The growth of emerging economies, such as China, India and Brazil brings with it both good and bad news for the once dominant countries of the West. With growth rates in China reaching double digits and a much greater resilience to the credit crunch and its aftermath in these emerging nations, they became the hope of the recovery for the West. But, is it only benefits that emerge from the growth in countries like China?
Chinese business has grown and expanded into all areas, especially technology, but countries such as the USA have been reluctant to allow mergers and takeovers of some of their businesses. Notably, the takeovers that have been resisted have been in key sectors, particularly oil, energy and technology. However, it seems as though pork is an industry that is less important or, at least, a lower risk to national security.
Smithfield Foods is a US giant, specialising in the production and selling of pork. A takeover by China’s Shuanghui International Holdings has been approved (albeit reluctantly) by the US Committee on Foreign Investment. While the takeover could still run into obstacles, this Committee’s approval is crucial, as it alleviates concerns over the impact on national security. The value of the deal is some $7.1bn, including the debt that Shuangui will have to take on. While some see this takeover as good news, others are more concerned, identifying the potential negative impact it may have on prices and standards in the USA. Zhijun Yang, Shuanghui’s Chief Executive said:
This transaction will create a leading global animal protein enterprise. Shuanghui International and Smithfield have a long and consistent track record of providing customers around the world with high-quality food, and we look forward to moving ahead together as one company.
The date of September 24th looks to be the decider, when a shareholder meeting is scheduled to take place. There is still resistance to the deal, but if it goes ahead it will certainly help other Chinese companies looking for the ‘OK’ from US regulators for their own business deals. The following articles consider the controversy and impact of this takeover.
US clears Smithfield’s acquisition by China’s Shuanghui Penn Energy, Reuters, Lisa Baertlein and Aditi Shrivastava (10/9/13)
Chinese takeover of US Smithfield Foods gets US security approval Telegraph (7/9/13)
US clears Smithfield acquisition by China’s Shuanghui Reuters (7/9/13)
Go-ahead for Shuanghui’s $4.7bn Smithfield deal Financial Times, Gina Chon (6/9/13)
US security panel approves Smithfield takeover Wall Street Journal, William Mauldin (6/9/13)
Questions
- What type of takeover would you classify this as? Explain your answer.
- Why have other takeovers in oil, energy and technology not met with approval?
- Some people have raised concerns about the impact of the takeover on US pork prices. Using a demand and supply diagram, illustrate the possible effects of this takeover.
- What do you think will happen to the price of pork in the US based on you answer to question 3?
- Why do Smithfield’s shareholders have to meet before the deal can go ahead?
- Is there likely to be an impact on share prices if the deal does go ahead?
House prices in the UK are rising and the rise seems to be accelerating – at least until the latest month (August). They are now growing at an annualised rate of nearly 4%. This is the fastest rate for three years (see chart below: click here for a PowerPoint of the chart).
This may be worrying for Mark Carney, the Governor of the Bank of England, who is committed to avoiding a new house price bubble. 
The problem is that, under the recently issued forward guidance, the Bank of England is set to retain the current historically low Bank rate of 0.5% until unemployment has fallen to 7%. But that could be some time – probably around two years.
So what can the Bank do in the meantime and what will be the consequences?
The following article from The Guardian looks at the options.
Article
How can the Bank of England prick the house price bubble? The Guardian, Patrick Collinson and Heather Stewart (30/8/13)
Data
Links to house price data The Economics Network, John Sloman
Questions
- What constitutes a housing price boom? Is the UK currently experiencing such a boom?
- What factors have led to the recent house price rises? Have these factors affected the demand or supply of houses (or both)?
- Who gains and who loses from rising house prices?
- Explain the policy adopted in New Zealand to curb house price inflation.
- Consider the merits of this option?
- Could borrowers find ways around this measure?
- Are there any other options open to the Bank of England?
Since the beginning of 2009, central banks around the world have operated an extremely loose monetary policy. Their interest rates have been close to zero (click here for a PowerPoint of the chart) and more than $20 trillion of extra money has been injected into the world economy through various programmes of quantitative easing.
