Below is a very good report from 60 Minutes Australia that gives you an update on China’s ghost cities. Roughly 22 percent of China’s urban housing stock is unoccupied, according to Professor Gan Li, who runs the main nationwide study. That adds up to more than 50 million empty homes, he said. One solution that the government could use is property or vacancy taxes to try to counter the issue, but neither appears imminent and some researchers, including Gan, say what actually counts as vacant could be tricky to determine.
For so long China has relied on major infrastructure projects including building cities to drive growth figures in their economy. Historically China’s economic model was based on export-led growth, massive government injections into the economy and access to cheap money. This is not sustainable and although you can keep blowing up bridges and build cities that nobody lives in at some point it becomes unsustainable. Furthermore since the global financial crisis economies have increased protectionist policies to look after their own economy and this has been followed with by the potential trade war with the USA. Therefore the Chinese government need to refocus the growth of the economy on domestic consumption rather than building things – Gross Fixed Capital Formation. So much more C than I in the GDP Expenditure equation. EG:
GDP = C↑+ I↓+ G + (X-M)
Good overview by CNBC on what GDP is and how it is calculated. It is also useful to hear why it tends not to be a good measure of standard of living.
This is a good summary of economic developments to watch in 2019 – from Al Jazeera. Some of the key points are:
- Protectionist policies will remain and any truce between the US and China will be short-lived.
- The US is in an unsustainable boom – the fiscal stimulus will fade and this will be followed by two larger deficits – budget and external. The US is consuming far more that it is producing and it mirrors the 1980’s – Reaganomics.
- China is slowing down – as well as the protectionist issues as a result of the US trade policy there are tensions between the economic system of capitalism and the political system of communism. This combination is referred to as ‘Market Socialism’. The problems are associated with: economic growth v environmental problems, rural areas v urban areas, rich v poor. China’s movement away from oil to gas which benefits Qatar but to the detriment of the Saudi economy.
- The Gulf economies are taking a hit from the fall in oil prices and government budgets may have to be cut. Diversification from the dependence on oil is necessary to avoid the resource curse and with a growing youth population job creating is needed. Movement to a more knowledge-based economy and large infrastructure projects are becoming focus areas as a necessity.
I have mentioned the ‘resource curse’ in many postings since starting this blog. It affects economies like in sub-Sahara Africa and Australia which have a lot of natural resources – energy and minerals. The curse comes in two forms:
- With high revenues from the sale of a resource, governments try and seek to control the assets and use the money to maintain a political monopoly.
- This is where you find that from the sale of your important natural resource there is greater demand for your currency which in turn pushes up its value. This makes other exports less competitive so that when the natural resource runs out the economy has no other good/service to fall back on.
The Australian economy did well at the height of the commodity boom in 2013 with iron ore, copper etc earning companies and the economy significant amounts of money. Investment in this area amounted to 9% of GDP in the same year with new mines, gas fields and infrastructure to cope with the increasing demand. But the collapse in commodity prices didn’t have the effect that suggest the resource curse. Countries like Venezuela – oil, Chile – copper, Nigeria – oil etc. have gone through turbulent times as commodity prices fall. Australia though has come through this period quite well for the following reasons:
- falling investment in the mining sector has allowed the central bank to lower interest rates allowing other sectors, previously shut out, cheaper access to investment funds
- the falling exchange rate – AUS$ lost 40% in value against US$ between 2011 – 2015 – made other elastic exports more competitive and this was particularly apparent in the tourism, education and construction sectors.
- Tourism – spending by tourists increased by 43% from 2012 and amounted to AUS$21bn in the year ending March 2018.
- Education – overseas student numbers increased from 300,000 in 2013 to 540,000 in 2018. Each year they contribute AUS$40bn.
- Construction – firms have completed projects worth AUS$29bn in the 4th quarter of 2017 which compares with AUS$20bn in the 1st quarter of 2012. The Foreign Investment Board approved AUS$72bn worth of residential-property purchases in 2016, up from AUS$20bn in 2011.
