Every three years the Bank for International Settlements (the central bankers’ central bank) publishes a survey of foreign exchange market activity. The latest survey has just been published. Despite the banking crisis and subsequent recession, foreign exchange market turnover has increased by nearly 20% since 2007. The daily average value of currencies traded on the foreign exchange market is now $3.981 trillion. In 2007 it was $3.324 trillion and in 2001 it was just $1.239 trillion.
According to the BIS press release:
• The increase was driven by the 48% growth in turnover of spot transactions, which represent 37% of foreign exchange market turnover. Spot turnover rose to $1.5 trillion in April 2010 from $1.0 trillion in April 2007.
• The increase in turnover of other foreign exchange instruments was more modest at 7%, with average daily turnover of $2.5 trillion in April 2010. Turnover in outright forwards and currency swaps grew strongly. Turnover in foreign exchange swaps was flat relative to the previous survey, while trading in currency options decreased.
• As regards counterparties, the higher global foreign exchange market turnover is associated with the increased trading activity of “other financial institutions” – a category that includes non-reporting banks, hedge funds, pension funds, mutual funds, insurance companies and central banks, among others. Turnover by this category grew by 42%, increasing to $1.9 trillion in April 2010 from $1.3 trillion in April 2007. For the first time, activity of reporting dealers with other financial institutions surpassed inter-dealer transactions (i.e. transactions between reporting dealers).
• Foreign exchange market activity became more global, with cross-border transactions representing 65% of trading activity in April 2010, while local transactions account for 35%.
• The percentage share of the US dollar has continued its slow decline witnessed since the April 2001 survey, while the euro and the Japanese yen gained relative to April 2007. Among the 10 most actively traded currencies, the Australian and Canadian dollars both increased market share, while the pound sterling and the Swiss franc lost ground. The market share of emerging market currencies increased, with the biggest gains for the Turkish lira and the Korean won.
• The relative ranking of foreign exchange trading centres has changed slightly from the previous survey. Banks located in the United Kingdom accounted for 36.7%, against 34.6% in 2007, of all foreign exchange market turnover, followed by the United States (18%), Japan (6%), Singapore (5%), Switzerland (5%), Hong Kong SAR (5%) and Australia (4%).
The following articles look at some of the details of the report and consider their implications for London and for the global economy: an economy that has grown (in money terms) by 82% since 2001, while exports have grown by 101% and foreign currency transactions by 221%.
Articles
Giant FX market now $4 trillion gorilla Reuters (1/9/10)
Global currency trading jumps 20% in three years BBC News (1/9/10)
Daily foreign-exchange turnover hits $4 trillion Market Watch, William L. Watts (1/9/10)
Banks’ shift pushes FX trading to $4,000bn a day Financial Times, Peter Garnham and Jennifer Hughes (1/9/10)
Demonised ‘algos’ push the surge in FX trading Financial Times, Jennifer Hughes (1/9/10)
A valueless banking boom? BBC News Blogs: Peston’s Picks, Robert Peston (1/9/10)
Financial crisis boosts London’s dominance in global currency trading Telegraph (1/9/10)
BIS Triennial Survey of Foreign Exchange and Over-the-Counter Interest Rate Derivatives Markets in April 2010 – UK Data Bank of England News Release (1/9/10)
BIS documents
Press Release Bank for International Settlements (1/9/10)
Report “Triennial Central Bank Survey of Foreign Exchange and OTC Derivatives Market Activity in April 2010 – Preliminary global results – Turnover” Bank for International Settlements (1/9/10)
Statistical Tables Bank for International Settlements (1/9/10)
Link to previous reports Link from Bank of England site
Questions
- Why has the foreign exchange market grown so strongly (a) since 1998; (b) since 2007?
- How has the balance of the types of foreign exchange transactions changed since 2007? Explain why.
- What are the implications of this growth for the UK economy?
- What are the implications of this growth for the stability of exchange rates?
- What are ‘algos’ and what benefits (if any) do they bring to the foreign exchange market?
- What are the benefits and costs of the growth of foreign exchange carried out on behalf of financial (as opposed to non-financial) businesses?
- Where in a balance of payments account would the bulk of foreign exchange transactions be recorded?
According to GDP figures released on 15 August, China overtook Japan in the second quarter of 2010 to become the world’s second largest economy. This raises two questions: just what do the GDP figures mean and why has this happened?
The GDP figures are total figures measured in US dollars at current exchange rates. According to these nominal figures, Japan’s GDP was $1.286 trillion in the second quarter of 2010; China’s was $1.335 trillion. This follows several years when Chinese growth rates have massively exceeded Japanese ones.
As far as explanations are concerned, economists look to a number of different factors, including investment policies, relative exchange rates, confidence, deflation in Japan and the scope for catching up in China.