The most recent example of loose monetary policy has been in Japan, where substantial quantitative easing has been the first of Japan’s three arrows to revive the economy (the other two being fiscal policy and supply-side policy).
One consequence of a rise in money supply has been the purchase of a range of financial assets, including shares, bonds and commodities. As a result, despite the sluggish or negative growth in most developed countries, stock markets have soared (see chart). From March 2009 to May 2013, the FTSE 100 rose by 91% and both the USA’s Dow Jones Industrial average and Germany’s DAX rose by 129%. Japan’s NIKKEI 225, while changing little from 2009 to 2012, rose by 78% from November 2012 to May 2013 (click here for a PowerPoint of the chart).
The US economy has been showing stronger growth in recent months and, as a result, the Fed has indicated that it may soon have to begin tightening monetary policy. It is not doing so yet, nor are other central banks, but the concern that this may happen in the medium term has been enough to persuade many investors that stock markets are likely to fall as money eventually becomes tighter. Given the high degree of speculation on stock markets, this has led to a large-scale selling of shares as investors try to ‘get ahead of the curve’.
From mid-May to mid-June, the FTSE 100 fell by 6.2%, the Dow Jones by 2.6%, the DAX by 4.5% and the NIKKEI by 15%. In some developing countries, the falls have been steeper as the cheap money that entered their economies in search of higher returns has been leaving. The falls in their stock markets have been accompanied by falls in their exchange rates.
The core of the problem is that most of the extra money that was created by central banks has been used for asset purchase, rather than in financing extra consumer expenditure or capital investment. If money is tightened, it is possible that not only will stock and bond markets fall, but the fragile recovery may be stifled. In other words, tighter money and higher interest rates may indeed affect the real economy, even though loose monetary policy and record low interest rates had only a very modest effect on the real economy.
This poses a very difficult question for central banks. If even the possibility of monetary tightening some time in the future has spooked markets and may rebound on the real economy, does that compel central banks to maintain their loose policy? If it does, will this create an even bigger adjustment problem in the future? Or could there be a ‘soft landing’, whereby real growth absorbs the extra money and gradually eases the inflationary pressure on asset markets?
Articles
How the Fed bosses all BBC News, Robert Peston (12/6/13)
The great reversal? Is the era of cheap money ending? BBC News, Linda Yueh (12/6/13)
The Great Reversal: Part II (volatility and the real economy) BBC News, Linda Yueh (14/6/13)
The end of the affair The Economist (15/6/13)
Out of favour The Economist, Buttonwood (8/6/13)
The Federal Reserve: Clearer, but less cuddly The Economist (22/6/13)
Global financial markets anxious to avoid many pitfalls of ‘political risk’ The Guardian, Heather Stewart (13/6/13)
Dow Falls Below 15,000; Retailers Add to Slump New York Times, (12/6/13)
Global market sell-off over stimulus fears The Telegraph, Rachel Cooper (13/6/13)
Nikkei sinks over 800 points, falls into bear market Globe and Mail (Canada), Lisa Twaronite (13/6/13)
Global shares drop, dollar slumps as rout gathers pace Reuters, Marc Jones (13/6/13)
The G8, the bond bubble and emerging threats BBC News, Stephanie Flanders (17/6/13)
Global monetary policy and the Fed: vive la difference BBC News, Stephanie Flanders (20/6/13)
The Federal Reserve’s dysfunctional relationship with the markets The Guardian, Heidi Moore (19/6/13)
Global stock markets in steep falls after Fed comment BBC News (20/6/13)
Federal Reserve’s QE withdrawal could signal real trouble ahead The Guardian, Nils Pratley (20/6/13)
Central banks told to head for exit Financial Times, Claire Jones (23/6/13)
Stimulating growth threatens stability, central banks warn The Guardian (23/6/13)
BIS Press Release and Report
Making the most of borrowed time: repair and reform the only way to growth, says BIS in 83rd Annual Report BIS Press Release (23/6/13)
83rd BIS Annual Report 2012/2013 Bank for International Settlements (23/6/13)
Data
Yahoo! Finance: see links for FTSE 100, DAX, Dow Jones, NIKKEI 225
Link to central bank websites Bank for International Settlements
Statistical Interactive Database – Interest & exchange rates data Bank of England
Questions
- Why have stock markets soared in recent years despite the lack of economic growth?
