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The Economist – 21/07/07
July 25, 2007, 3:23 am
Filed under: current affairs

The Economist – 21/07/07

  • The Fed will not move to support the economy unless inflation is tamed; interest rates stayed at 5.25%.
  • America’s economy is enduring a bumpy landing. The labour market is weaker than it looks; weak growth due to the housing investment slump has not pushed up jobless figures, which might indicate the hoarding of workers by home-builders in anticipation of a housing revival and the undocumented employment of illegals. Another sign of a faltering jobs market is the decline in the share of population willing to work, which might indicate the non-acceleration of wages and a weakening jobs market. American consumers might be faltering with retail sales falling 0.9% in June.
  • Panama is growing at Chinese rates since it has been revamped as a service hub. A few factors explain the boom. The transfer of sovereignty over the Panama Canal in 1999 has led to the government, led by Martin Torrijos, to push through a referendum last year to approve a $5.2b plan to expand the canal, doubling its capacity and enabling it to take much bigger ships. In the wake of the expansion comes big projects, with Occidental Petroleum setting up an oil refinery and COSCO and a consortium led by Hutchison Whampoa competing to build ports. Torrijo’s government is another factor, as it is more effective than its predecessors. He has cleaned public finances, reformed social security, courted foreign investors and negotiated a FTA with the US. The property market is booming and foreign direct investments have increased. However, the education system remained weak and a handful of families continue to control most of the country’s wealth. Corruption is still rife with informal links between government and local business oligarchs making life hard for foreign firms.
  • Berlin is short of rich people one in tow live on pension or unemployment benefit and well-heeled Germans prefer to live in more opulent places like Munich or Hamburg. The city is seeking to change itself with the “City of Change” campaign.
  • Africa’s garment industry relies heavily on preferential market access, only really taking off after America adopted the African Growth and Opportunity Act in 2000. The industry was badly hit when the Multi-Fibre Agreement, which restricted export of Chinese clothes to rich countries, ended in January 2005. Things are now looking up, with new restrictions on Chinese imports, tax breaks from the government and a push to attract fresh foreign investment. New investors from South Africa and mainland China have set up shop in Lesotho. However, American, European and South African quotas on Chinese exports are likely to be abolished within the next couple of years. The WTO has also decided that rich countries should extend preferential access to all poor countries and not just Africa.
  • Venture capital investing in clean technology is picking up, increasing by 147% in 2006 from 2005. Most of the investment is in solar energy, a booming field in which several Chinese firms have gone public in the past year. The government has also set environmental targets. The combination of environmental degradation, economic growth and manufacturing prowess means that China has the opportunity to be at the forefront in finding solutions to the energy problems that the world faces.
  • Facebook is being touted as the next Google. It focuses in mapping out the real and pre-existing connections between people.
  • Iceland’s companies have been in an acquisitive mood in recent years, borrowing heavily to buy abroad. The country has also used foreign finance to build some large aluminium smelters. As a result, its gross foreign debt is more than five times the value of its GDP. The Central Bank of Iceland has tried to slow the process, raising short-term interest rates to nearly 15%. But its efforts have, if anything, backfired. High rates have made Iceland the beneficiary of the “carry trade”, where investors borrow in a low-yielding currency and invest the proceeds in a higher-yielding one. This trade offends economic theorists, who assume the juicy yields Iceland offers will be offset by an eventual plunge in the value of its currency. But so far the trade seems to have worked. Meanwhile, Icelandic consumers have taken the opportunity to borrow cheaply abroad, bypassing the punishing interest rates imposed by their central bank.
  • In Latvia, credit growth has exploded, hitting 50-70% in each of the last three years, while wage growth has reached an annual rate of 25%. Latvia’s fixed exchange rate stops the central bank raising rates to counter the boom. Nor have foreign investors sounded the alarm; foreign banks are responsible for much of the lending spree. There is not much the Latvian authorities can do.
  •  The travails of Iceland and Latvia are part of a wider trend. New Zealand is also struggling with the conflict between its domestic aim of controlling inflation and the impact that higher interest rates have on international capital flows. All three countries have unusually small and open economies. As such, they are the first to register any change in the wind.
  • If globalisation has weakened the hand of central banks, so has financial innovation. The growth of derivatives, for example, has made it harder for central banks to control the supply of money and credit. According to the Bank for International Settlements, the face value of outstanding derivative positions on over-the-counter markets is some $400 trillion. These instruments give investors a claim on a large chunk of assets, with only a small downpayment. When asset prices rise, speculators can then borrow against their increased wealth, helping to drive prices even higher.
  • The world’s largest companies in terms of revenues are mostly oil companies, like Exxon Mobil, Royal Dutch Shell and BP. Wal-Mart Stores remains the biggest.
  • Health spending in OECD countries keeps growing faster than their economies, with the US, France and Germany heading the list in that order.
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