by Rebecca
Cross posted from Newsneconomics

These are interesting times in global economics, especially from the policy perspective. And although there was a sense of global urgency across the G7 (Canada, France, Germany, Japan, Italy, UK, and US) and the G5 (Brazil, People's Republic of China, India, Mexico, and South Africa) late in 2008 and early in 2009, policy makers now face very different economic circumstances. The global downturn was (mostly) ubiquitous, but the upswing will not be. The G5 are likely to initiate explicit exit strategies before the G7, as growth, domestic demand, and inflation rebound first.

The downturn in the developed world was very severe, as illustrated by the sharp contraction of GDP of the G7 countries. And across the G5, some countries experienced similar declines, however given the nose-dive that was global trade, the economic resilience via expansionary policy in India and China has been rather remarkable. 

Domestic demand, underpinned by robust fiscal and monetary policy pushed auto sales forward in the G5 and simply offset some of the decline in retail sales in the G7 (see charts below). I used auto sales in the G5 as a proxy for retail sales, as I could not access a retail sales in India (not even sure they offer the statistic). Impressively, though, retail sales remained strong in the UK. Auto sales in China, Brazil, and India have been hot - the real question here is: what is the underlying demand for goods and services in these countries, especially in China.

Monetary policy - driving down interest rates in order to stimulate consumption via the credit markets - was very successful in the G5, but much less so in the ailing G7.

And finally, inflation has been quite resilient in some countries, notably in the UK and India. As such, the Bank of England has a real trade-off with which to contend: inflation (as measured by the CPI), 1.6% over the year, remains sticky and remarkably close to target, 2.0%. The Reserve Bank of India is seeing food prices drive inflation steadily upward. http://online.wsj.com/article/SB125439928727956013.html?mod=googlenews_wsjSome expect India to be one of the first emerging markets to start tightening (The Bank of Israel was the first).

There are a lot of question marks right now - the biggest is when central banks and fiscal authorities start to pull back. Especially in the G7, too early and one risks the feared W, but too late, and inflation becomes an issue.

Across the G7, rate hikes are unlikely to occur until well-into 2010, and maybe even 2011 for some. Across the G5, however, late 2010 is more likely an upper limit, however, some countries like Mexico are seriously struggling and policy will remain loose for some time. (See RGE Monitor Nouriel Roubini's latest, "Thoughts on Where We Are" - unfortunately, a subscription is required.)

This one’s going to be long because a lot of general themes get presented. Those looking for the shorter version may want to just go to the website and watch the videos.*

William Jefferson Clinton (WJC) introduces the proceedings by giving a background on the Clinton Global Initiative (CGI). CGI began in 2005, and required each participant to make a specific, measurable commitment. (This statement is followed by shot of Jessica Alba and Cash Warren, possibly because they started dating that year, but probably just because the director liked the shot.) Almost all commitments that were made then were multi-year (generally 3- to 5-year commitments). Five years into the CGI, about one-fourth of the commitments made have been fully completed. The CGI has, for instance, given 48 million people better access to health care. (Isn’t that just about what National Health Insurance would do for the US alone? Still, it’s 48 million people who are often ignored.)

There have also been "unvaluable but invaluable" effort at reconciliations. (I checked this; "unvaluable" is indeed a word.) Unlike other conferences, attendees will receive only a gift bag—the gift to participants is "only a bag."** Each attendee (not certain if this includes the press, but I assume not) has been allocated 200 “points” that can be used at the “Giving Back Center.” For instance, one can donate “a P&G water filtration system” for 10 points.

I should mention that the organizers and donors to the conference are the clearest indication of the payoff from WJC’s “third way” efforts: Tom Golisano, for instance, is cited as a founding and continuing sponsor. Other major sponsors and donors to the conference include P&G, ExxonMobil, and APCO Worldwide (who are providing Wi-Fi access). I half expected to see ADM listed. (Matt Damon’s appearance sponsored by?)

(That ExxonMobil is a major sponsor of a conference that is placing Climate Change front and center in its discussions [see below] is a sign of either encouragement or a coming paradigm shift. Perhaps both.