- What is meant by ‘overshooting’? Has overshooting taken place in stock markets (a) up to mid-May this year; (b) since mid-May? How would you establish whether overshooting has taken place?
- What role is speculation currently playing in stock markets? Would you describe this speculation as destabilising?
- What has been the impact of quantitative easing on (a) bond prices; (b) bond yields?
- Argue the case for and against central banks continuing with the policy of quantitative easing for the time being.
- Find out how much the Indian rupee and the Brazilian real have fallen in recent weeks. Explain your findings.
The strength of the housing market is often a key indicator of the strength of the economy. But, the opposite is also true: a weak economy often filters through to create a weak housing market. With the current weak economy, a boost in confidence is needed and signs suggest that the housing market is beginning to recover.
While the picture of the housing market today is nothing like the pre-crisis view, things are beginning to look up. For a couple of years now, house price inflation in the UK has been very close, if not equal to zero. However, data from Nationwide Building Society suggests that in May, house prices rose by 0.4% and the once stagnant year-on-year change in house prices rose to 1.1% (see chart below: click here for a PowerPoint of the chart). This is the fastest it has grown since the end of 2011.
Commentators have suggested that this latest data is an indication that ‘the market is gaining momentum’. A further confirmation of this rejuvenated market came with the data that property sales were 5% up each month this year, than the average monthly level for 2012. Despite this improvement, they still remain well below the pre-crisis levels.
Which factors have contributed to this tentative recovery? Most households require a mortgage to purchase a house and, given the central role that the housing market played in the financial crisis with companies engaging in excessive lending as a means of expanding their mortgage books, the availability of mortgages fell. The number of mortgage approvals is likely to feed through to affect the number of house sales and these have improved in the first few months of 2013. Interest rates offered by lenders have also fallen, making mortgages more affordable, thus boosting demand. Furthermore, government assistance is available to help individuals put a deposit down on a house, by offering them an equity loan. Further measures are due to come into effect in January 2014, with the aim of providing a further boost to the housing market. The chief economist at Nationwide, Robert Gardner said:
Widespread expectations that the economy will continue to recover gradually in the quarters ahead, that interest rates will remain low, and the ongoing impact of policy measures aimed at supporting the availability and lowering the cost of credit all provide reasons for optimism that activity will continue to gain momentum in the quarters ahead.
Despite the optimism, the situation is different across the UK, with some areas benefiting more than others. London and the South-East are driving this 0.4% rise, whereas other areas may be in need of further assistance to keep pace (see The UK housing market: good in parts).
Although these latest data may be a sign of things to come, it is also possible that things could go the opposite way. Incomes remain low; employment data are hardly encouraging; and the spectre of inflation is always there. Perhaps most importantly, consumer confidence remains fragile and until that gains momentum, uncertainty will continue to plague the UK marketplace. The following articles consider this issue.
Articles
UK house prices again up in May, says Nationwide The Guardian, Hilary Osborne (30/5/13)
Housing market could boost retail industry, Kingfisher says The Telegraph, Graham Ruddick (30/5/13)
UK house prices see modest rise, says Nationwide BBC News (30/5/13)
Hugh’s Review: House prices in spotlight BBC News, Hugh Pym with Yolande Barnes of Savills and Matthew Pointon of Capital Economics (31/5/13)
House prices are racing ahead as stimulus for the market kicks in Independent, Russell Lynch (31/5/13)
’Pick up’ in house prices recorded in sign of market confidence, says Nationwide Independent, Vicky Shaw (30/5/13)
House prices at highest level for nearly two years as confidence in UK economy grows and mortgages get cheaper This is Money, Matt West (30/5/13)
Stamp duty is ‘choking’ housing market as it rises seven times faster than inflation over last 15 years Mail Online, Tara Brady (28/5/13)
Nationwide launches Help to Buy mortgages The Telegraph, William Clarke (29/5/13)
UK home prices rise most in 18 months, Nationwide says Bloomberg, Jennifer Ryan (30/5/13)
House price data
Links to house price data The Economics Network
Statistical data set – Property transactions Department of Communities and Local Government
Nationwide house price index Nationwide Building Society
Halifax House Price Index Lloyds Banking Group
Lending to individuals – November 2012 Bank of England
Questions
- How is the equilibrium determined in the housing market? Using a demand and supply diagram, illustrate the equilibrium. Make sure you think about the shapes of the curves you’re drawing.