Australia GDP Annual Growth Rate – 2010-2018
Source: Trading Economics
So despite the end of the resources boom the Australian economy’s GDP per annum hasn’t fallen below 2.4% – see GDP graph. Furthermore, Australia ranks as the 14th largest economy on the globe but ranks 7th regarding the volume of foreign investment and this ranking has risen despite the end of the resources boom. Prudent fiscal measures and a sound monetary policy have also played their part in a resilient Aussie economy.
HT to colleague Paul Chapman for this graphic from ‘Dynamic Graphics’. The Dynamic Graph (Data Visualization) Shows the Top 20 Countries with the Highest GDP PPP from 1980 to 2023. The Ranking includes superpowers, such as United States, China, Japan, India, and Germany. It also compares the total GDP (PPP) of different continents from the Top 20 countries, mostly North America, Europe, and Asia. Interesting to see the rise of China and the changes in top continent by GDP (PPP).
Since the GFC economics has been dominated by fiscal and monetary policies to stimulate aggregate demand. Monetary policy has in particular been reinventing itself with low interest rates not being enough to stimulate demand and the introduction of numerous rounds of QE.
Other policy areas might lack the excitement of delving into the unknown but are just as important to an economy. Maintenance of a country’s infrastructure, assets and government accounts are essential to the long-term development but government’s tend to avoid them as they are not creating anything new and therefore not recognisable by voters. A new hospital, school or major road grab the headlines and inform the electorate that they have been busy putting tax payer money to good use. Maintenance lacks the glamour of innovation.
The US after the GFC did spend a lot of money on new vanity infrastructure projects but these were in sparsely populated areas. However, it was busy cities that really needed their transport infrastructure upgraded and you would think this would be a priority for governments. In the US the fraction of existing road surfaces that are too bumpy has risen from 10% in 1997 to 21% in 2018. Invariably if infrastructure is not maintained it causes significant costs for an economy and in some cases fatalities – the recent bridge collapse in Genoa, Italy. One of the issues for economists is that the typically used measure of an economy, GDP, doesn’t take into consideration the cost of wear and tear. In order to do this they must work out the lifespan of each asset and decide on its depreciation. Some are similar to light bulbs which means they work until they blow – economists refer to this as the “one hoss shay” case. This is based on a poem where it imagines a horse-drawn cart built so well that it never broke down until it eventually fell apart. victim of a “general flavour of mild decay”. Other assets are more linear in how they depreciate in that they lose the same amount each year. Japan assumes that houses lose 4% in value each year and that is why Japan’s consumption of fixed capital is high – 22% of GDP – see graph from The Economist.
Too often governments, and organisations for that matter, preserves day-to-day spending by cutting maintenance and investment. Finance ministers might invest more in maintenance if the resulting boost to public wealth became more transparent. Furthermore if all government departments had to account for all the capital tied up in their operations, they might feel obliged to be more productive with it. New Zealand seems to be the only country to update its public-sector balance-sheet every month, allowing for timely assessment of public-sector worth. So instead of impressing voters with ideas and glossy projects, being boring might actually do some good. Economists tend to be good at this.
Source: The Economist – October 20th 2018
Danny Quah of the London School of Economics (LSE) wrote a paper in 2011 describing the dynamics of the global economy’s centre of gravity. By economic centre of gravity he refers to the average location of the planet’s economic activity measured by GDP generated across nearly 700 identifiable locations on the Earth’s surface.
The graphic below from The Economist shows an updated WECG. In 1AD China and India were the world’s largest economies. European industrialisation and America’s rise drew the economic centre of gravity into the Atlantic. However Japan’s economic boom made it the second largest economy in teh world pulling the centre north. As China has regained economic leadership, the centre is now retracing its footsteps towards the east. Extrapolating growth in the 700 locations is projected by 2025 to locate between India and China.