WJC noted that Participants not invited back unless they do something toward their commitment during the year. However, due to the Global Financial Crisis, several previously-made commitments have had to be extended. (Three-year goals have become five-year goals, fives have become seven. This mirrors the year in which I expect to be solvent again.)

And then WJC talks about what WJC is best at talking about: po9litics. He notes that there are two questions that are asked in any political discussion: 1) What are you going to do? 2) How much money are you going to spend on it? Politicians almost never discuss how to do it to maximize positive impact in other people’s life. And it is that discussion that the CGI is all about.

He proceeds then to introduce a pairing that was made possible by last year’s CGI: Gary White and Matt Damon of water.org. The statistics flow from his (WJC’s) tongue: one billion people lack water, and 2.5 billion lack sanitation facilities. He loves this, and it's somewhat infectious.

Water.org is an outgrowth, I gather, work that Gary White has been doing since 1990. Mr.White describes the economy before Watercredit was founded, where people paid 25% of their gross income for clean water, or had to borrow money from loan sharks at 125% interest rates to install toilets. By combining microfinance with technology transfer, water credit was able to ameliorate this situation in many areas—and its loans are repaid 97% of the time. I can think of several mortgage lenders who would like that repayment ratio.

Matt Damon then announced a new commitment for water.org, in that they are extending their efforts into Haiti, where 51% of the rural population lacks clean drinking water and 29% of the urban population lacks proper sanitation facilities. They are able to do this in part due to a generous commitment from the Ex;it Foundation. Many organizations are getting some good, useful publicity here.

The next presenter is Linda Lockhart of Global Give Back Circle, whose group is devoted to Educational Progress in Kenya for girls. Again, the source for this group was through CGI Connect. (Ms. Lockhart claims to have been surprised when she entered the keywords for her group’s goal [education, women] and immediately received multiple responses from organizations. (We clearly do not travel in the same circles.) The group’s efforts were rewarded when they discovered one of the root causes of women dropping out: lack of shoes. Teaming up with, among others, Microsoft, they presented the feel-good moment of the Opening Ceremonies with three Kenyan girls speaking--often in unison, sometimes sotto voce—about the good that Global Giveback Circle did for them.

At this point, the Plenary Session begins. WJC introduces Muhtar Kent, President and CEO of Coke. Mr. Kent speaks how Equal allocation of resources in Sub-Saharan Africa would, in and of itself, increase production 10-20%. In the current situation, women’s mobility is severely more restricted than men’s, of course. Kent, too, seems amazed to have learned this.

Kent is followed by Michelle Bachelet, current President of Chile and also, the first female defense minister in Latin America. Being a female politician, she not only has noticed but also has a strong interest in “soft” issues.

Mike Duke, the current CEO of Wal-Mart (WMT), ran the International Division before ascending to the chairmanship. WJC notes that WMT now offers health insurance to its employees, as well as having made a major effort to reduce its greenhouse gas emissions. (WJC stated, I believe, that WMT’s stock began rallying only when they announced their “global warming initiative.” I cannot find the evidence of this, though I didn’t do a thorough search.) Duke notes that a 5% reduction in their packaging alone was the equivalent of taking 210,000 diesel trucks off road. (And it saved them money. This theme will recur throughout from the CEOs.)

After this, WJC introduces Australian Prime Minister Kevin Rudd, describing him as having spoken about climate change in “excruciating detail,” which may well be the first time someone has done that to WJC instead of the reverse. Rudd notes that Australia is the country that has been the hardest hit by Anthropogenic Global Warming, and is the leading proponent of the other first-day theme: the G-8 giving way to G-20.

The particpants's discussion on a Rock Following.


*If they post them; let me know in comments if you can find the video on the site and I'll add a direct link.

**Compare with most conferences, where you get a bag and almost enough "swag" to cover the retail cost of the membership (which, for attendees, was $1,000 minimum).

by Rebecca

Yesterday's post on the Australian economy sparked some discussion of its housing market. I agree - Australia's bubble is large relative to that in the US (interestingly enough) and Canada.