- Which factors affect the demand for and supply of housing?
- Why are there regional variations in house prices?
- Why is the housing market a good indicator of the strength of the economy?
- Why have house prices risen throughout 2013? Is the trend likely to continue?
- If the housing market does indeed gain momentum, how might this affect the rest of the economy? Which sectors in particular are likely to benefit?
- Explain why the government’s intervention in the housing market could be seen to have a multiplier effect?
- Concerns have been raised that the government’s schemes to help the housing market may create a house price bubble. Why might this be the case?
A simple model in economics is that of demand and supply. Through the price mechanism, signals are sent between consumers and producers and this interaction results in an equilibrium market price and quantity. However, what happens when the market for a good or service is in disequilibrium?
When a market is in equilibrium, demand equals supply. However, as we discussed in a previous blog concerning baby milk in China (see Milking the economy), markets are not always in equilibrium. If demand exceeds supply, a shortage will emerge and to eliminate this, the price must rise. If, on the other hand, supply exceeds demand, there will be an excess supply and thus the price must fall to restore equilibrium.
The market in question here is toilet paper in Venezuela! A severe shortage of this product has emerged in recent months, with shops running out of supplies. In a bid to relieve this shortage, the country’s Minister of Commerce has received approval for a $79 million credit, which can be used to import this basic product in short supply. Fifty million rolls will be imported to help fill the shortage that has emerged. The shortage is not just a problem for toilet paper, but also across a range of basic consumer goods. The article from Reuters comments that:
The government says the toilet paper shortages, like others, are the results of panicked buying and unscrupulous merchants hoarding the goods to artificially inflate prices.
Opposition critics say the problem is caused by the currency controls, created a decade ago by late socialist leader Hugo Chavez, and years of nationalizations that weakened private industry and left businesses unwilling to invest.
With shortages across a variety of products, the President has begun to work closely with business leaders to address this situation. The following articles consider this basic market, the intervention and consequences.
Venezuela hopes to wipe out toilet paper shortage by importing 50m rolls The Guardian (16/5/13)
Venezuela ends toilet paper shortage BBC News (22/5/13)
With even toilet paper scarce, Venezuelan president warms to business Reuters, Eyanir Chinea (22/5/13)
Toilet paper shortage in Venezuela to end after lawmakers back plans to import 39 million rolls Huffington Post, Sara Nelson (22/5/13)
Venezuela’s toilet paper shortage ended; 3 other basic goods that went scarce in the country International Business Times, Patricia Rey Mallen (22/5/13)
Questions
- Using a demand and supply diagram, explain how equilibrium is determined in a free market.
- Illustrate the shortage described in the aticles on your above demand and supply diagram. How should the price mechanism adjust?
- What types of government intervention have led to the shortages of such basic consumer goods?
- How have currency controls created a problem for Venezuela?
- With an increase in imported products, what impact might there be on Venezuela’s exchange rate and on its balance of payments?
The growth of emerging economies, such as China, India and Brazil brings with it both good and bad news for the once dominant countries of the West. With growth rates in China reaching double digits and a much greater resilience to the credit crunch and its aftermath in these emerging nations, they became the hope of the recovery for the West. But, is it only benefits that emerge from the growth in countries like China?
Smithfield Foods is a US giant, specialising in the production and selling of pork. A takeover by China’s Shuanghui International Holdings has been approved (albeit reluctantly) by the US Committee on Foreign Investment. While the takeover could still run into obstacles, this Committee’s approval is crucial, as it alleviates concerns over the impact on national security. The value of the deal is some $7.1bn, including the debt that Shuangui will have to take on. While some see this takeover as good news, others are more concerned, identifying the potential negative impact it may have on prices and standards in the USA. Zhijun Yang, Shuanghui’s Chief Executive said:
