Chief Economist’s Corner: Sure don’t look none too prosperous

As a child I watched John Steinbeck’s social realist masterpiece “The Grapes of Wrath” on TV. In this film Henry Fonda stars as Tom Joad, a farm worker who because of the severe drought in the US during the Great Depression of the 1930s is forced to uproot his family and move from the Midwest to seek fortune in California.

It is a very disturbing film and at the time it made a huge impression on me. Maybe this is why images of a desperate Henry Fonda flash before my inner eye when I think about the severe drought that has hit the US and is sending prices of corn and other crops skyhigh.

Fortunately, the social consequences are not quite as serious today as back then as the US Administration has already stepped in, offering massive financial support to the drought-affected farmers. Nevertheless, it is worth keeping an eye on developments. The rising food prices will erode households’ purchasing power around the world at a time when the global economy is in crisis and it is difficult to foster renewed growth. Consequently, the drought in the US may contribute to delaying the global economic upswing. Especially in poor countries there is a risk that the rising food commodity prices could cause huge problems. In these countries food still takes up a large proportion of household spending – as was the case in the US and Denmark in the 1930s. 

Taxes hit as hard as the drought

Food prices in Denmark have also tended to rise – again.  The reason is twofold: the US drought and rising indirect taxes. In July consumer prices rose by a hefty 2.3% y/y, but adjusted for all tax changes over the past year, the increase was actually only 1.6%. This is quite a difference, and for some wage earners the higher taxes are the main reason why their real wages and purchasing power are currently shrinking. Moreover, the indirect taxes hamper Danish competitiveness, limiting the effect of the government’s kickstart of the domestic economy. 

Hot potato and the Tom Joads of today

Not surprisingly, against this backdrop the (quite extensive) indirect tax system in Denmark now and then becomes a political hot potato  – also because some taxes do not have the desired effect. One example is the surcharge on foods that are high in saturated fat. This fat tax took effect on 1 October last year and was introduced to make us all eat more healthy food – and boost the government’s coffers. However, surveys show that we eat just as much saturated fat as before. But after the introduction of the fat tax we buy food products of a poorer quality or – just as a Tom Joad of today – we rush to the land of plenty south of the border (Germany) to fill our trailers with beer and soft drinks and other taxed goods at the flourishing border shops. 

Consequently, the effect of the fat tax is limited – both in terms of reducing waist sizes and boosting the government’s coffers. This is something that the MPs should keep in mind during the upcoming budget talks where new indirect taxes no doubt will pop up on the agenda.

Latest research

IDR: IDR: Jokowi win paves way for strengthening

The official election result is out and Indonesia has got a new president, the popular Jokowi. This is already priced in the market so IDR will be range-bound for now. It would be IDR positive in a longer perspective, if he succeeds in promoting growth and improving standards of living.

Euro area: PMIs offer hope amidst gloomy headlines

The flash PMIs for July point to a continued recovery in the Euro-area economy. Positive development in sentiment indicators is certainly welcome at a time, when the effect of e.g. the Ukrainian/Russian crisis is weighing on the economy. It is worth remembering that the numbers are unlikely to capture the recent escalation in geopolitical tensions, but the latest weakening of the euro and the ECB’s June easing package, on the other hand, are supportive of the Euro-area economy.

Sweden: Same old story in unemployment

Unemployment bounced back somewhat in June after the stronger than expected reading in May. Seen over the last two years, it is very hard to spot any clear trend downward in unemployment, despite the clear trend upward in employment. Today’s number did not change this overall picture and the expected, future decrease in unemployment seems to continue to be very gradual.

Swedish Morning Briefing - Thursday July 24

South Korea presents stimulus package Reserve Bank of New Zealand lifts policy rate

China: Good PMI no guarantee for growth outperformance

The Chinese economy is currently in a cyclical upturn. But the long-term perspective has not changed. The economy will continue to readjust to the new normal, meaning that a significant pick-up of growth is unlikely.

FI Eye-Opener: Reaching for the stars

German bonds take back earlier losses – yields to creep higher today. S&P 500 just manages to rise to new highs. China’s economy picks up steam. Bank of England not unanimous for too much longer? Russian sanctions on the agenda again. Euro-zone PMIs set to rebound.

Euro Rates Update

The latest Euro Rates Update is now available

BoE minutes: First hike getting closer, but not around the corner yet

BoE minutes showed a unanimous monetary policy decision at the July meeting, but the differing views about the outlook are starting to emerge. The modest wage pressures mean that the Bank is not in any hurry to start to raise rates, and the first rate hike is not around the corner. The August monetary policy meeting and the inflation report will be interesting.

Swedish Morning Briefing - Wednesday 23 July

EU to limit Russian access to capital markets Minutes of BoE meeting due at 10.30

FI Eye-Opener: Some easing in Euro-zone deflation threat

German yields rebound – US Treasuries end with a small rally. Core bond to remain supported today. Equities with clear gains. EU continues to advance with small steps with Russian sanctions. US inflation pressures remain limited for now. At least some easing in the Euro-zone deflation threat. New 30-year benchmark from the EFSF. BoE minutes and French business confidence ahead.

US: Core consumer prices rise less than expected

The overall trend of inflation remained subdued in June

Morning Briefing - Tuesday July 22

Japanese government cuts GDP forecast Pro-Russian separatists hand over black boxes to Malaysia

FI Eye-Opener: Searching for inflation

Core bond yields edge further down – geopolitical tensions continue to support bonds. Equity markets feeling pressure. More sanctions on Russia in the pipeline. US inflation pressures finally picking up? Belgium to sell longer bonds.

Morning Briefing - Monday July 21

Growing pressure for further sanctions against Russia Israel steps up ground offensive in Gaza

While you were busy...

If you are just back from holiday, here are a few bullets on what happened while you were busy…

FI Eye-Opener: Markets too upbeat on Europe?

Bond yields end a bit higher, but near-term upside still limited. US equities with a clear rebound – resistance in sight. Money market rates rise on higher LTRO repayments. More warnings on markets being too optimistic. US inflation numbers and Euro-zone PMIs ahead. Supply action easing – more coupon and redemption payments ahead.

FX: the EUR trap

Is Europe next Japan? Hopefully not. ECB and releveraging implications for EUR.

Week Ahead: 19 - 25 July 2014

US CPI inflation will be out on Tuesday . China and the Euro-zone will present PMI figures. On Friday the German Ifo indexes is released. The BoE will deliver minutes from the July meeting and UK GDP figures will be out on Friday

Swedish Morning Briefing - Friday 18 July

Passenger plane downed over eastern Ukraine Israel launches ground offensive in Gaza

FI Eye-Opener: Increasing tensions to push German yields to new lows

Bonds continue to rally – yields in several semi-core countries hit record lows. Equities suffer a beating. Chinese home prices continue to fall. Geopolitical concerns take centre stage ahead of the weekend. German 10-year yield about to fall to new lows. Mixed US data – Bullard sees early rate hikes. No ABS purchases from the ECB for a long while. US consumer confidence and euro debate ahead.