It is interesting to note how the WECG seems to move horizontally so does this suggest that the north-south divide will remain invariant? In looking at the actual data in Quah’s research, it shows that latitude declines from 66 degrees North to 44 degrees North by 2049. This might seem to imply that the south, like the east, is actually gaining considerable relative economic strength. Policy formulation for the entire global economy, and global governance more generally, will no longer be the domain of the last century’s rich countries but instead will require more inclusive engagement of the east. Many global policy questions will remain the same, e.g. promoting growth in the world economy, but others might change in character, e.g. appropriate political and military intervention. If you are interested in Quah’s paper you can download it by clicking here.
The Global Economy’s Shifting Centre of Gravity by Danny Quah. 2011
The Economist – The Chinese Century – October 27th 2018
New Zealand has enjoyed a high standard of living and solid economic growth in recent years. However, during this period New Zealand has also exhibited a comparatively low level of productivity growth relative to our OECD peers. Broad-based evidence of this can be seen in New Zealand’s Gross Domestic Product (“GDP”) per capita. This metric measures output per New Zealander and is standardised into US Dollars for all countries. On this metric, New Zealand has consistently trailed the United States, Australia, Canada, Great Britain, France, Japan and the OECD average.
In 2017, New Zealand was ranked 22 of 48 countries surveyed by the OECD, compared with 9th place in 1970 and 20th in 1993. Over the last 50 years the world has seen much stronger growth in exports of manufactured products and slower growth in exports of primary products. And New Zealand’s competitive advantage is still in primary products. We are now on the brink of a technological revolution that will alter the way we live and work. The fourth industrial revolution is all about embracing the digital revolution. Our low productivity levels are a bit of a conundrum and the reasons for this are varied and subjective. Source – ANZ Bank
OECD GDP PER CAPITA (2017)
Source: Organisation for Economic Co-operation and Development (“OECD”)
New Zealand dairy farmers are making banks worried about their ability to keep up with their mortgage payments. Four recent issues haven’t helped the cause:
1. Falling produce prices making it harder for farms to service debt
2. Mycoplasma bovis cutting productivity and profitability of the sector
3. Regulatory changes – restrictions on foreign ownership and therefore reducing the value of dairy farms
4. Environmental regulations – increasing operating costs for farms
Whilst the last two might improve the long-term sustainability of the dairy sector they could reduce the profitability of highly indebted farms and their equity buffers.
Banks are closely monitoring about 20% of their dairy farm loans because of concerns about the borrowers’ financial strength. Although a dairy downturn is unlikely to threaten the solvency of the banking system, it does weaken their position if there is another external shock like another GFC. Bank lending in the dairy sector has been consistent over the last few year years but the proportion of loans on principal and interest terms has increased from 6% in January 2017 to 12% in March this year.
Although the average mortgage for most farm types has decreased in dollar value over the past six months, the average mortgage amount increased in the dairy farms – see graph below. The average mortgage for dairy farms is the highest at $5.1 million for the first time since the survey began in August 2015.
The table below shows the average current mortgage by sector over the years shown. Dairy farmers continue to hold the largest proportion of mortgages in excess of $2 million. They are also more likely to have a mortgage over $2 million – 62.5% of all dairy farms – and $20 million – 3.4% of dairy farms.
Source: Federated Farmers of New Zealand – Banking Survey – May 2018
Traditional economic measures, such as gross domestic product (GDP), productivity and economic growth remain fundamentally important but they’re not the whole picture. We think economics is ultimately about improving people’s living standards but you can’t look at GDP as the indicator to focus on.
US senator Robert F Kennedy pointed out 50 years ago that GDP traditionally measures everything except those things that make life worthwhile.
The introduction of the living standards framework in New Zealand takes into account environmental resources, individual and community assets, ‘social capital’ – which includes cultural norms and how people interact – and human capital, such as people’s health, and their skills and qualifications.
By living standards, the NZ Treasury means more than income; it’s people having greater opportunities, capabilities and incentives to live a life that they value, and that they face fewer obstacles to achieving their goals.
Limitations of GDP as a measure of standard of living – see list below.
- Regional Variations in income and spending
- Inequalities of income and wealth
- Leisure and working hours
- The balance between consumption and investment
- The shadow economy and non-monetised sectors
- Changes in life expectancy
- Innovation and the development of new products
- Defensive expenditures