Euler Hermes Wirtschaftsaussichten

Leitartikels

Parallel lives

25.01.2010

Plutarch’s Parallel Lives, pairing biographies of “the noble Greeks and Romans”, brings me to mind of the world economic situation as we begin 2010: not in order to compare the period of exceptional crisis that we have just gone through with the great conflicts of the Hellenistic world of two millennia ago, but to note that the paths of today’s great economic poles are in the process of diverging. Looked at overall, the surface of the picture might appear fairly uniform, as the end of the recession and start of world economic recovery are confirmed by most of the indicators: a jump of some 40% in commodity prices (true for practically all commodities including energy and agricultural products), taking them now back to their averages of winter 2007-2008; a roughly 30% gain in world stock market prices in one year; or the 30% rise in world steel output also in a year.

On closer view, however, disparities jump into focus. This is true regionally: Asia is enjoying an economic expansion in which not even a trace of last year’s crisis remains. China, South Korea and India have not only caught up to their levels of production of before the financial shock, but have also resumed very fast growth rates. In all three countries, automobile production and sales are taking off, cement output is soaring, and electricity production has leapt almost 20% in a year.

Across the rest of the world, the picture is the opposite: US industrial output at the end of 2008 equalled that of 2002, while in the United Kingdom and euro zone, it was back at its levels of 1992. In Western Europe, unlike the United States, retail sales have yet to stop dropping, despite support measures from vehicle scrappage schemes. Eastern Europe displays an additional difference: not only was the contraction there more powerful, but also practically no signs of improvement have yet been detected.

Finally, the path taken by Latin America is different still: while not rivalling the Asian success story, the upturn in this part of the world is very clear, with domestic demand dynamic and little affected by the crisis of last year. The economic lives of the regions are becoming parallel little by little– parallel in the sense that the contact points, the convergences, of these zones seem to be diminishing. It is striking to note that, last autumn, intra zone trade in Asia leapt by 6%, whereas in the Middle East it contracted. This is even more striking when we set the Asian figure against the clear absence of recovery in world trade at this stage: advanced indicators even began worsening in the autumn!

We do not yet understand everything that this crisis will end up altering in the world economy, but one path seems to be currently taking shape: world trade is being restructured by spheres of influence – less astonishing with China and South Korea now about to strengthen the ranks of ASEAN. While over the past ten years globalisation was structured on an OECD/non-OECD basis geographically, it could be disaggregating and forming several parallel and intensive trade patterns, within zones that are more closed…new versions of ancient Rome’s rule over the Mediterranean, its mare nostrum.

Karine Berger

Source: Euler Hermes Economic Outlook, Winter 2009-2010

"They forgot nothing and learned nothing"

12.10.2009

The words above were spoken in 1814 by the unsinkable French statesman Charles Maurice de Talleyrand, ambassador or minister under six regimes and perennial survivor of an even greater number of the crises that rocked France in the years before, during and after the French Revolution. One year after the fall of Lehman Brothers, we are tempted to believe that his injunction to learn from events is still valid for surviving through today’s economic revolutions.

First, on ‘forgetting nothing’. Only a few months ago, crushed by a web of toxic lending, swept by exploding bubbles and general panic, the world financial system was being given up for dead: critics rose from all corners to condemn the financial actors for speculative behaviour castigated as unacceptable and destructive. The consequences for the world economy were – and remain – dramatic: the year 2009 will go down as the first year of peace time global recession. The fall in both output and exports nearly matches those seen on stock markets: world industrial output was down by 15% in spring, with global imports at the same time down by nearly 20%. As for unemployment, this will continue to soar up to the end of 2010,with the OECD forecasting that, by then, within its member countries alone, some 25 million people will have lost their jobs due to this historic crisis.

Even so, as I write these words in September 2009, I have a strong impression that people have ‘learned nothing” from these upheavals. The striking upturns now seen in the financial world, at that same time that the consequences of the crisis are still weighing on business profitability, suggest that the same kind of financial behaviour that created the crisis has returned with renewed vigour. This raises doubts over whether any lessons have been learned from the monetary policy mistakes of the past, which led to the excessive credit at the root of the crisis. Even more striking is the rapid drying up of cooperation between banking institutions and governments, at a time when controls on the remuneration of risk need to be seriously thought through. Remember that it was this very cooperation that only last autumn allowed the financial system to be rescued from the brink.

On a similar level, the current calls for supporting credit in the construction sector seem imprudent, given that it was the earlier explosion in prices and debt in that sector that proved the triggering factor in the crisis. Indeed, the word ‘crisis’ itself seems to have been banned from newspaper headlines, in favour of words like ‘recovery’ and ‘revival’…a change admittedly justified by the sharp upturn seen in the autumn, but which overlooks the still deep wounds that need to be tended.