The following podcasts and webcasts look at these questions, as do the articles.
Podcasts and webcasts
China eyes Japan’s slowing GDP growth BBC News, Roland Buerk (16/8/10)
Japan’s economic strategy ‘not happening’ BBC Today Programme Interview with Dr Seijiro Takeshita of Mizuho International banks (16/8/10)
China’s growth rate slows to 10.3% as lending tightens BBC News, Chris Hogg (15/7/10)
China exports jump in May BBC News, Chris Hogg (10/6/10)
China Overtakes Japan in 2Q As No. 2 Economy Associated Press on YouTube (16/8/10)
China’s economy takes over Japan’s AsianCorrespondent on YouTube (16/8/10)
Articles
China overtakes Japan to become world’s second-biggest economy Telegraph, Roland Gribben (17/8/10)
Chinese economy eclipses Japan’s Financial Times, Lindsay Whipp and Jamil Anderlini (16/8/10)
Decoding China’s modesty Financial Times blogs, Jamil Anderlini (17/8/10)
China ‘overtakes Japan in economic prowess’ asiaone news (17/8/10)
China overtakes Japan to become second largest economy in world Irish Times, Clifford Coonan (17/8/10)
China Passes Japan As Second-Largest Economy Huffington Post, Joe McDonald (16/8/10)
Data
World Economic Outlook July 2010 Update IMF (7/7/10)
China Economic Statistics and Indicators EconomyWatch
Japan Economic Statistics and Indicators EconomyWatch
Questions
- Why may simple GDP figures be a poor indicator of the relative size of the Chinese and Japanese economies?
- If purchasing-power parity figures were used, how would this affect the relative sizes of the two economies? Explain why purchasing-power parity exchange rates are so different from nominal exchange rates in the two countries.
- What impact have the relative exchange rates of the two countries had on economic growth?
- Why are simple GDP figures a poor indicator of living standards?
- What factors will determine whether income inequality is likely to widen or narrow in China over the coming years?
- What factors explain Japan’s low rate of economic growth since the early 1990s? How likely is it that these factors will apply in China in the future?
The link below is to a podcast by Martin Wolf of the Financial Times. It considers a new book, Fault Lines by Raghu Rajan of the University of Chicago Booth School of Business. Rajan argues that the global economy is severely unbalanced:
There is a fair amount of consensus that the world economy is in need of rebalancing. Countries like Iceland, Greece, Spain, and the United States overspent prior to the crisis, financing the spending with government or private borrowing, while countries like Germany, Japan, and China supplied those countries goods even while financing their spending habits. Simply put, the consensus now requires U.S. households to save more and Chinese households to spend more in order to achieve the necessary rebalancing.
Martin Wolf identifies these imbalances and discusses various possible solutions. The problem is that what may seem sensible economically is not always feasible politically.
Podcast
Three years and new fault lines threaten Financial Times podcasts, Martin Wolf (13/8/10)
Article
Three years and new fault lines threaten (transcript of podcast) Financial Times podcasts, Martin Wolf (13/8/10)
Questions
- What are the fault lines that Martin Wolf identifies?
- Have they become more acute since the credit crunch and subsequent recession?
- What risks do these fault lines pose to the future health of the global economy?
- How do political relationships make integrating the world economy more difficult? What insights does game theory provide for understanding the tensions in these relationships?
- Is a policy of export-led growth a wise one for the UK to pursue?
- Explain why global demand may be structurally deficient.
Russia and Kazakhstan have been discussing the formation of a trade agreement for some time and an agreement is now in place. From July 1 2010 a customs union between these two countries will be launched. Belarus has also been in talks with the Russian government, but as yet, it will not become a member, due to disputes with Russia. Belarus was hoping that the customs union would free it from export duties on oil, but this has not been the case. The gas dispute between Russia and Belarus has continued, although a meeting is taking place to try to resolve the issue.
President Alexander Lukashenko has said that Belarus will sign the Customs Unions documents if Russia cancels petroleum products duties now and oil duties from January 2011. He said:
“As a goodwill step, we propose removing customs barriers and customs duties on petroleum products now, and we will wait until the beginning of next year regarding oil duties; but the duties must be removed from January 1.”
Although the customs union between Russia, Kazakhstan and Belarus formally began on January 1 2010, it will not work fully until these disputes have been resolved. The following articles consider this agreement and the likely impact on the countries’ negotiations to join the WTO.
Russia, Kazakhstan agree customs union minus Belarus Reuters (28/5/10)
Russia hopeful of settling Belarus gas dispute Reuters (19/6/10)
Belarus to sign customs union documents, if Russia cancel oil duties RIA Novosti, (18/6/10)
Creation of customs union should not hinder Russia’s entering WTO RIA Novosti (17/6/10)
Kazakhstan ‘moving to re-instate Soviet Union’ with customs unions with Russia Telegraph, Richard Orange (11/6/10)
Russia, Kazakhstan launch customs union without Belarus AFP (28/5/10)
Questions
- What is a customs union? How does it differ from a common market and a monetary union, as we have in Europe?