The chart illustrates the price to rent ratio in Australia, Canada, France, Ireland, the UK, and the US, which measures the trade-off between owning and renting. Across country, the housing indices are not perfectly comparable - for example, Statistics Canada measures the value of new homes, while the S&P/Case-Shiller index measures repeat sales of existing homes. Furthermore, countries often measure the owner-equivalent rents differently. Nevertheless, the trends are meaningful.

Australia's bubble was (is) big, and relative to rents, home values recently turned upward. According to Steve Keen (thank you reader VtCodger for the link), government subsidies provided households the incentive to leverage up their balance sheets while the private business sector deleveraged. Basically, the crash is yet to come.

The recent uptick in the Australian price-rent ratio, i.e., jump in housing prices relative to rents, is interesting. Notice the same is happening in the UK and Ireland; however in their cases, seriously weak economic conditions are dragging down the CPI housing index (the denominator). (In the UK, prices are likewise rising, but rents are falling faster.) As rents slide, so too will the relative attractiveness of home ownership.

I expect that the same will happen in the US. In Q2 2009, the S&P/Case-Shiller home price index grew 1.4%, faster than did the owner-occupied rents index in the CPI. Owner-occupied housing (see CPI table here) inflation slowed dramatically in Q2; and given the long lag on core price fluctuations, there is a very good chance that it turns negative.

Rebecca Wilder

by Rebecca

Australia is another on the short list of countries that “escaped recession” (another is Poland, which I wrote about earlier). As much of the developed world struggles with job loss and weak economic groundwork, Australia managed to push through the global meltdown with just one quarter of negative growth, -2.8% annualized growth in the fourth quarter of 2008. Since then, GDP in the first and second quarters of 2009 grew at an annualized pace of 1.6% and 2.5%, respectively. (Note: the chart on the left illustrates growth over the year, rather than annualized.)

To what does Australia owe this honor? Net exports and policy. First, while most of the developed world saw export demand plummet – in the US, exports dropped at an annualized rate of 29.9% and 5.0% in the first and second quarters of 2009, respectively – Australia, with its high concentration of primary products exports (foods, fuels, minerals, etc.), benefited from positive real export growth of 8.2% and 3.9% (annualized rates) during the first and second quarters of 2009. Imports fell even faster, and net exports picked up the slack for the huge drag on GDP coming from inventories and investment.

In 2008, 14.6% of Australia’s exports went to China, whose economy, as we all know, is faring much better than previously expected. And in July, Australia’s exports remained strong to China, growing 4.6% over the month.

Likewise, the Australian government underpinned the economy with huge fiscal stimulus, around $42 billion AUD or 3.5% of GDP, and robust expansionary monetary policy, cutting its cash rate 400 bps to 3.0%. The stimulus firmed household spending’s contribution to GDP growth above zero.

Australia escaped the recession, but it is not immune. Last week, the OECD released its updated forecast, which includes estimate of potential GDP. Although stimulus and exports kept Australia afloat, production remains well below the OECD’s estimates of potential output. And well, so does the rest of the world.

Against this backdrop, Poland really does shine.

Rebecca Wilder

Rebecca Wilder

Poland: the bull of eastern and central Europe. While most of central and eastern Europe are either defending exchange rate pegs – this limits the ability to stimulate the economy through monetary policy - and/or running large current account deficits (see chart 2 here), Poland grew a remarkable 1.1% in the second quarter of 2009 compared to the same quarter last year. Given that its regional trading partners are falling precipitously, that is a real economic feat.



2009 is a great year NOT to be part of the ERM II, which requires a relatively inflexible exchange rate policy. And since Poland can allow its exchange rate to fluctuate a bit more, strong expansionary monetary policy (lowering its policy rate by almost half) has helped to cushion the blow to regional exports.

In the meantime, Poland’s relative immunity to the globally synchronous crash has kept the fiscal balance in check (relatively speaking).



Even though Poland’s fiscal deficit is expected to rise in 2009 (perhaps outside the share of GDP allowed by the Eurosystem), its more stable growth pattern will clearly “cost less” in terms of government spending and fiscal deficits, making it a strong candidate for euro conversion growing out of the crisis currently scheduled for 2012)

As the IMF article suggests, the re-emergence of regional trade is important for sustainable growth. However, Poland's relatively flexible currency should keep it competitive.