Lastly, it is only those industrial enterprises most severely hit by the storm that have ‘learned anything’, since they are moving to reconfigure the global structure of their production chains. ‘Forgetting nothing but learning nothing’ may, perhaps, see us through difficult times, but it will not protect us against the next shocks to come, nor will it prepare us for the genuine upheavals that in the end will arise. The tortured history of France in the age of Talleyrand is a perfect example of this truth.

Karine Berger

Source: Euler Hermes Economic Outlook, Winter 2009

Tomorrow never dies

It is always useful to take stock of what we managed to anticipate correctly in making previous decisions – and whatwe did not – in order to improve the decisions we now have to make. Let us thus go back a year, to June 2008, when we wrote: “We now expect the shockwaves to spread through the entirety of business and household financial markets: the spread of the crisis of the real economy via the restriction of credit in spring 2008 has been only the beginning. When a credit crunch commences in one given market – in this case, construction – economic history teaches us that it often blindly spreads to the others… The stage is set for Act II of the financial crisis of 2008.” Re-reading these lines now seems strange, remembering that,when they were written, very few in Europe were anticipating an economic crisis.

It is also strange to again take up our analysis –which has shown itself to be correct about the events that followed – with the descent into record recession across the entire OECD, the indeed unpredictable shocks that followed the collapse of Lehman Brothers, and the near-halving of world automobile production. But, as modesty demands, we should also point out that the blows that rained down over the past year have exceeded anything that we predicted.

Still, we can draw at least one lesson from looking back: that,when we opt for rationality and realism, we have good chances of getting close to the truth of events. So, from a rational and realistic perspective,what can we say about the future? Well, what is irrational is the current wave of unfounded optimism propagated during the months of May and June on world stock exchanges and reflected in confidence surveys: after the historic turning point of the 2009 crisis, how can one believe that everything could carry on as it was before? Rational thinking demands we admit that the profound structural problems at the root of this crisis – essentially, the issuing of credit on a scale unjustified by the productivity of economies – remain unresolved, and that redesigning the systems, balances and controls involved will clearly take a long time.

Realism also calls on us to consider that, after the absolutely unprecedented shocks undergone in the fabric of the global economy – in supply aswell as demand, in credit as well as savings – economic stability will take a long time to achieve , but that by necessity it will come. In concrete terms, it is likely both that the worst is behind us but also that we are entering into a period of convalescence, during which growth is likely to recover only weakly, and only in certain parts of the world – those which have opted formassive and immediate recovery measures, i.e., the US and China. The economy is not simply a matter of psychology: it is best to face the facts and avoid being lulled by a few harbingers of spring.

Businesses need to take decisions now: those that do so with realism and caution up to summer 2010 will do better than others in seizing all the opportunities that come and will emerge stronger from this long economic freeze. Tomorrow never dies, but we could be in for a long night.

Karine Berger

Source: Euler Hermes Economic Outlook, Summer 2009

On Atlas’s shoulders: a world of information

What would happen if Atlas, the legendary Titan of Greek mythology who bears the globe on his shoulders, were to shrug his shoulders and drop his burden? The question is a legitimate but also disturbing one, given the global economy’s continuing descent to the depths. In just a few short months at the end of 2008, turnovers fell by as much as 10%, 20%, or even 40% for some companies. This year will bring even worse. We continue to think that recovery in 2010 remains the most likely scenario, given US and Chinese budget and monetary plans. But there is no doubt that the recovery will be slow, fragile, and difficult. And this is because, this year, for the first time since the Second World War, world growth will be negative, and manifestly so. Moreover, the exceptional gravity of the shocks being felt means that we cannot rule out that other possibility: that of a triggering of deflation in the OECD countries next year. This is not the most likely outcome, but it is not beyond the realms of possibility.

At such an uncertain juncture, what is the right stance to take? As a credit insurer, we have a responsibility to stem the coming – and indeed already rising – tide of claims and insolvencies. We also have a responsibility to ensure that the security of commercial exchanges is guaranteed, and that forming accurate judgements on the situation of economic agents continues to remain possible. In this current shock of 2008-2009, more than in any past crisis, information plays a critical role. During an economic crisis, one of the key mechanisms of its amplification is a shortage of accurate information about the various economic agents. To use the technical terms, I refer to here to the risks associated with ‘adverse selection’ or with the ‘principal-agent problem’ (the ‘agency dilemma’). Broadly, because the risk of non-payment strongly increases, and because accurate information gets harder to obtain, bad allocation decisions are made, further worsening the recession…which, in turn, engenders further bad decisions. And so on.

