Economy
Savings Rate, Household Debt: U.S. vs. Canada
Canada avoided much of the impact of the global financial crisis especially with regards to its financial system. Canadian banks and regulators alike won praise from investors worldwide for following prudent,conservative policies with respect to risk management. While for many quarters the big five Canadian banks met or exceeded expectations, recently however Bank of Montreal and Royal Bank reported disappointing earnings for the second quarter.
Savings Rate:
In the past, Americans used to save less than Canadians. But the phenomenon is changing. Nowadays due to de-leveraging the personal savings rate in the U.S. is higher than Canada as shown in the chart below:
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Source: The Boeckh Investment
From the latest edition of The Boeckh Investment report:
“While Canada has deservedly had a good ride in recent years particularly through the global recession, due to strong Federal Government finances and a strong balance sheet, all is not quite as rosy as meets the eye. Chart 16 shows that, while the U.S. savings rate has gone from 2% to 6.5% since 2007, the Canadian savings rate, after a brief rally, has collapsed to about 2 1/2%. Canadian households have continued to add to their debt, oblivious to the changed world environment. House prices rose to new highs during the recovery, while U.S. house prices are down over 30% from their peak. Moreover, while federal debt levels and trends are good by world standards, provincial debts are disastrous. There is even some talk of Ontario going the way of California. Its per capita public debt is ten times that of California whose bonds are rated slightly less risky than Croatia’s.”
Household Debt:
Canadian household debt continued to increase in 2008 and 2009 while in the U.S. it decreased as shown in the table below:
Source: Where is the Money Now: The State of Canadian Household Debt as Conditions for Economic Recovery Emerge, The Certified General Accountants Association (CGA) of Canada
From the CGA study:
“A cross-country comparison of household debt in Canada and in the US may be a useful exercise for a number of reasons. Both countries have relatively high levels of per capita income and living standards, are located in geographical proximity to one another, and share close historical and commercial ties. Both countries have experienced similar rates of inflation in the past decade and exhibit great resemblance in demographic characteristics when it comes to aging population, levels of labour force participation, and high reliance on immigration.
Similar to the situation in Canada, US households have been rapidly increasing their indebtedness in the past two decades with total household debt outgrowing consumer spending and disposable income. However, during the most recent recessionary period, some noticeable differences emerged in the debt dynamic of Canada and the US. Specifically, in Canada, mortgages and particularly consumer credit continued to expand in 2008 and 2009 at annual rates very similar to those seen prior to the economic downturn. In contrast, the US saw brisk contraction in both components of household debt (Table 2). In turn, a dramatic drop in interest rates that occurred in both Canada and the US at the end of 2008 did not much alter the household debt-service burden in either country, leaving it at approximately the same level in 2009 as it stood in 2006.”
It must be noted however that difference in the debt-service ratios between U.S. and Canada is large because of the methodology used to calculate the figures. In the U.S. mortgage interest paid is tax deductible but it is not allowed in Canada. This creates an incentive for borrowing in the U.S.
Overall while on the surface Canada appears to be much stronger than the U.S., in reality it is not based on some factors. Unlike the U.S., Canada is still a commodity-based economy and is heavily dependent on trade with the US. Should the housing market in Canada collapse and the US economy enter another recession, the Canadian economic strength will be tested significantly.
Germany’s Top Trading Partners and Export Goods
The German economy grew sharply by 2.2% in the second quarter of this year according to data released on Friday. This figure is the highest recorded since the reunification of East and West Germany.
From an article in The Economist blog:
“The success of the euro-area’s largest economy owed a lot to a surge in exports (much of it to emerging markets) and to investment by firms at home looking to upgrade and expand their capital stock to meet that demand. Germany’s talent for bespoke engineering and sleek cars fits well with the needs of fast-industrialising countries and their new middle classes. China is a prized customer for the German firms that supply kit for power plants and other infrastructure projects. Small producers of niche capital goods have also seen a surge in orders. German cars have been selling well to affluent consumers in emerging markets. Sales of luxury Mercedes cars to China tripled in the year to July. Sales to India more than doubled. Other carmakers, such as VW and BMW, have prospered too.”
Germany’s Top Trading Partners in 2009
Germany’s Top Export Goods in 2009
Source: Federal Statistical Office
European countries are the top exports for German goods as shown in the chart above. However exports to China and other emerging countries are growing at a faster pace. Machinery, automobiles & parts and Chemicals are the top three export sectors accounting for about 40% of total exports in 2009.
In terms of investment opportunities, just five German companies currently trade on the organized US exchanges with many others on the OTC markets. The US exchange-listed German stocks are Aixtron (AIXG), Deutsche Bank(DB), Fresenius Medical Care(FMS), SAP (SAP) and Siemens(SI). Many large German firms do not trade on the US markets. For example, Germany’s largest steel maker Thyssenkrupp is not listed in the US markets. However the iShares MSCI Germany ETF (EWG) offer exposure to 51 stocks including Thyssenkrup.Financials account for 20% of the portfolio. The total net assets of the fund is $1.5B and the expense ratio is 0.55%.
A Review of Unemployment Rates in the U.S. and Germany
The U.S. employment stood at 9.5% as of June this year, according to BLS. After reaching a peak of 10.1% in October last year, the rate has steadily declined but continues to stay above 9%. Since 2005, the lowest unemployment rate recorded was 4.4% in 2006 and in early 2007. Currently 14.6 million Americans are unemployed as per official figures.
In a NY Times Op-Ed piece on August 2nd, the Treasury Secretary Timothy Geithner mentioned: “Private job growth has returned — not as fast as we would like, but at an earlier stage of this recovery than in the last two recoveries. Manufacturing has generated 136,000 new jobs in the past six months.”
From a Bloomberg article the next day:
“Treasury Secretary Timothy F. Geithner said U.S. unemployment may rise again before it falls and the economy isn’t recovering rapidly enough.
“It’s possible you’re going to have a couple months where it goes up,” he said on ABC’s “Good Morning America” program. “People start to come back into the labor force, and that can cause the measured unemployment rate to go up temporarily.”
The U.S. economy grew at a slower-than-expected 2.4 percent pace in the second quarter as consumer spending slowed, according to Commerce Department data. Companies probably added about 90,000 jobs in July, according to the median estimate in a Bloomberg News survey before the Labor Department’s Aug. 6 employment report. The jobless rate is forecast to rise to 9.6 percent from 9.5 percent.”
Compared to the unemployed rate of 9.5% in the U.S., the unemployment rate in Germany stood at just 7.6% in July. From a high of over 12% in 2005, the German unemployment rate steadily declined till 2008 and then increased during the global financial crisis but still stayed under 9%. A New York Times article titled “In Germany, a Broad Recovery Is Under Way” credits Germany’s rising demand for labor to the unique government incentive program called the short work program. From the article:
“Surging earnings, also reported in recent weeks by companies like the chemical maker BASF and Deutsche Bank, partly explain why German hiring is bouncing back. But the jobs recovery also has roots in the changes that Germany has made to its labor market, and to the lessons that German companies learned from past crises.
For example, Trumpf, a machine-tool maker in the south German city of Ditzingen, managed to get through the recession without laying off any of its 4,000 German workers. In the United States, Trumpf laid off 90 of the 650 workers.
Why the difference? Part of the answer is that, in Germany, Trumpf could take advantage of government incentives to reduce worker hours rather than lay off people, a system known as short work. In the program, the government gives workers partial compensation for the lost wages.
“We wanted to keep our well-trained people on board,” the Trumpf chief executive, Nicola Leibinger-Kammüller, wrote in an e-mail. “Short work helped a lot.”
Many larger German companies also resorted to short work. Siemens, which at one point had 19,000 German employees on reduced hours, said last week that all were back working full time again. Siemens has 128,000 employees.
It may even turn out that short work improved German competitiveness by encouraging workers to use the free time to improve their skills.
Gabrieli Kiesel, quality expert at a Siemens plant in Erlangen, Germany, that makes factory automation equipment, used the extra day off each week to qualify as a meister, or master, in his specialty. He said he could live with the reduced pay, which amounted to 85 percent of his previous wages for a four-day week.
“All in all, short work was a very good solution for me,” Mr. Kiesel, 33, said. “Without it I would have been more fearful about losing my job.” ”
The chart below shows the comparison of monthly unemployment rates between U.S. and Germany since January 2005 thru June 2010:
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Source: http://www.destatis.de, BLS
In addition to the unique short-work program, other factors such as strict immigration policies have resulted in keeping the majority of workers employed in Germany. For example, in the last few years lesser than 700 qualified foreigners have made Germany their home. From an article in Der Speigel:
“As with similar debates in the past, however, the call for an increase in the number of qualified immigrants coming to Germany has been met with resistance. On Tuesday, a spokesman for Chancellor Angela Merkel said the chancellor does not currently see a need for a change in the laws currently governing immigration to Germany.
Furthermore, Frank-Jürgen Weise, who heads up the country’s unemployment office, the Federal Employment Agency, said that, instead of bringing in more foreigners, one should focus on domestic workers. “The existing potential in the country should be used first,” he told the Financial Times Deutschland. “We cannot allow a situation wherein people are jobless just because their talents are not being used properly.”
The current back-and-forth is just the most recent manifestation of a debate that has periodically flared up in Germany over the last decade. In 2000, the center-left government of Chancellor Gerhard Schröder introduced a “green card” system in an effort to streamline the immigration of IT specialists. Despite the need for computer experts, however, opposition to the plan was intense, with Jürgen Rüttgers, then campaigning to become the governor of North Rhine-Westphalia, coining the phrase “Kinder statt Inder” — “children instead of Indians” — to indicate his preference for training Germans rather than opening up the borders to foreigners.” (emphasis added)
In contrast to Germany, despite the millions of Americans currently unemployed, the U.S. allowed the entry of 85,000 foreigners under the controversial H1-B visa program for skilled workers in 2009. This included 65,000 visas, the maximum allowed under the general category and 20,000 under the “advanced degree” exemption category. As early as December last year the U.S. Citizenship and Immigration Services received enough petitions to fill the same quota for the fiscal year 2010. The agency has also received some 26,000 petitions till last month towards the fiscal year 2011 general quota. In the “unskilled” category occupations, American workers have to compete not only with other Americans but also with the millions of illegals in this country. Commenting on the broken immigration system, President Obama states on his website:
“In the end, our broken immigration system affects more than a single community; it affects our entire country. And as we continue to strengthen our economy and jump-start job creation, we need to do so with an immigration system that works, not the broken system we have now.”
It is about time that this administration take a hard look at our immigration policies and implements comprehensive reforms to put American back on the right track.
Related articles:
Outsourcing to India Draws Western Lawyers
The German Unemployment Story is Better than the NYT Suggests
U.S. To Train 3,000 Offshore IT Workers
Service Sector Can Help Asia Achieve Higher Growth
Unlike Western economies, most of the Asian economies are overly dependent on manufacturing for growth. As the demand for cheap products declines in the West, Asian countries can reduce their dependency on exports and instead grow their service sectors to boost growth according to an article by Olaf Unteroberdoerster in the latest edition of IMF’s Finance and Development(F&D) magazine.
Chart:
Industry’s contribution to China’s GDP is about 50%. This is much higher than the average for OECD countries and about 10% higher than the figure for low and middle-income countries. As the chart above shows, other countries such as Malaysia, Indonesia, Japan, Korea, etc. are also heavily reliant on industry. Similar to China, the industrial sector contribution to the GDP of these economies are also high by 5 to 10 percentage points of peer countries.
From the article:
“Given Asia’s dependence on exports, it is no surprise that services’ share in GDP is generally low by international standards. For example, in 2008 China’s service sector GDP share was nearly 13 percentage points below the low- and middle-income
country average. The same holds true even for Singapore, which as a financial center is a service-based economy. Employment patterns—the distribution of the labor force across agriculture, industry, and the service sector—confirm Asian economies’ overexposure to industry and underexposure to services.
The dominance of industry has been an important factor in Asian economies’ strong growth performance and rapid rise in living standards. Rapid industrialization allowed hundreds of millions of workers to move out of low-paying jobs, particularly in agriculture, where Asian productivity levels have remained very low (see Chart 2). But future growth will depend on the service sector. As Asian economies, starting with Japan and Korea, move into a postindustrial world, the service sector must create jobs and catch up with productivity levels in advanced economies. Until now, productivity growth in Asia’s service sector has stagnated compared with that of the United States in recent years.”
The author notes that the service sector is a major component of India’s economy and has been leading India’s GDP growth for the past two decades. India’s service sector productivity is much higher than other countries due to the following reasons:
- Advances in communications technology, which gave India’s ample supply of trained, English-speaking workers access to growing domestic and global markets
- Successful deregulation of services
- Privatization
- Foreign direct investment
- Financial sector reforms
Converting an economy from manufacturing-based to service sector-led will be a tough challenge to Asian countries. Malaysia tried to grow its service sector especially in the IT field but was unsuccessful. Malaysia then focused on manufacturing on the mass production electronic goods and components, the traditional industries of palm oil and rubber plantations. However it was an easy process to accomplish in the West especially in the U.S. when factories were moved overseas to low-cost locations and American workers ended up taking employment in the service sector.
Public debt in 2020: Emerging Vs. Developed Markets
In a study titled “Public debt in 2020″, Deutsche Bank analyzed public debt sustainability in both developed and emerging markets using data for 21 emerging markets(EMs) and 17 developed markets(DMs). The results show that the public-debt-to-GDP ratio is projected to soar from just over 100% this year to 133% in developed markets.
Charts:
The authors of this report conclude:
“Although there is a strong need for medium-term fiscal consolidation in many DMs and a few EMs, one should not forget that expansionary policies mitigated the adverse effects of the global crisis and very likely prevented a collapse of the global financial system and the world economy. At the moment, it appears that a fiscal exit can take place only gradually. Our 2020 scenarios as well as our debt target analysis highlight that public debt has become, or is at least at the risk of becoming, unsustainable in many DMs but only in a few EMs. At least in theory, most EMs could afford to run looser fiscal policies, for instance by extending counter-cyclical fiscal policies in order to smooth the fall-out from the global crisis. Moreover, moderate initial debt levels put them in a relatively
comfortable position to stabilise or even outgrow their debt-to-GDP ratios.”
China vs. India: Economy and Government Finances
China and India are two of the largest fast-growing emerging countries with populations of over one billion each. After Independence from Britain in 1947, India became the world’s largest democracy with a closed economy primarily based on agriculture. In 1949, Communist leader Mao Zedong took control of whole of mainland China and established a communist state. Following the USSR, both countries implemented five-year plans to varying degrees of success. Due to lack of foreign investment, capital controls, centralized planning, socialist policies and other factors the economies never reached their full growth potential.
However under the leadership of Deng Xiaoping China opened up its economy in the early 1990s focusing on foreign trade. Similarly India also liberalized its economy in 1991 and removed many barriers for foreign investment. Since then the economies of China and India have achieved tremendous growth almost each year becoming two of the hottest emerging markets in the world. Some have predicted that these countries would become the future superpowers replacing the U.S., the lone superpower now. While it is too early to speculate on the possibility of China and India becoming superpowers militarily it is likely that their economies would be much larger and become a powerful force in in the global economy. In this post lets a took a quick look at where they are today in terms of government finance and the composition of the economy.
Comparison of Government Finances
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China’s public debt as a percentage of GDP is 18%. India’s public debt to GDP is much higher at 75%.
At $2.4 Trillions, China holds the largest foreign currency reserves in the world. India on the other hand holds $263 billions which is just 11% of China’s reserves.
External debt of China is slightly higher than India’s. However as noted above China has a huge foreign reserve and the economy is much larger than the India economy.
Share of GDP by Sector
Sources: CIA World Factbook and other sites
The manufacturing sector accounts for about 47% of the economy in China. This is not surprising since China is now considered as the factory floor of the world. Industries account for 28% of the Indian economy. India’s services sector is higher than China’s with the sector accounting for over half of the economy. For example, India excels in service industries such as IT, call centers, Business Process Outsourcing(BPO), etc. Agriculture is still one of the major sectors in India providing jobs for millions. Despite the growth of IT and other industries in recent years, agriculture is still the life blood for majority of the population in India especially in rural areas. China has reduced it dependence on agriculture as a major industry due to the explosive growth in the manufacturing sector. As a result of this shift millions of Chinese have been pulled out of poverty.
