VB-2 provides the export corporate goods price index on the basis of the contract currency. The export corporate goods price index on the basis of the contract currency increased from 97.9 in Jun 2009 to 102.3 in Feb 2012 or 4.5 percent but dropped to 101.5 in Feb 2013 or minus 0.8 percent relative to Feb 2012 and gained 3.7 percent relative to Jun 2009.
Chart VB-2, Japan, Export Corporate Goods Price Index, Monthly, Contract Currency Basis, 2008-2013
http://www.stat-search.boj.or.jp/index_en.html
Japan imports primary commodities and raw materials. As a result, the import corporate goods price index on the yen basis in Chart VB-3 shows an upward trend after the rise during the global recession in 2008 driven by carry trades from fed funds rates collapsing to zero into commodity futures and decline during risk aversion from late 2008 into beginning of 2008 originating in doubts about soundness of US bank balance sheets. More careful measurement should show that the terms of trade of Japan, export prices relative to import prices, declined during the commodity shocks originating in unconventional monetary policy. The decline of the terms of trade restricted potential growth of income in Japan. The import corporate goods price index on the yen basis increased from 93.5 in Jun 2009 to 106.4 in Feb 2012 or 13.8 percent and to 120.4 in Feb 2013 or gain of 13.2 percent relative to Feb 2012 and 28.8 percent relative to Jun 2009. Recent depreciation of the yen relative to the dollar explains the increase in imports in domestic yen prices.
Chart VB-3, Japan, Import Corporate Goods Price Index, Monthly, Yen Basis, 2008-2013
Source: Bank of Japan
http://www.stat-search.boj.or.jp/index_en.html
Chart VB-4 provides the import corporate goods price index on the contract currency basis. The import corporate goods price index on the basis of the contract currency increased from 86.2 in Jun 2009 to 115.8 in Feb 2012 or 34.3 percent and to 114.9 in Feb 2013 or minus 0.8 percent relative to Feb 2012 and gain of 33.3 percent relative to Jun 2009. There is evident deterioration of the terms of trade of Japan: the export corporate goods price index on the basis of the contract currency increased 3.7 percent from Jun 2009 to Feb 2012 while the import corporate goods price index increased 33.3 percent. Prices of Japan’s exports of corporate goods, mostly industrial products, increased only 3.7 percent from Jun 2009 to Feb 2012, while imports of corporate goods, mostly commodities and raw materials increased 33.3 percent. Unconventional monetary policy induces carry trades from zero interest rates to exposures in commodities that squeeze economic activity of industrial countries by increases in prices of imported commodities and raw materials during periods without risk aversion. Reversals of carry trades during periods of risk aversion decrease prices of exported commodities and raw materials that squeeze economic activity in economies exporting commodities and raw materials. Devaluation of the dollar by unconventional monetary policy could increase US competitiveness in world markets but economic activity is squeezed by increases in prices of imported commodities and raw materials. Unconventional monetary policy causes instability worldwide instead of the mission of central banks of promoting financial and economic stability.
Chart VB-4, Japan, Import Corporate Goods Price Index, Monthly, Contract Currency Basis, 2008-2013
http://www.stat-search.boj.or.jp/index_en.html
Table VB-9 provides the Bank of Japan’s Corporate Goods Price indexes of exports and imports on the yen and contract bases from Jan 2008 to Feb 2013. There are oscillations of the indexes that are shown vividly in the four charts above. For the entire period from Jan 2008 to Feb 2013, the export index on the contract currency basis increased 2.3 percent and fell 8.3 percent on the yen basis. For the entire period from Jan 2008 to Feb 2013, the import index increased 14.1 percent on the contract currency basis and increased 1.2 percent on the yen basis. The charts show sharp deteriorations in relative prices of exports to prices of imports during multiple periods. Price margins of Japan’s producers are subject to periodic squeezes resulting from carry trades from zero interest rates of monetary policy to exposures in commodities.
Table VB-9, Japan, Exports and Imports Corporate Goods Price Index, Contract Currency Basis and Yen Basis
| Month | Exports Contract | Exports Yen | Imports Contract Currency | Imports Yen |
| 2008/01 | 99.2 | 115.5 | 100.7 | 119 |
| 2008/02 | 99.8 | 116.1 | 102.4 | 120.6 |
| 2008/03 | 100.5 | 112.6 | 104.5 | 117.4 |
| 2008/04 | 101.6 | 115.3 | 110.1 | 125.2 |
| 2008/05 | 102.4 | 117.4 | 113.4 | 130.4 |
| 2008/06 | 103.5 | 120.7 | 119.5 | 140.3 |
| 2008/07 | 104.7 | 122.1 | 122.6 | 143.9 |
| 2008/08 | 103.7 | 122.1 | 123.1 | 147 |
| 2008/09 | 102.7 | 118.3 | 117.1 | 137.1 |
| 2008/10 | 100.2 | 109.6 | 109.1 | 121.5 |
| 2008/11 | 98.6 | 104.5 | 97.8 | 105.8 |
| 2008/12 | 97.9 | 100.6 | 89.3 | 93 |
| 2009/01 | 98 | 99.5 | 85.6 | 88.4 |
| 2009/02 | 97.5 | 100.1 | 85.7 | 89.7 |
| 2009/03 | 97.3 | 104.2 | 85.2 | 93 |
| 2009/04 | 97.6 | 105.6 | 84.4 | 93 |
| 2009/05 | 97.5 | 103.8 | 84 | 90.8 |
| 2009/06 | 97.9 | 104.9 | 86.2 | 93.5 |
| 2009/07 | 97.5 | 103.1 | 89.2 | 95 |
| 2009/08 | 98.3 | 104.4 | 89.6 | 95.8 |
| 2009/09 | 98.3 | 102.1 | 91 | 94.7 |
| 2009/10 | 98 | 101.2 | 91 | 94 |
| 2009/11 | 98.4 | 100.8 | 92.8 | 94.8 |
| 2009/12 | 98.3 | 100.7 | 95.4 | 97.5 |
| 2010/01 | 99.4 | 102.2 | 97 | 100 |
| 2010/02 | 99.7 | 101.6 | 97.6 | 99.8 |
| 2010/03 | 99.7 | 101.8 | 97 | 99.2 |
| 2010/04 | 100.5 | 104.6 | 99.9 | 104.6 |
| 2010/05 | 100.7 | 102.9 | 101.7 | 104.9 |
| 2010/06 | 100.1 | 101.6 | 100 | 102.3 |
| 2010/07 | 99.4 | 99 | 99.9 | 99.8 |
| 2010/08 | 99.1 | 97.3 | 99.5 | 97.5 |
| 2010/09 | 99.4 | 97 | 100 | 97.2 |
| 2010/10 | 100.1 | 96.4 | 100.5 | 95.8 |
| 2010/11 | 100.7 | 97.4 | 102.6 | 98.2 |
| 2010/12 | 101.2 | 98.3 | 104.4 | 100.6 |
| 2011/01 | 102.1 | 98.6 | 107.2 | 102.6 |
| 2011/02 | 102.9 | 99.5 | 109 | 104.3 |
| 2011/03 | 103.5 | 99.6 | 111.8 | 106.3 |
| 2011/04 | 104.1 | 101.7 | 115.9 | 111.9 |
| 2011/05 | 103.9 | 99.9 | 118.8 | 112.4 |
| 2011/06 | 103.8 | 99.3 | 117.5 | 110.5 |
| 2011/07 | 103.6 | 98.3 | 118.3 | 110.2 |
| 2011/08 | 103.6 | 96.6 | 118.6 | 108.1 |
| 2011/09 | 103.7 | 96.1 | 117 | 106.2 |
| 2011/10 | 102.9 | 95.1 | 116.6 | 105.6 |
| 2011/11 | 101.9 | 94.8 | 115.4 | 105.4 |
| 2011/12 | 101.5 | 94.5 | 116.1 | 106.2 |
| 2012/01 | 101.8 | 94 | 115 | 104.3 |
| 2012/02 | 102.3 | 95.8 | 115.8 | 106.4 |
| 2012/03 | 102.9 | 99.2 | 118.3 | 112.9 |
| 2012/04 | 103 | 98.6 | 119.5 | 113.1 |
| 2012/05 | 102.2 | 96.2 | 118.1 | 109.9 |
| 2012/06 | 101.2 | 94.9 | 115.2 | 106.7 |
| 2012/07 | 100.6 | 94.1 | 112.3 | 103.8 |
| 2012/08 | 100.9 | 94.2 | 112.6 | 103.8 |
| 2012/09 | 101.1 | 94.2 | 114.9 | 105.5 |
| 2012/10 | 101 | 94.7 | 114 | 105.4 |
| 2012/11 | 101 | 96 | 113.5 | 106.8 |
| 2012/12 | 100.8 | 98 | 113.8 | 109.9 |
| 2013/01 | 101.1 | 102.5 | 114.2 | 115.8 |
| 2013/02 | 101.5 | 105.9 | 114.9 | 120.4 |
Source: Bank of Japan http://www.stat-search.boj.or.jp/index_en.html
Further insight into inflation of the corporate goods price index (CGPI) of Japan is provided in Table VB-10. Petroleum and coal with weight of 5.7 percent increased 3.6 percent in Feb 2013 and increased 8.7 percent in 12 months. Japan exports manufactured products and imports raw materials and commodities such that the country’s terms of trade, or export prices relative to import prices, deteriorate during commodity price increases. In contrast, prices of production machinery, with weight of 3.1 percent, increased 0.0 percent in Feb 2013 and increased 1.0 percent in 12 months. In general, most manufactured products have been experiencing negative or low increases in prices while inflation rates have been high in 12 months for products originating in raw materials and commodities. Ironically, unconventional monetary policy of zero interest rates and quantitative easing that intended to increase aggregate demand and GDP growth deteriorated the terms of trade of advanced economies with adverse effects on real income.
Table VB-10, Japan, Corporate Goods Prices and Selected Components, % Weights, Month and 12 Months ∆%
| Feb 2013 | Weight | Month ∆% | 12 Month ∆% |
| Total | 1000.0 | 0.4 | -0.1 |
| Food, Beverages, Tobacco, Feedstuffs | 137.5 | 0.1 | 0.5 |
| Petroleum & Coal | 57.4 | 3.6 | 8.7 |
| Production Machinery | 30.8 | 0.0 | 1.0 |
| Electronic Components | 31.0 | 0.1 | -1.9 |
| Electric Power, Gas & Water | 52.7 | -0.5 | 3.8 |
| Iron & Steel | 56.6 | 0.2 | -8.2 |
| Chemicals | 92.1 | 0.8 | 1.0 |
| Transport | 136.4 | 0.0 | -2.2 |
Source: Bank of Japan http://www.stat-search.boj.or.jp/index_en.html http://www.boj.or.jp/en/statistics/pi/cgpi_release/cgpi1302.pdf
Percentage point contributions to change of the corporate goods price index (CGPI) in Feb 2013 are provided in Table VB-11 divided into domestic, export and import segments. In the domestic CGPI, increasing 0.4 percent in Feb 2013, the energy shock resulting from carry trades is evident in the contribution of 0.25 percentage points by petroleum and coal products in new carry trades of exposures in commodity futures. The exports CGPI increased 0.4 percent on the basis of the contract currency with contribution of 0.16 percentage points by chemicals & related products and 0.12 percentage points by metals & related products. The imports CGPI increased 0.6 percent on the contract currency basis. Petroleum, coal & natural gas added 0.48 percentage points because of new carry trades into energy commodity exposures while other primary products and manufactured goods added 0.03 percentage points. Shocks of risk aversion cause unwinding carry trades that result in declining commodity prices with resulting downward pressure on price indexes. The volatility of inflation adversely affects financial and economic decisions worldwide.
Table VB-11, Japan, Percentage Point Contributions to Change of Corporate Goods Price Index
| Groups Feb 2013 | Contribution to Change Percentage Points |
| A. Domestic Corporate Goods Price Index | Monthly Change: |
| Petroleum & Coal Products | 0.25 |
| Nonferrous Metals | 0.07 |
| Chemicals & Related Products | 0.07 |
| Agriculture, Forestry & Fishery | 0.04 |
| Scrap & Waste | 0.04 |
| Electric, Power, Gas & Water | -0.03 |
| B. Export Price Index | Monthly Change: |
| Chemicals & Related Products | 0.16 |
| Transportation Equipment | 0.06 |
| Metals & Related Products | 0.05 |
| Other Primary Products & Manufactured Goods | 0.04 |
| C. Import Price Index | Monthly Change: 0.6 % contract currency basis |
| Petroleum, Coal & Natural Gas | 0.48 |
| Metals & Related Products | 0.05 |
| Other Primary Products & Manufactured Goods | 0.03 |
Source: Bank of Japan
http://www.stat-search.boj.or.jp/index_en.html http://www.boj.or.jp/en/statistics/pi/cgpi_release/cgpi1302.pdf
VC China. China estimates an index of nonmanufacturing purchasing managers on the basis of a sample of 1200 nonmanufacturing enterprises across the country (http://www.stats.gov.cn/english/pressrelease/t20121009_402841094.htm). Table CIPMNM provides this index and components. The index fell from 58.0 in Mar to 55.2 in May but climbed to 56.7 in Jun, which is lower than 58.0 in Mar and 57.3 in Feb but higher than in any other of the months in 2012. In Jul 2012 the index fell marginally to 55.6 and then to 56.3 in Aug and 53.7 in Sep but rebounded to 55.5 in Oct and 55.6 in Nov 2012. Improvement continued with 56.1 in Dec 2012 and 56.2 in Jan 2013.
Table CIPMNM, China, Nonmanufacturing Index of Purchasing Managers, %, Seasonally Adjusted
| Total Index | New Orders | Interm. | Subs Prices | Exp | |
| Jan 2013 | 56.2 | 53.7 | 58.2 | 50.9 | 61.4 |
| Dec 2012 | 56.1 | 54.3 | 53.8 | 50.0 | 64.6 |
| Nov | 55.6 | 53.2 | 52.5 | 48.4 | 64.6 |
| Oct | 55.5 | 51.6 | 58.1 | 50.5 | 63.4 |
| Sep | 53.7 | 51.8 | 57.5 | 51.3 | 60.9 |
| Aug | 56.3 | 52.7 | 57.6 | 51.2 | 63.2 |
| Jul | 55.6 | 53.2 | 49.7 | 48.7 | 63.9 |
| Jun | 56.7 | 53.7 | 52.1 | 48.6 | 65.5 |
| May | 55.2 | 52.5 | 53.6 | 48.5 | 65.4 |
| Apr | 56.1 | 52.7 | 57.9 | 50.3 | 66.1 |
| Mar | 58.0 | 53.5 | 60.2 | 52.0 | 66.6 |
| Feb | 57.3 | 52.7 | 59.0 | 51.2 | 63.8 |
| Jan | 55.7 | 52.2 | 58.2 | 51.1 | 65.3 |
Notes: Interm.: Intermediate; Subs: Subscription; Exp: Business Expectations
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/
Chart CIPMNM provides China’s nonmanufacturing purchasing managers’ index. There was slowing of the general index in Apr 2012 after the increase in Jan-Mar 2012 and further decline to 55.2 in May 2012 but increase to 56.7 in Jun 2012 with marginal decline to 55.6 in Jul 2012 and 56.3 in Aug 2012 and sharper drop to 53.7 in Sep 2012, rebounding to 55.5 in Oct 2012, 55.6 in Nov 2012, 56.1 in Dec 2012 and 56.2 in Jan 2013.
Chart CIPMNM, China, Nonmanufacturing Index of Purchasing Managers, Seasonally Adjusted
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/
Table CIPMMFG provides the index of purchasing managers of manufacturing seasonally adjusted of the National Bureau of Statistics of China. The general index (IPM) rose from 50.5 in Jan 2012 to 53.3 in Apr and declined to 50.1 in Jul and to the contraction zone at 49.2 in Aug and 49.8 in Sep, climbing above 50.0 to 50.2 in Oct, 50.6 in Nov-Dec 2012 and 50.4 in Jan 2013. The index of new orders (NOI) fell from 54.5 in Apr 2012 to 49.0 in Jul and 48.7 in Aug, climbing above 50.0, 51.2 in Nov 2012-Dec 2012 and 51.6 in Jan 2013. The index of employment also fell from 51.0 in Apr to 49.1 in Aug and further down to 48.7 in Nov 2012, 49.9 in Dec 2012 and 47.8 in Jan 2013.
Table CIPMMFG, China, Manufacturing Index of Purchasing Managers, %, Seasonally Adjusted
| IPM | PI | NOI | INV | EMP | SDEL | |
| Jan 2013 | 50.4 | 51.3 | 51.6 | 50.1 | 47.8 | 50.0 |
| Dec 2012 | 50.6 | 52.0 | 51.2 | 47.3 | 49.9 | 48.8 |
| Nov | 50.6 | 52.5 | 51.2 | 47.9 | 48.7 | 49.9 |
| Oct | 50.2 | 52.1 | 50.4 | 47.3 | 49.2 | 50.1 |
| Sep | 49.8 | 51.3 | 49.8 | 47.0 | 48.9 | 49.5 |
| Aug | 49.2 | 50.9 | 48.7 | 45.1 | 49.1 | 50.0 |
| Jul | 50.1 | 51.8 | 49.0 | 48.5 | 49.5 | 49.0 |
| Jun | 50.2 | 52.0 | 49.2 | 48.2 | 49.7 | 49.1 |
| May | 50.4 | 52.9 | 49.8 | 45.1 | 50.5 | 49.0 |
| Apr | 53.3 | 57.2 | 54.5 | 48.5 | 51.0 | 49.6 |
| Mar | 53.1 | 55.2 | 55.1 | 49.5 | 51.0 | 48.9 |
| Feb | 51.0 | 53.8 | 51.0 | 48.8 | 49.5 | 50.3 |
| Jan | 50.5 | 53.6 | 50.4 | 49.7 | 47.1 | 49.7 |
IPM: Index of Purchasing Managers; PI: Production Index; NOI: New Orders Index; EMP: Employed Person Index; SDEL: Supplier Delivery Time Index
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/
China estimates the manufacturing index of purchasing managers on the basis of a sample of 820 enterprises (http://www.stats.gov.cn/english/pressrelease/t20121009_402841094.htm). Chart CIPMMFG provides the manufacturing index of purchasing managers. There is deceleration from 51.2 in Sep 2011 to marginal contraction at 49.0 in Nov 2011. Manufacturing activity recovered to 53.3 in Apr 2012 but then declined to 50.4 in May 2012 and 50.1 in Jun 2012, which is the lowest in a year with exception of contraction at 49.0 in Nov 2011. The index then fell to contraction at 49.2 in Aug 2012 and improved to 49.8 in Sep with movement to 50.2 in Oct 2012, 50.6 in Nov 2012 and 50.4 in Jan 2013 above the neutral zone of 50.0.
Chart CIPMMFG, China, Manufacturing Index of Purchasing Managers, Seasonally Adjusted
Source: National Bureau of Statistics of China
http://www.stats.gov.cn/english/
Cumulative growth of China’s GDP in the four quarters of 2012 relative to the same period in 2011 was 7.8 percent, as shown in Table VC-GDP. Secondary industry accounts for 45.3 percent of GDP of which industry alone for 40.1 percent in the first three quarters of 2012 and construction with the remaining 6.7 percent in the first three quarters of 2012. Tertiary industry accounts for 43.8 percent of GDP in the first three quarters of 2012 and primary industry for 9.4 percent in the first three quarters of 2012. China’s growth strategy consisted of rapid increases in productivity in industry to absorb population from agriculture where incomes are lower (Pelaez and Pelaez, The Global Recession Risk (2007), 56-80). The bottom block of Table VC-GDP provides quarter-on-quarter growth rates of GDP and their annual equivalent. China’s GDP growth decelerated significantly from annual equivalent 9.9 percent in IIIQ2011 to 7.0 percent in IVQ2011 and 6.1 percent in IQ2012, rebounding to 8.2 percent in IIQ2012, 9.1 percent in IIIQ2012 and 8.2 percent in IVQ2012.
Table VC-GDP, China, Cumulative and Quarterly Growth of GDP, Current CNY 100 Million and Inflation Adjusted ∆%
| Cumulative GDP 2012 | Value Current CNY Billion | 2012 Year-on-Year ∆% |
| GDP | 51,932.2 | 7.8 |
| Primary Industry | 5,237.7 | 4.5 |
| Farming IIIQ | 33,088.0 | 4.2 |
| Secondary Industry | 23,531.9 | 8.1 |
| Industry IIIQ | 141,641.5 | 7.9 |
| Construction IIIQ | 23,787.0 | 9.2 |
| Tertiary Industry | 23,162.6 | 8.1 |
| Transport, Storage, Post IIIQ | 18,941.0 | 6.7 |
| Wholesale, Retail Trades IIIQ | 31,651.2 | 11.8 |
| Hotel & Catering Services IIIQ | 7,015.6 | 7.6 |
| Financial Intermediation IIIQ | 22,465.2 | 9.5 |
| Real Estate IIIQ | 20,789.6 | 2.7 |
| Other IIIQ | 54,101.0 | 7.7 |
| Growth in Quarter Relative to Prior Quarter | ∆% on Prior Quarter | ∆% Annual Equivalent |
| 2012 | ||
| IVQ2012 | 2.0 | 8.2 |
| IIIQ2012 | 2.2 | 9.1 |
| IIQ2012 | 2.0 | 8.2 |
| IQ2012 | 1.5 | 6.1 |
| 2011 | ||
| IVQ2011 | 1.7 | 7.0 |
| IIIQ2011 | 2.4 | 9.9 |
| IIQ2011 | 2.5 | 10.4 |
| IQ2011 | 2.2 | 9.1 |
Source: National Bureau of Statistics of China http://www.stats.gov.cn/english/
Chart VC-GDP of the National Bureau of Statistics of China provides annual value and growth rates of GDP. China’s GDP growth in 2012 is still high at 7.8 percent but at the lowest rhythm in five years.
Chart VC-GDP, China, Gross Domestic Product, Million Yuan and ∆%, 2008-2012
Source: National Bureau of Statistics of China http://www.stats.gov.cn/english/
Table VC-GDPb provides growth of GDP in China relative to a year earlier and relative to prior quarter. Growth of GDP relative to a year earlier decelerated from 12.1 percent in IQ2010 to 7.4 percent in IIIQ2012 and 7.9 percent in IVQ2012. Growth of secondary industry decelerated from 14.5 percent in IQ2010 to 7.4 percent in IIIQ2012 and 7.9 percent in IVQ2012.
Table VC-GDPb, China, Growth Rate of GDP, ∆% Relative to a Year Earlier and ∆% Relative to Prior Quarter
| IQ 2011 | IIQ 2011 | IIIQ 2011 | IVQ 2011 | IQ 2012 | IIQ 2012 | IIIQ 2012 | IVQ 2012 | |
| GDP | 9.7 | 9.5 | 9.1 | 8.9 | 8.1 | 7.6 | 7.4 | 7.9 |
| Primary Industry | 3.5 | 3.2 | 3.8 | 4.5 | 3.8 | 4.3 | 4.2 | 4.5 |
| Secondary Industry | 11.1 | 11.0 | 10.8 | 10.6 | 9.1 | 8.3 | 8.1 | 8.1 |
| Tertiary Industry | 9.1 | 9.2 | 9.0 | 8.9 | 7.5 | 7.7 | 7.9 | 8.1 |
| GDP ∆% Relative to a Prior Quarter | 2.2 | 2.3 | 2.4 | 1.9 | 1.8 | 1.8 | 2.2 | 2.0 |
| IQ 2010 | IIQ 2010 | IIIQ 2010 | IVQ 2010 | |||||
| GDP | 12.1 | 11.2 | 10.7 | 12.1 | ||||
| Primary Industry | 3.8 | 3.6 | 4.0 | 3.8 | ||||
| Secondary Industry | 14.5 | 13.3 | 12.6 | 14.5 | ||||
| Tertiary Industry | 10.5 | 9.9 | 9.7 | 10.5 |
Source: National Bureau of Statistics of China http://www.stats.gov.cn/english/
Table VC-IND provides values and growth rates of important segments of economic activity in China. Value added by industry decelerated from 12.1 percent in 2010 to 7.9 percent in 2012. Construction growth also decelerated from 18.6 percent in 2009 during high stimulus to 9.3 percent in 2012. There is also deceleration of investment in fixed assets from growth of 30.0 percent in 2009 and 23.8 percent in 2011 to 20.2 percent in 2012. Growth of retail sales of consumer goods fell from 18.3 percent in 2010 to 14.3 percent in 2012.
Table VC-IND, China, Value Added by Industry, Construction, Investment in Fixed Assets and Retail Sales of Consumer Goods, Billions of Yuan and ∆%, 2008-2012
| IND VA BY | ∆% | CON BY | ∆% | IFA BY | ∆% | RSCG BY | ∆% | |
| 2012 | 1999 | 7.9 | 355 | 9.3 | 3747 | 20.3 | 2103 | 14.3 |
| 2011 | 1885 | 10.4 | 319 | 9.7 | 3115 | 23.8 | 1839 | 17.1 |
| 2010 | 1607 | 12.1 | 267 | 13.5 | 2781 | 23.8 | 1570 | 18.3 |
| 2009 | 1352 | 8.7 | 224 | 18.6 | 2246 | 30.0 | 1327 | 15.5 |
| 2008 | 1303 | 9.9 | 187 | 9.5 | 1788 | 25.9 | 1148 | 22.7 |
Notes: IND VA: Value Added by Industry; CON: Construction; IFA: Investment in Fixed Assets; RSCG: Retail Sales of Consumer Goods; BY: Billions of Yuan
Source: National Bureau of Statistics of China http://www.stats.gov.cn/english/
Table VC-F provides China FX reserves, exports and imports from 2008 to 2012. Growth of exports and imports fell from high two-digit rates to 7.9 percent for exports and 4.3 percent for imports in 2012. Growth of China’s international reserves also fell from high two-digit rates to 4.1 percent in 2012 with the stock of reserves at a high level of $3.3 trillion.
Table VC-F, China, Foreign Exchange Reserves, Exports and Imports, USD Billions and ∆%
| FX Reserves USD B | ∆% | Exports USD B | ∆% | Imports USD B | ∆% | |
| 2012 | 3311.6 | 4.1 | 2048.9 | 7.9 | 1817.8 | 4.3 |
| 2011 | 3181.1 | 11.7 | 1898.4 | 20.3 | 1743.5 | 24.9 |
| 2010 | 2847.3 | 18.7 | 1577.8 | 31.3 | 1396.2 | 38.8 |
| 2009 | 2399.2 | 23.3 | 1201.6 | 19.5 | 1005.9 | -6.8 |
| 2008 | 1946.0 | 27.3 | 1005.9 | 1132.6 |
Notes: USD B: US Dollar Billions
Source: National Bureau of Statistics of China http://www.stats.gov.cn/english/
The HSBC Flash China Manufacturing Purchasing Managers’ Index™ (PMI™) compiled by Markit (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10856) is improving. The overall Flash China Manufacturing PMI™ increased marginally from 50.4 in Feb to 51.7 in Mar while the Flash China Manufacturing Output Index increased from 50.8 in Feb to 52.8 in Mar, both in expansion territory above 50.0. Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds that the economy of China is improving toward moderate growth (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10856).The HSBC China Services PMI™, compiled by Markit, shows relative strength in business activity in China with the HSBC Composite Output, combining manufacturing and services, decreasing from the two-year high in Jan of 53.5 to 51.4 in Feb (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10827). Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds that combined manufacturing and services data suggest continuing growth (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10827). The HSBC Business Activity index decreased from 54.0 in Jan to 52.1 in Feb with continuing growth in services at a slower rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10827). Hongbin Ku, Chief Economist, China & Co-Head of Asian Economic Research at HSBC, finds strength in services with sound labor markets and continuing recovery in manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10685). The HSBC Purchasing Managers’ Index™ (PMI™), compiled by Markit, decreased to 50.4 in Feb from 52.3 in Jan, indicating moderate activity (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10799). New export orders increased marginally with respondents of the survey finding strengthening demand in Europe, Japan and the US. Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds manufacturing is gaining traction following improving domestic demand and labor markets (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10799). Table CNY provides the country data table for China.
Table CNY, China, Economic Indicators
| Price Indexes for Industry | Feb 12-month ∆%: minus 1.6 Feb month ∆%: 0.2 |
| Consumer Price Index | Feb month ∆%: 1.1 Feb 12 months ∆%: 3.2 |
| Value Added of Industry | Feb month ∆%: 0.79 Jan-Feb 2013/Jan-Feb 2012 ∆%: 9.9 |
| GDP Growth Rate | Year IVQ2012 ∆%: 7.9 |
| Investment in Fixed Assets | Feb month ∆%: -0.23 Total Jan-Feb 2012 ∆%: 21.2 Real estate development: 16.9 |
| Retail Sales | Feb month ∆%: 0.99 Jan-Feb ∆%: 12.3 |
| Trade Balance | Feb balance $15.25 billion Cumulative Feb: $44.40 billion |
Links to blog comments in Table CNY:
3/17/13 http://cmpassocregulationblog.blogspot.com/2013/03/recovery-without-hiring-ten-million.html
3/10/13 http://cmpassocregulationblog.blogspot.com/2013/03/thirty-one-million-unemployed-or.html
1/20/13 http://cmpassocregulationblog.blogspot.com/2013/01/recovery-without-hiring-world-inflation.html
VD Euro Area. Table VD-EUR provides yearly growth rates of the combined GDP of the members of the European Monetary Union (EMU) or euro area since 1996. Growth was very strong at 3.2 percent in 2006 and 3.0 percent in 2007. The global recession had strong impact with growth of only 0.4 percent in 2008 and decline of 4.4 percent in 2009. Recovery was at lower growth rates of 2.0 percent in 2010 and 1.4 percent in 2011. EUROSTAT forecasts growth of GDP of the euro area of minus 0.6 percent in 2012 and minus 0.3 percent in 2013 but 1.4 percent in 2014.
Table VD-EUR, Euro Area, Yearly Percentage Change of Harmonized Index of Consumer Prices, Unemployment and GDP ∆%
| Year | HICP ∆% | Unemployment | GDP ∆% |
| 1999 | 1.2 | 9.6 | 2.9 |
| 2000 | 2.2 | 8.7 | 3.8 |
| 2001 | 2.4 | 8.1 | 2.0 |
| 2002 | 2.3 | 8.5 | 0.9 |
| 2003 | 2.1 | 9.0 | 0.7 |
| 2004 | 2.2 | 9.3 | 2.2 |
| 2005 | 2.2 | 9.2 | 1.7 |
| 2006 | 2.2 | 8.5 | 3.2 |
| 2007 | 2.1 | 7.6 | 3.0 |
| 2008 | 3.3 | 7.6 | 0.4 |
| 2009 | 0.3 | 9.6 | -4.4 |
| 2010 | 1.6 | 10.1 | 2.0 |
| 2011 | 2.7 | 10.1 | 1.4 |
| 2012* | 2.5 | 11.4 | -0.6 |
| 2013* | -0.3 | ||
| 2014* | 1.4 |
*EUROSTAT forecast Source: EUROSTAT http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/
The GDP of the euro area in 2011 in current US dollars in the dataset of the World Economic Outlook (WEO) of the International Monetary Fund (IMF) is $13,114.4 billion (http://www.imf.org/external/pubs/ft/weo/2012/02/weodata/index.aspx). The sum of the GDP of France is $2778.1 billion with the GDP of Germany of $3607.4 billion, Italy of $2198.7 billion and Spain $1479.6 billion is $10,063.8 billion or 76.7 percent of total euro area GDP. The four largest economies account for slightly more than three quarters of economic activity of the euro area. Table VD-EUR1 is constructed with the dataset of EUROSTAT, providing growth rates of the euro area as a whole and of the largest four economies of Germany, France, Italy and Spain annually from 1996 to 2011 with the estimate of 2012 and forecasts for 2013 and 2014 by EUROSTAT. The impact of the global recession on the overall euro area economy and on the four largest economies was quite strong. There was sharp contraction in 2009 and growth rates have not rebounded to earlier growth with exception of Germany in 2010 and 2011.
Table VD-EUR1, Euro Area, Real GDP Growth Rate, ∆%
| Euro Area | Germany | France | Italy | Spain | |
| 2014* | 1.4 | 2.0 | 1.2 | 0.8 | 0.8 |
| 2013* | -0.3 | 0.5 | 0.1 | -1.0 | -1.4 |
| 2012 | -0.6 | 0.7 | 0.0* | -2.2* | -1.4* |
| 2011 | 1.4 | 3.0 | 1.7 | 0.4 | 0.4 |
| 2010 | 2.0 | 4.2 | 1.7 | 1.8 | -0.3 |
| 2009 | -4.4 | -5.1 | -3.1 | -5.5 | -3.7 |
| 2008 | 0.4 | 1.1 | -0.1 | -1.2 | 0.9 |
| 2007 | 3.0 | 3.3 | 2.3 | 1.7 | 3.5 |
| 2006 | 3.2 | 3.7 | 2.5 | 2.2 | 4.1 |
| 2005 | 1.7 | 0.7 | 1.8 | 0.9 | 3.6 |
| 2004 | 2.2 | 1.2 | 2.5 | 1.7 | 3.3 |
| 2003 | 0.7 | -0.4 | 0.9 | 0.0 | 3.1 |
| 2002 | 0.9 | 0.0 | 0.9 | 0.5 | 2.7 |
| 2001 | 2.0 | 1.5 | 1.8 | 1.9 | 3.7 |
| 2000 | 3.8 | 3.1 | 3.7 | 3.7 | 5.0 |
| 1999 | 2.9 | 1.9 | 3.3 | 1.5 | 4.7 |
| 1998 | 2.8 | 1.9 | 3.4 | 1.4 | 4.5 |
| 1997 | 2.6 | 1.7 | 2.2 | 1.9 | 3.9 |
| 1996 | 1.5 | 0.8 | 1.1 | 1.1 | 2.5 |
Source: EUROSTAT http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/
The Flash Eurozone PMI Composite Output Index of the Markit Flash Eurozone PMI®, combining activity in manufacturing and services, decreased from 47.9 in Feb to 46.5 in Mar, for fourteen consecutive declines and seventeen drops in eighteen months with acceleration of the rate of contraction (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10860). Chris Williamson, Chief Economist at Markit, finds that the Markit Flash Eurozone PMI index is consistent with GDP declining in a fourth consecutive quarter but at a rate around 0.3 percent, which would be lower than the decline of 0.6 percent in IVQ2012 in EUROSTAT estimates (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10860). The Markit Eurozone PMI® Composite Output Index, combining services and manufacturing activity with close association with GDP, decreased from 48.6 in Jan to 47.9 in Feb, which is the thirteenth consecutive contraction (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10814). Chris Williamson, Chief Economist at Markit, finds that the data are consistent with milder contraction likely of 0.2 percent decline in GDP in IQ2013 in contrast with fall of 0.6 percent in IVQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10814). The Markit Eurozone Services Business Activity Index decreased from 48.6 in Jan to 47.9 in Feb (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10814). The Markit Eurozone Manufacturing PMI® was unchanged at 47.9 in Feb from 47.9 in Jan, which indicates contraction in nineteen consecutive months of deterioration of manufacturing business in the euro zone but with the index at a high in eleven months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10783). Contraction of total new orders was the slowest since Jun 2011 because improving new export orders. Chris Williamson, Chief Economist at Markit, finds moderating decline of manufacturing in 2013 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10783). Table EUR provides the regional data table for the euro area.
Table EUR, Euro Area Economic Indicators
| GDP | IVQ2012 ∆% -0.6; IVQ2012/IVQ2011 ∆% -0.9 Blog 3/10/13 |
| Unemployment | Jan 2013: 11.9% unemployment rate Jan 2013: 18.998 million unemployed Blog 3/3/13 |
| HICP | Feb month ∆%: 0.4 12 months Feb ∆%: 1.8 |
| Producer Prices | Euro Zone industrial producer prices Jan ∆%: -0.6 |
| Industrial Production | Jan month ∆%: -0.4; Jan 12 months ∆%: -1.3 |
| Retail Sales | Jan month ∆%: 1.2 |
| Confidence and Economic Sentiment Indicator | Sentiment 87.8 Jan 2013 Consumer minus 23.9 Jan 2013 Blog 2/3/13 |
| Trade | Jan-Dec 2012/Jan-Dec 2011 Exports ∆%: 7.4 Jan 2013 12-month Exports ∆% 5.2 Imports ∆% 1.4 |
Links to blog comments in Table EUR:
3/17/13 http://cmpassocregulationblog.blogspot.com/2013/03/recovery-without-hiring-ten-million.html
3/10/13 http://cmpassocregulationblog.blogspot.com/2013/03/thirty-one-million-unemployed-or.html
3/3/13 http://cmpassocregulationblog.blogspot.com/2013/03/mediocre-gdp-growth-at-16-to-20-percent.html
2/3/13 http://cmpassocregulationblog.blogspot.com/2013/02/thirty-one-million-unemployed-or.html
Euro zone trade growth continues to be relatively strong as shown in Table VD-1. Exports grew at 7.4 percent and imports at 1.8 percent in Jan-Dec 2012 relative to Jan-Dec 2011. The 12-month rate of growth of exports was -3.2 percent in Dec 2012 while imports decreased 5.4 percent. In Jan 2013, exports increased 5.2 percent in 12 months and imports increased 1.4 percent. At the margin, rates of growth of trade are declining in part because of moderation of commodity prices.
Table VD-1, Euro Zone, Exports, Imports and Trade Balance, Billions of Euros and Percent, NSA
| Exports | Imports | |
| Jan-Dec 2012 | 1,868.9 | 1,787.8 |
| Jan-Dec 2011 | 1,740.4 | 1,756.1 |
| ∆% | 7.4 | 1.8 |
| Jan 2013 | 146.5 | 150.4 |
| Jan 2012 | 139.2 | 148.3 |
| ∆% | 5.2 | 1.4 |
| Dec 2012 | 143.2 | 132.5 |
| Dec 2011 | 148.0 | 140.0 |
| ∆% | -3.2 | -5.4 |
| Trade Balance | Jan-Dec 2012 | Jan-Dec 2011 |
| € Billions | 81.1 | -15.7 |
Source: EUROSTAT http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/6-18032013-AP/EN/6-18032013-AP-EN.PDF
The structure of trade of the euro zone in Jan-De 2012 is provided in Table VD-2. Data are still not available for trade structure for Jan 2013. Manufactured exports increased 6.4 percent in Jan-Dec 2012 relative to Jan-Dec 2011 while imports fell 1.6 percent. The trade surplus in manufactured products was marginally higher than the trade deficit in primary products in Jan-Dec 2012 but lower in Jan-Dec 2011 largely because of the commodity shock caused by carry trades.
Table VD-2, Euro Zone, Structure of Exports, Imports and Trade Balance, € Billions, NSA, ∆%
| Primary | Manufactured | Other | Total | |
| Exports | ||||
| Jan-Dec 2012 € B | 296.5 | 1,519.4 | 53.0 | 1,868.9 |
| Jan-Dec 2011 € B | 262.7 | 1,428.2 | 49.5 | 1,740.4 |
| ∆% | 12.9 | 6.4 | 7.1 | 7.4 |
| Imports | ||||
| Jan-Dec 2012 € B | 667.1 | 1,088.7 | 32.0 | 1,787.8 |
| Jan-Dec 2011 € B | 620.8 | 1,105.9 | 29.4 | 1,756.1 |
| ∆% | 7.5 | -1.6 | 8.8 | 1.8 |
| Trade Balance € B | ||||
| Jan-Dec 2012 | -370.6 | 430.7 | 21.0 | 81.1 |
| Jan-Dec 2011 | -358.1 | 322.3 | 20.1 | -15.7 |
Source: EUROSTAT http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/6-18032013-AP/EN/6-18032013-AP-EN.PDF
VE Germany. Table VE-DE provides yearly growth rates of the German economy from 1992 to 2012, price adjusted chain-linked and price and calendar-adjusted chain-linked. Germany’s GDP fell 5.1 percent in 2009 after growing below trend at 1.1 percent in 2008. Recovery has been robust in contrast with other advanced economy. The German economy grew at 3.7 percent in 2010, 3.0 percent in 2011 and 0.7 percent in 2012. Growth slowed in 2011 from 1.2 percent in IQ2011, 0.5 percent in IIQ2011 and 0.4 percent in IIIQ2011 to decline of 0.1 percent in IVQ2011 and growth of 0.5 percent in IQ2012, 0.3 percent in IIQ2012, 0.2 percent in IIIQ2012 and decline of 0.6 percent in IVQ2012.
The Federal Statistical Agency of Germany analyzes the fall and recovery of the German economy (http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/VolkswirtschaftlicheGesamtrechnungen/Inlandsprodukt/Aktuell,templateId=renderPrint.psml):
“The German economy again grew strongly in 2011. The price-adjusted gross domestic product (GDP) increased by 3.0% compared with the previous year. Accordingly, the catching-up process of the German economy continued during the second year after the economic crisis. In the course of 2011, the price-adjusted GDP again exceeded its pre-crisis level. The economic recovery occurred mainly in the first half of 2011. In 2009, Germany experienced the most serious post-war recession, when GDP suffered a historic decline of 5.1%. The year 2010 was characterised by a rapid economic recovery (+3.7%).”
Table VE-DE, Germany, GDP Year ∆%
| Price Adjusted Chain-Linked | Price- and Calendar-Adjusted Chain Linked | |
| 2012 | 0.7 | 0.9 |
| 2011 | 3.0 | 3.1 |
| 2010 | 4.2 | 4.0 |
| 2009 | -5.1 | -5.1 |
| 2008 | 1.1 | 0.8 |
| 2007 | 3.3 | 3.4 |
| 2006 | 3.7 | 3.9 |
| 2005 | 0.7 | 0.8 |
| 2004 | 1.2 | 0.7 |
| 2003 | -0.4 | -0.4 |
| 2002 | 0.0 | 0.0 |
| 2001 | 1.5 | 1.6 |
| 2000 | 3.1 | 3.3 |
| 1999 | 1.9 | 1.8 |
| 1998 | 1.9 | 1.7 |
| 1997 | 1.7 | 1.8 |
| 1996 | 0.8 | 0.8 |
| 1995 | 1.7 | 1.8 |
| 1994 | 2.5 | 2.5 |
| 1993 | -1.0 | -1.0 |
| 1992 | 1.9 | 1.5 |
Source: Statistisches Bundesamt Deutschland (Destatis) https://www.destatis.de/EN/PressServices/Press/pr/2013/02/PE13_066_811.html;jsessionid=59DE7E440F9F7393B12C16FDA63BEB66.cae1
The Flash Germany Composite Output Index of the Markit Flash Germany PMI®, combining manufacturing and services, decreased from 53.3 in Feb to 51.0 in Mar, which indicates moderate expansion with the decline of 2.3 points in one month being the sharpest since Jul 2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10862). New export orders for manufacturing decreased, with respondents finding soft demand in southern Europe but enhanced demand in Asia and North America. Tim Moore, Senior Economist at Markit and author of the report, finds strength in Germany’s private sector with potential to provide impulse to GDP growth in IQ2013 but with risks of moderation in the latest survey (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10862). The Markit Germany Composite Output Index of the Markit Germany Services PMI®, combining manufacturing and services with close association with Germany’s GDP, decreased from 54.4 in Jan to 53.3 in Feb (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10829). Tim Moore, Senior Economist at Markit and author of the report, finds that the economy of Germany has moved away from contraction to expansion with growth in both manufacturing and services at the fastest rate since the strong first part of 2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10829). The Germany Services Business Activity Index decreased from 55.7 in Jan to 54.7 in Feb (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10829). The Markit/BME Germany Purchasing Managers’ Index® (PMI®), showing close association with Germany’s manufacturing conditions, increased from 49.8 in Jan to 50.3 in Feb, breaking the chain of eleven consecutive month in contraction territory below 50.0 but below the long-term average of 51.9 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10780). New export orders increased briskly at the fastest rate in 12 months with broad geographical reach in Asia and outside Europe. Tim Moore, Senior Economist at Markit and author of the report, finds stronger demand from emerging Asian markets in Germany’s return to manufacturing growth propelled by the fastest growth rate of new export orders in almost two years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10780).Table DE provides the country data table for Germany.
Table DE, Germany, Economic Indicators
| GDP | IVQ2012 -0.6 ∆%; IV/Q2012/IVQ2011 ∆% 0.1 2012/2011: 0.7% GDP ∆% 1992-2012 Blog 8/26/12 5/27/12 11/25/12 2/17/13 2/24/13 |
| Consumer Price Index | Feb month NSA ∆%: 0.6 |
| Producer Price Index | Feb month ∆%: -0.1 CSA, 0.1 NSA |
| Industrial Production | Mfg Jan month CSA ∆%: -0.2 |
| Machine Orders | MFG Jan month ∆%: -1.9 |
| Retail Sales | Jan Month ∆% 3.1 12-Month ∆% 2.4 Blog 3/3/13 |
| Employment Report | Unemployment Rate SA Jan 5.3% |
| Trade Balance | Exports Jan 12-month NSA ∆%: 3.1 Blog 3/17/13 |
Links to blog comments in Table DE:
3/17/13 http://cmpassocregulationblog.blogspot.com/2013/03/recovery-without-hiring-ten-million.html
3/10/13 http://cmpassocregulationblog.blogspot.com/2013/03/thirty-one-million-unemployed-or.html
3/3/13 http://cmpassocregulationblog.blogspot.com/2013/03/mediocre-gdp-growth-at-16-to-20-percent.html
2/24/13 http://cmpassocregulationblog.blogspot.com/2013/02/world-inflation-waves-united-states.html
2/17/13 http://cmpassocregulationblog.blogspot.com/2013/02/recovery-without-hiring-united-states.html
11/25/12 http://cmpassocregulationblog.blogspotcom/2012/11/contraction-of-united-states-real.html
8/26/12 http://cmpassocregulationblog.blogspot.com/2012/08/expanding-bank-cash-and-deposits-with_26.html
VF France. Table VF-FR provides growth rates of GDP of France with the estimates of Institut National de la Statistique et des Études Économiques (INSEE). The long-term rate of GDP growth of France from IVQ1949 to IVQ2012 is quite high at 3.3 percent. France’s growth rates were quite high in the four decades of the 1950s, 1960, 1970s and 1980s with an average growth rate of 4.1 percent compounding the average rates in the decades and discounting to one decade. The growth impulse diminished with 1.9 percent in the 1990s and 1.7 percent from 2000 to 2007. The average growth rate from 2000 to 2012, using fourth quarter data, is 1.0 percent because of the sharp impact of the global recession from IVQ2007 to IIQ2009. Cobet and Wilson (2002) provide estimates of output per hour and unit labor costs in national currency and US dollars for the US, Japan and Germany from 1950 to 2000 (see Pelaez and Pelaez, The Global Recession Risk (2007), 137-44). The average yearly rate of productivity change from 1950 to 2000 was 2.9 percent in the US, 6.3 percent for Japan and 4.7 percent for Germany while unit labor costs in USD increased at 2.6 percent in the US, 4.7 percent in Japan and 4.3 percent in Germany. From 1995 to 2000, output per hour increased at the average yearly rate of 4.6 percent in the US, 3.9 percent in Japan and 2.6 percent in Germany while unit labor costs in US fell at minus 0.7 percent in the US, 4.3 percent in Japan and 7.5 percent in Germany. There was increase in productivity growth in the G7 in Japan and France in the second half of the 1990s but significantly lower than the acceleration of 1.3 percentage points per year in the US. Lucas (2011May) compares growth of the G7 economies (US, UK, Japan, Germany, France, Italy and Canada) and Spain, finding that catch-up growth with earlier rates for the US and UK stalled in the 1970s.
Table VF-FR, France, Average Growth Rates of GDP Fourth Quarter, 1949-2012
| Period | Average ∆% |
| 1949-2012 | 3.3 |
| 2000-2012 | 1.0 |
| 2000-2011 | 1.1 |
| 2000-2007 | 1.7 |
| 1990-1999 | 1.9 |
| 1980-1989 | 2.6 |
| 1970-1979 | 3.8 |
| 1960-1969 | 5.7 |
| 1950-1959 | 4.2 |
Source: Institut National de la Statistique et des Études Économiques http://www.insee.fr/en/themes/info-rapide.asp?id=26&date=20130214
The Markit Flash France Composite Output Index fell from 43.1 in Feb to 42.1 in Mar for the lowest reading in four years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10859). Jack Kennedy, Senior Economist at Markit and author of the report, finds that the data suggest the sharpest decline of overall output in about four years since IQ2009 with expectations on the economic environment at depressed levels (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10859).
The Markit France Composite Output Index, combining services and manufacturing with close association with French GDP, increased marginally from the low in 46 months of 42.7 in Jan to 43.1 in Feb, indicating significant contraction of private sector activity for a twelveth consecutive month at marginally slower rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10731). Jack Kennedy, Senior Economist at Markit and author of the France Services PMI®, finds that composite data for manufacturing and services suggest further contraction of GDP in France in IQ2013 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10731). The Markit France Services Activity index increased from the lowest reading in 45 months of 43.6 in Jan to 43.1 in Feb (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10682). The Markit France Manufacturing Purchasing Managers’ Index® increased marginally to to 43.9 in Feb from 42.9 in Jan, remaining deeply below the neutral level of 50.0 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10728). Jack Kennedy, Senior Economist at Markit and author of the France Manufacturing PMI®, finds continuing weakness in manufacturing with weakness in new internal orders because of weak domestic economic views (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10728). Table FR provides the country data table for France.
Table FR, France, Economic Indicators
| CPI | Feb month ∆% 0.3 |
| PPI | Jan month ∆%: 0.5 Blog 3/3/13 |
| GDP Growth | IVQ2012/IIIQ2012 ∆%: -0.3 |
| Industrial Production | Jan ∆%: |
| Consumer Spending | Manufactured Goods |
| Employment | IVQ2012 Unemployed 2.944 million |
| Trade Balance | Jan Exports ∆%: month -2.4, 12 months 0.0 Jan Imports ∆%: month -1.0, 12 months 0.7 Blog 3/17/13 |
| Confidence Indicators | Historical averages 100 Mar Mfg Business Climate 90 Blog 3/24/13 |
Links to blog comments in Table FR:
3/17/13 http://cmpassocregulationblog.blogspot.com/2013/03/recovery-without-hiring-ten-million.html
3/10/13 http://cmpassocregulationblog.blogspot.com/2013/03/thirty-one-million-unemployed-or.html
3/3/13 http://cmpassocregulationblog.blogspot.com/2013/03/mediocre-gdp-growth-at-16-to-20-percent.html
2/24/13 http://cmpassocregulationblog.blogspot.com/2013/02/world-inflation-waves-united-states.html
2/17/13 http://cmpassocregulationblog.blogspot.com/2013/02/recovery-without-hiring-united-states.html
Table VF-1 shows the INSEE business climate manufacturing indicator. The headline synthetic index decreased 89 in Dec 2012 to 87 in Jan 2013 but increased to 90 in Feb 2013 and Mar 2013. The final row shows general production expectations improving from minus 38 in Dec 2012, minus 35 in Jan 2012 and minus 37 in Feb 2013, which is still well below the average since 1976 of minus 9, but deteriorating to minus 42 in Mar 2013 The indicator of demand and export order levels fell from minus 37 in Dec 2012 and minus 41 in Jan 2013, improving to minus 28 in Feb 2013 and minus 24 in Mar 2013, which is still well below the average since 1976 of minus 13.
Table VF-1, France, Business Climate Indicators of INSEE
| Mfg 2012-2013 | Average since 1976 | Dec 12 | Jan 13 | Feb 13 | Mar 13 |
| Synthetic Index | 100 | 89 | 87 | 90 | 90 |
| Recent Changes in Output | 5 | -10 | -24 | -24 | -17 |
| Finished- Goods Inventory Level | 13 | 11 | 4 | 9 | 2 |
| Demand and Total Order Levels | -17 | -37 | -34 | -34 | -40 |
| Demand and Export Order Levels | -13 | -37 | -41 | -28 | -24 |
| Personal Production Expectations | 5 | -9 | -14 | 4 | 0 |
| General Production Expectations | -9 | -38 | -35 | -37 | -42 |
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20130322
Chart VF-1 of the Institut National de la Statistique et des Études Économiques (INSEE) provides the history of the business climate synthetic index of INSEE since 1992. The index fell during the contractions of 1991, 2001 and 2008. After rapid recovery beginning in 2009 the synthetic index shows declining trend in 2011 with upward reversal in 2012 interrupted in Apr through Jul 2012 and a marginal upward move in Aug-Sep 2012 but new decline in Oct 2012, marginally reversed in Nov 2012 with stability in Dec 2012 and decline in Jan 2013 but improvement in Feb 2013 and stability in Mar 2013.
Chart VF-1, France, INSEE Industrial Business Climate Synthetic Index
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20130322
Chart VF-2 of the Institut National de la Statistique et des Études Économiques (INSEE) shows strong drops of the turning point indicator in the recessions of 1991, 2001 and 2008. There have been other drops of this index. The turning point indicator has fallen to levels in the direction of past contractions and after rebounding in Oct and Nov 2011 is showing declining trend in Jan 2012 with slight reversal in Feb followed by significant improvement in Mar and deterioration in Apr through Jul 2012 with new improvement in Aug 2012 followed by decline in Sep-Oct 2012 followed by rebound in Nov 2012 and stability in Dec 2012 to Jan-Mar 2013.
Chart VF-2, INSEE Business Climate Manufacturing Turning Point Indicator
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20130322
Chart VF-3 of the Institut National de la Statistique et des Études Économiques (INSEE) of France shows the indexes of general production expectations, personal production expectations and recent changes in output. All three indexes fell during the past three contractions after 1991, 2001 and 2008. The indexes are showing downward trend in 2011 that continued in Nov, Dec and Jan 2012 with slight reversal in Feb and significant improvement in Mar followed by weakens in Apr through Jul 2012 and stability in Aug-Sep 2012 and new decline in Oct 2012 followed by improvement in Nov 2012 and stability in Dec 2012 with some improvement in Jan-Feb 2013 and deterioration in Mar 2013.
Chart VF-3, Climate Manufacturing General Production, Personal Production and Recent Changes in Output of INSEE, SA %
Source: Institut National de la Statistique et des Études Économiques
http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20130322
© Carlos M. Pelaez, 2010, 2011, 2012, 2013
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