- Russia wants to maintain its tariff on gas and oil supplies. Illustrate the effects of the imposition of a tariff. Does society gain?
- What are the arguments for and against retaining protectionist measures on trade with other nations?
- Assess the likely effects of the customs union on (a) the individual members and (b) other nations. Who do you think will benefit and lose the most?
- What will be the impact of the customs union and its disputes on the accession of these countries to the WTO.
- Is it a good idea for Russia, Kazakhstan and Belarus to join the WTO? What conditions have to be met?
‘Austerity’ seems to be the buzzword, as more and more countries across Europe make steps towards reducing substantial budget deficits. The UK has implemented £6.2 billion of cuts, with cuts of £50 billion expected by 2015 to tackle a budget deficit of over 10% of GDP. Portugal’s deficit stands at 8% of GDP and this will be tackled with rises in income, corporate and VAT tax, together with spending cuts aimed at halving the budget deficit by next year. Ireland’s austerity package includes public-sector pay cuts of up to 20%, plus reductions in child benefit, tax rises, and several key services facing cuts in employment, including emergency service and teachers. And, of course, we can’t forget Greece, with a budget deficit 12.2% of GDP, a national debt of 124.9% of GDP, and a forecast to remain in recession this year and the next. The Greek economy faces hard times with a huge austerity drive, including 12% civil service pay cuts, a large privatisation programme, and substantial pension cuts.
Greece is already in receipt of a €110bn rescue package. The Hungarian economy has already received €20bn aid from the EU, IMF and World Bank and spending cuts have been implemented, as markets began to fear that Hungary would become the next Greece. Germany is the most recent country to announce austerity measures, including plans to cut €10 billion annually until 2016.
But, what does this all mean? For years, many countries have spent beyond their means and only with the global recession did this growing problem really rear its ugly head. The only way to eliminate the budget deficit and restore confidence in the economy and ensure future prosperity is to raise taxes and/or to implement spending cuts. As the German Finance Minister said: “The main concern of citizens is that the national deficit could take on immeasurable proportions”. Unfortunately, this has already happened in some counties.
Although austerity measures are undoubtedly needed over the medium term in order to get deficits down, the impact of them is already being felt across the EU. Strikes have already occurred in massive proportions across Greece in response to the austerity package and tens of thousand of workers in Spain and Denmark also took to the streets in protest. There was anger from industry, trade unions and the media in response to €86 billion of cuts ordered in Germany between 2011 and 2014. The UK has already seen a number of strikes and more could be to come with further spending cuts in the pipeline. The Public and Commercial Services Union is threatening to re-launch strikes which began in March involving 200 000 civil servants (the action was suspended for the election.) A spokesman said: “If the cuts are anything like what is being suggested, industrial action by the unions is not only likely, it’s inevitable.”
EU governments have announced public spending cuts of €200 billion, together with a €500 billion safety blanket for the euro. Although these cuts are unlikely to have any positive effects for the everyday person for perhaps many years to come, in order to restore confidence and ensure a future economy that is both prosperous and stable, these austerity measures are deemed by many as essential. As Guy Verhofstadt (the former Belgian Prime Minister) said: “We’re entering a long period of economic stagnation. That will be the main problem for years. Europe is the new Japan.”
But will reduced aggregate demand resulting from the cuts lead to a double-dip recession and a (temporarily) worsening deficit from automatic fiscal stabilisers? We wait with baited breath.
EU austerity drive country-by-country BBC News (7/6/10)
Europe embraces the cult of austerity but at what cost? The Observer, Toby Helm, Ian Traynor and Paul Harris (13/6/10)
Germany joins EU austerity drive with €10bn cuts Guardian, Helena Smith (6/6/10)
G20 to endorse EU crisis strategy Reuters (28/5/10)
The Global recovery? It’s each state for itself Guardian, Jonathan Fenby (9/6/10)
Austerity angers grow in Europe AFP (9/6/10)
Austerity Europe: who faces the cuts? Guardian, Ian Traynor and Katie Allen (12/6/10)
Is this the end of the European welfare state? New Statesman (10/6/10)
Questions
- Are spending cuts or tax rises the best method to reduce a budget deficit? Explain your answer.
- What are the economic costs of the austerity packages across Europe?
- Who is likely to gain from the debt crisis in Europe?
- If austerity packages had not been initiated to the extent that they have, how do you think the rest of the world have reacted?
- Using the BBC News article and the Guardian article ‘Austerity measures: who faces the cuts?’, which country do you think is (a) in the best state and (b) in the worst state?
- How will you be affected by the austerity measures?