Growth, Meritocracy, Apple(s) and Mangoes? – Let’s talk about that…

I wasn’t really sure which article to choose so I put them all in this post…

Growth – 

UK economy records fastest growth since 2007

The UK’s economy grew by 2.6% last year, the fastest pace since 2007 and up from 1.7% in 2013, official figures have shown. That was a slowdown from 0.7% growth recorded in the previous three months. Economists were mixed over whether the loss of momentum in the final quarter might be temporary or prolonged.

“The dominant services sector remains buoyant while the contraction has taken place in industries like construction, mining and energy supply, which can be erratic,” he said. – This is probably due to the implications of globalisation which resulted in the shift towards a more tertiary sector domination and thus de-industrialisation.

The services sector grew by 0.8% in the quarter, but construction contracted by 1.8%. Manufacturing grew by just 0.1%, its worst performance since the start of 2013.

Tuesday figures mean the UK was among the best-performing of the all the major economies in 2014. The IMF forecasts UK growth of 2.7% in 2015. However, Samuel Tombs, of consultancy Capital Economics, has predicted growth of 3%.

“With the recent halving of oil prices providing a timely boost to households’ discretionary spending power, credit still becoming cheaper and pay growth on an improving trend… the best days of the UK’s recovery may still lie ahead,” he said.

How significant do you think is the slowdown in the British economy, given that the dominant service sector is still booming, but construction is shrinking and manufacturing almost back to flat-lining? – Read the article to find out

http://www.bbc.com/news/business-30999206

Meritocracy – 

This article is probably less relevant to the course material, but in line with a discussion we had about inheritance and meritocracy in an earlier lesson, thus quite interesting. It basically offers a different angle to the argument based on statistical evidence.

“…More than ever before, America’s elite is producing children who not only get ahead, but deserve to do so: they meet the standards of meritocracy better than their peers, and are thus worthy of the status they inherit.”

http://www.economist.com/news/briefing/21640316-children-rich-and-powerful-are-increasingly-well-suited-earning-wealth-and-power

Apple – 

US technology giant Apple has reported the biggest quarterly profit ever made by a public company.

Apple reported a net profit of $18bn (£11.8bn) in its fiscal first quarter, which tops the $15.9bn made by ExxonMobil in the second quarter of 2012, according to Standard and Poor’s.

Apple’s impressive results represent a significant shift towards the massive untapped potential of China.

With a strong line-up of devices entering the final quarter, it was able to reap the fruits of its deal with the world’s biggest mobile network, China Mobile.

Currency woes

Apple’s revenue grew to $74.6bn in 2014 – a 30% increase from a year earlier.

However, on a conference call to discuss earnings, Mr Cook complained of “fierce foreign exchange volatility”, which added Apple to a growing list of US firms who have been hurt by the strong dollar abroad.

Apple said that currency fluctuations shaved 4% from its first-quarter revenue.

http://www.buzzfeed.com/tomgara/heres-how-big-apple-is#.ahX9p1zG3

http://www.bbc.com/news/business-31012410

Mangoes

Ban on Indian mango imports to EU to be lifted. “Today’s decision demonstrates the marked improvements India has made to its export system and it is important that these standards are maintained so that trade can continue and UK plant health remains protected,” – Increase in quality of the mangoes due to the protectionist measures and thus a potential increase in consumer surplus when the ban is lifted.

Even though India sells only a fraction of its mangoes abroad, Europe is a significant market for the industry. PRofits were more than halved after prices came down. Exports fell from $307.4m between April and November in 2013, to $291.4m in the same period last year.

However, imports of four other products – aubergines, bitter gourds, snake gourds and patra leaves – remain suspended subject to sustained improvements in plant pest control.

http://www.bbc.com/news/business-30898966


 

World Commodities Map

An interesting image to preview next week’s patterns of trade. – Every Country’s Highest Valued Exports

http://www.businessinsider.com/every-countrys-highest-valued-export-2014-5


 

 

 

Advertisements

Don’t put all your eggs in one basket

China’s policy makers have recently set about trying to curb China’s rapid economic growth. They’re calling it the ‘new normal’. They are essentially not implementing short-term growth stimuli in response to fluctuations in the economy (for example, they are limiting tax breaks). Now, I’m not going to go into what this means for China but instead look at our friend Laurence Harris in the UK.

Laurence is a Welsh farmer who supplies milk to Pret-a-Manger chains in Hong Kong. He has not as yet begun to feel the impact of China’s slowdown, however, analysts predict it will soon hit exporters like him. This is on account of the 7.4% drop in China’s growth. The Chinese government is tightening its grip on spending and the ‘new normal’ will soon see falling demand affecting the Laurences of the world. Larger multinationals like Unilever and Ben & Jerry’s have already begun to feel the brunt of the ‘new normal’ after reporting a 20% fall in their sales in the last quarter of 2014.

The British marine industry, in particular, has been hit pretty hard; it’s sales having dropped from 71m in 2012 to 52m in 2013 to 34m in 2014. This is, in part, due to the volatility of the industry – you don’t exactly see people running out and buying a powerboat every other day; it’s usually only the Donald Trumps of the world that go out and buy one, maybe one in every harbour city in his case, but you get the idea: it’s a one-time buy sort of good. However, the drop in Chinese economic momentum has also played a significant part. Not only has the fall in demand seen a fall in sales, but it creates uncertainty – exporters are unable to predict and plan how much stock to move. This places increased pressure on factors like employment and storage/ holding costs.

Companies like Alucast, however, haven’t been hit as badly and here’s why. They spread their operations over a number of different countries. They have operations in the US, Hungary, Romania, China. It increases their security and reduces the chance of them being catastrophically hit on account of Xi Jinping’s decisions over in China. Globalisation has its perks but it also has its weaknesses, and dangerously high interdependence is one of them. So, the moral of the story? Don’t put all your eggs in one basket.

Wealth: Having it all and wanting more

It is estimated that by 2016, more than half of the world’s wealth will be owned by the top 1%.  Is it bad? Depends on if you’re in that 1% or not *cough* Kritika *cough*. For the other 99%, it’s pretty unfair that the hardwork put in isn’t rewarded with fat paychecks, giving the rich more power and leaving the rest with voiceless and uncared for.

More detail can be drawn from the (poorly copied – couldn’t do much about that sorry) figures. The figures have % share of global wealth on the vertical axis, and the years as shown on the horizontal one. The top figure (to be referred to as figure 1) shows the projected changes in inequality (the black line represents the top 1% in both figures). The bottom figure (2) shows how the distribution of wealth has changed over the past recent years. What’s interesting to see is that inequality was generally falling up until The Great Recession. Why?

2-8f768068e2

One possible reason could be through derived demand theory (world demand was falling, so this has a knock-on effect to labour). This impacted severely on households (not only did the income streams stop, but companies weren’t looking to hire). Workers had to be willing to accept lower wages in order to find a job (to pay bills), or, as most did, sacrifice your own home. So as a result disposable income, and thus income available to be invested in ways of increasing one’s wealth, fell. In contrast, the 1% flourished during this time (see my other article on hedge fund managers earning $1 billion+ in 2009). The tax reforms by governments didn’t help – in the UK and US taxes on the richest 1% actually fell, pushing them further away from the rest.

Other reasons include exploitation of monopsony power over labour in 3rd world countries, monetary policy, inflation, poor tax policies etc.

 

Can anything be done?

Yes, surprisingly.

Oxfam, the publisher of this eye-opening report, called on governments to adopt a 7-point plan, including points such as:

  • Clamp down on tax dodging e.g. transfer pricing
  • Invest in free health care and education (yet the UK government is reducing this at the moment)
  • Shifting tax from labour and consumption to capital and wealth
  • Introduction of national minimum wages
  • Introduce equal pay legislation and promote policies to give women a fair deal
  • Safety nets for the poorest people e.g. minimum income guarantees

Whilst these policies look fair, they have major set-backs. E.g. tighter regulation on transfer pricing or changing the tax policies may see brain drains from countries. Minimum wages will reduce demand for labour. What if people getting these minimum income guarantees waste them? How can we be sure that legislation on equal pay and giving women a fair deal will implemented effectively? What about rising government debts – shouldn’t governments be cutting spending and adopting austerity measures first, before pursuing other objectives?

There are some major opportunity costs here – on one hand we can try and reduce inequality in the short-run, but it will come at a cost in the long-run as governments hit debt ceilings. If we adopt austerity measures in the short-run, it is likely that inequality will worsen, until debts are paid off.

 

Sources:

Wealth

Richest 1% to own more than half of world’s wealth – guardian

Tackling Inequality @ WEF -guardian

 

 

 

Greece’s brain drain.

Europe’s economic woes don’t seem to be abating, but in comparison to Greece’s they appear trivial.  Since the Great Recession over 200 000 thousand Greeks have left for North America or other countries within Europe and it does not appear to be stopping.  The implications for the Greek economy are worrying and we can apply some useful diagrams to aid our analysis.  Obviously the long term unemployment here is a good starting point.  Unemployment is over 50% and unemployment hysteresis postulates that a temporary shock to aggregate demand (AD) can permanently lower the potential output of the economy and increase the equilibrium level of unemployment.  The diagram below shows that higher unemployment and reduced incomes results in an inward shift of AD but the structural unemployment, evident here, results in an inward shift of the LRAS.

For ease of explanation we can use the PPF diagram to help illustrate the effects of the above as well as the impact of a significant exodus of human capital from the Greek economy.

greece’s brain drain