In the current situation, whether the crisis is accelerated or, alternatively, whether it is eased, will much depend on the extent of reciprocal information sharing by economic agents and the level of confidence they hold in one another, in particular concerning the scale of latent unpaid debts in their bank balances. The role of the credit insurer is to calculate commercial risks down the last decimal. In the past year, commercial risk has increased by a factor of two or three, irrespective of the initial situation of the businesses concerned. We need to be more selective in order to eliminate the risk of adverse selection, that is, the risk of overreacting to the crisis. This is a difficult, but necessary, balancing act.

In February, The Economist published delayed and disturbing statistics, showing the correlation between sales of novelist Ayn Rand’s US best-seller Atlas Shrugged and announcements of recovery programmes. There is a good correlation between them, for at least two reasons. First, Rand was a long-standing friend of former Federal Reserve chairman Alan Greenspan, and there were rumours that his decisions were highly influenced by her book. Economic actors hoped to find the solution to the crisis in its pages, and, more pragmatically, which sector would be the next to collapse. The second reason is that the book tells the story of the collapse of the US economy, sector by sector, and state by state. It tells us how, one day, Atlas decides to shrug his shoulders. But what is the identify of this Atlas, whose action spells the undoing of the world economy? For the answer, I leave it to you to read the story of Dagny Taggart, the main character in Rand’s novel.


Karine Berger

Source: Euler Hermes Economic Outlook, Spring 2009

Which pumps to prime?

It only lasted a few hours, and, in all honesty, it was a matter of just a few basis points.
But all the same, in the week of December 10, at a time when the Federal Reserve had yet to make its spectacular decision to opt for a zero interest rate policy, US three-month treasury bills for the first time in history posted a negative yield! US monetary policy was at the brink of the unthinkable in this exceptional financial crisis. The governors of the Federal Reserve, after having fixed their lead interest rates in a range between 0% and 0,25% on December 17, have no more room for manoeuvre on the interest rate front. And, by undertaking an unprecedented increase in Fed holdings via the acquisition of illiquid or even risky new assets (e.g.,mortgage obligations, for example), it has also significantly reduced its scope for future action.

Admittedly, quantitative interventions remain possible theoretically. But using interest rates for balancing financial markets and especially for shaping expectations is no longer possible. Dowe need to be reminded that this kind of monetary policy turned out to be a one-way ticket for the Japanese economy in the 1990s? Of course, this new American experiment has been weighed and calculated in light of, and informed by, the Japanese experience. Even so, many observers see this as a leap into the dark. This is all the more the case given that there remains really not alternative means of priming the pump for the world economy. US monetary policy now finds its hands tied, while American budget policy is chained to some very heavy balls. Public debt in the OECD countries is mushrooming, raising serious concern over the actual efficacy of themany recovery plans announced in December. These are the equivalent of 5% of GDP in the US (against debt of 60% of GDP), 1.5% of GDP in Germany (with debt of 65% of GDP), and 5% of GDP in Italy (with debt of 104% of GDP).

This winter it has become fashionable to re-read the great John Maynard Keynes. Also worth reading is Barro (‘Are Government Bonds Net Wealth?’, Journal of Political Economy, 1974): the Ricardo-Barro equation says simply that debt cannot mount in unlimited fashion, and that all public debt is at the expense of private debt, i.e., that beyond a certain level of debt, recovery is no longer possible. This means that, no matter how we eventually manage to restart the pump, the profound imbalances of the OECD economies will not be reabsorbed. Private and public agent indebtedness is scaling historic peaks, and it is extremely probable that a slightly hasty exit from the global crisis will conceal a shift of bubbles from certain markets to others. What the present crisis is questioning is the very economic growth thatwe have enjoyed for the past ten years.
Undoubtedly, despite painting ourselves into monetary and budgetary corners, We will manage to restart the economic pump, but without having answered the
initial question posed by the crisis of 2008-2009: exactly which pump should we prime?

Karine Berger

Source: Euler Hermes Economic Outlook, Winter 2008-2009

2008 – the year of living dangerously

“With the end of summer 2008, storms are battering world stockmarkets like the hurricanes lashing the coasts of America. After the US Treasury rescue of FannyMae and FreddieMac, and especially after the grant of Chapter 11 protection to investment bank Lehman Brothers – founded 160 years ago – all the facts that seemed to slightly ease concerns over the summer are now forgotten, and 2008 is nowwell and truly the year of living dangerously on the financial and economic front. Admittedly, commodity prices, and in particular oil prices, have started to ease, but, for the moment, they continue to fluctuate around levels never seen prior to 2008. Also admittedly, the US situation has seemed more
favourable, with growth of 1% in the second quarter of the year, but this upturn is explained in very large part by export price competitiveness gains related to the fall in the dollar against all other currencies. Over the whole of 2008, more than three quarters of US growth will come from the contribution of foreign trade, and it will be impossible for theworld’s leading economy to repeat this performance next year.

At the same time, the spreads applied on lending to businesses (i.e., the premium over government bond rates that large companiesmust pay in order to raise finance on the markets) have not stopped increasing, demonstrating the genuine blockage in investment finance, affecting even very large global businesses. And at the beginning of September, the bankruptcies on the part of financial institutions in the US and of major world industrial or services companies have shown, rather, that the worst is yet to come. The euro zone outlook is now a cause of increased concern following its results for the second quarter, during which overall domestic demand in the zone contracted. The European economies have thus moved into tune with the US crisis since spring, and the preliminary figures for the summer period suggest that this situation is not improving. The economic crisis will continue to spread on both sides of the Atlantic over the course of the autumn, first in the construction sector, also via the financial crisis in credit markets, which undoubtedly has yet to claim all its victims, and lastly with the crisis in consumption, durably traumatised by the explosion in prices of some weeks back.

In this context, the economic policy responses planned by various OECD countries offer food for thought: it is during the autumn that most governments complete their budgets for the following year, and wherever they can – that is wherever budgetary lee way resulting from good management in previous years permits – governments have opted for recovery policies. It is noted that the United States, Spain, the United Kingdom, and undoubtedly Germany, are all ready to inject not inconsiderable sums into their economies in order to avoid recession. What do these four countries have in common? They all returned to a balanced budget in the course of the last four years. By contrast, France and Italy find themselves blocked: with their public finances mired in debt that kept rising even during the years of economic growth since 2003, both countries are bound hand and foot in the face of the economic downturn and the upheaval in the financial markets.

Karine Berger

Source: Euler Hermes Economic Outlook, Autumn 2008

A little reminder of the 1970s

‘Oil shock’ – the very phrase seems a little old-fashioned, or at least ‘retro’, so long has it been since we last experienced one. But hearing it again now, thirty years on, the old memories come flooding back – the global redistribution of wealth, the ineffectual monetary policies, the drive to save energy – all brought back to mind by those two words, themselves a sort of Proustian reminder, redolent of oil and the 1970s.

We had forgotten, first of all, that an oil shock is above all a violent redistribution of the world’s wealth, from those who use oil to those who produce it. To give an idea of the scale of this, the rise from $73 a barrel last year to an average of a little over $120 a barrel this year corresponds to the sudden transfer of $620 billion from the major net importing countries to the major oil exporting countries. This calculation, based on 2008 alone, needs to be doubled if we are to gauge the latent shock that has been developing from2003 onwards. Overall, it works out to around 2.4% of world GDP, which, since 2003, has changed hands simply because of the rise in the price of oil. For the record, the oil shocks of 1973 to 1980 represented a transfer of 1.9% of world GDP. Another thing we had forgotten is that the initial shock always gives rise to multiple international macroeconomic shocks.
First, the general equilibrium in current account balances obviously gets called into question. However, the OECD countries are not necessarily the ones that suffer the most damaging effects: wealth transfers also occur between developing countries, and to an even greater extent today than thirty years ago. Among the ten biggest net oil importers, we find China, India and Taiwan. China, the third biggest net importer, is seeing its much-heralded external surplus trimmed by $60 bn, or 1.4% of its GDP. Naturally, the question of the dollar pegging of currencies of some producer countries, for example Abu Dhabi, is equally called into question.
Second, inflation is revived. Even if the shock is not quite on the same scale on opposite sides of the Atlantic, the euro zone being partially shielded by the high level of the euro, the effects are still very similar on consumer prices, up by 4% in the euro zone in June, and by 5% in the US in the same month. Undergoing, thus, a fairly similar shock, the consequences are identical: in the US and the euro zone alike, household consumption is floundering at its lowest rate of growth seen for a decade. This sudden shortfall in domestic demand is what is sending growth to around zero – in the US, in France or in Italy alike – in this second half of 2008.
Third, serious uncertainty surrounds the state of business profitability: the supply shocks of the 1970s gave way to several years during which production was restructured across the world, notably in industry. Still, this second chapter of the 2008 shock has not yet been written. And, in the face of all these more or less confirmed outcomes, there again arises the issue of energy independence: thirty years after the first campaigns to save energy, the landscape of oil dependency is extremely diverse, notably in terms of the choices made to either pursue or forego nuclear energy.
France, which has taken the former route, has assured itself 50% self-sufficiency in energy. Among its neighbours, the figure is only 18% in the case of Italy and less than 40% for Germany. These great differences could well determine a large part of the economic future of each of these economies.

Karine Berger

Source: Euler Hermes Economic Outlook, Summer 2008