No era tan difícil; “Nadie predijo el crecimiento de la economía española”

Félix López – 17 de febrero, 2016

Leemos en Cinco Días: Nadie predijo el crecimiento de la economía española 

La economía española creció un 3,2% en 2015, un avance que ningún instituto económico fue capaz de predecir. BBVA, que estimó un 2,3%, fue la institución que más se acercó.

Recoge los datos de un estudio de ESADE que pueden consultar aquí. Agradecer a la compañera escuela de negocios el esfuerzo que realizan en recoger y ordenar toda esta información. El siguiente gráfico recoge las diversas estimaciones de los diferentes organismos y servicios de estudios de organizaciones económicas analizados por ESADE. La verdad es que están todos muy lejos de lo que realmente ha ocurrido; todos estimando crecimientos alrededor del 2% cuando la realidad ha sido muy superior, 3,2%.The Economist, OCDE, FMI, los peores)

Previsiones PIB 2015

Aquí, en Spanish Paradox, estamos realmente sorprendidos; no creemos que hubiera sido tan difícil estimar el crecimiento de la economía española, al menos no con el grado de inexactitud observado. No le encontramos explicación. Alguien -una gran mayoría- debería haberse aproximado. Y si creemos que no debería haber sido muy difícil el acertar es porque aquí, en Spanish Paradox, acertamos de pleno; al 100%.

En nuestro post de 7 de abril, 2015 realizábamos nuestras estimaciones del futuro crecimiento del PIB español. Aportábamos el siguiente gráfico, junto con las explicaciones adecuadas.

indicator 31st March 2015

El gráfico, como explicamos en el post, no es un gráfico del crecimiento medio de la economía, sino un gráfico de la previsión del nivel del PIB a un año. Por qué preferimos este gráfico, o esta manera de medir crecimientos del PIB, a la más tradicional de las tasas de crecimiento medio ya lo explicábamos también. De todas formas es fácil comprobar haciendo algunos números que nuestro procedimiento -traducido a tasas medias anuales- da crecimientos para el 2015 alrededor del 3,2% (es lo que da en nuestra hoja de cálculo donde controlamos estos parámetros).

En el estudio del ESADE se hacen estas precisiones adicionales.

En general, el grado de acierto este año ha sido mayor que el pasado, cuando la media de los pronósticos apenas se situaba en la mitad del crecimiento final del PIB en 2014 (un 0,7 % en el pronóstico frente al 1,4 % real), aunque la desviación media de las previsiones ha seguido siendo elevada (1,2 puntos).

¡Pues menos mal que se mejoró! Aquí no tenemos pruebas escritas (no están publicadas), pero posiblemente nos creerán. También acertamos en nuestras estimaciones para 2014 (la flechita negra del anterior gráfico da una buena pista)… bueno fallamos un poco (estimamos algo ligeramente más alto, un 1,5% de tasa media anual). Y más nos vale el haber acertado en 2014; si no, en 2015, hubiéramos fallado. Todo esto está bastante interconectado.

En fin, no es que nuestra profesión sea la de adivinos del futuro: todo esto lo hacemos más bien a modo de divertimento; pero visto lo visto, si alguien está interesado en saber con mucha, mucha aproximación, que es lo que va hacer la economía española en un futuro (no muy lejano), casi mejor nos pregunta a nosotros, o lee en este blog lo que comentemos en el futuro. Y así se ahorra mucha labor de desbroce de entre lo que mucha gente escribe.

Una cosa más. Las anteriores previsiones hay que actualizarlas ya para 2016. Por cuestiones de los ritmos de la economía española (un poco como muchas empresas, que prefieren tener un año fiscal que no coincide con el año natural) y sus implicaciones sobre el mercado de trabajo y otras variables de interés que estimamos (beneficios empresariales, comercio exterior, inversiones) preferimos hacer las estimaciones de 1 de abril a 31 de marzo del siguiente año (aunque es muy fácil ajustarlas a cualquier horizonte temporal que necesitemos según el problema que tengamos que abordar) Reconocerán que realizar una previsión ahora, y hasta que no se clarifique la situación política, es realmente complicado. Pero bueno, es lo que hay; así que dentro de unos días tendremos que mojarnos.


On the Chinese rebalancing timetable: a reply to professor Pettis

Javier López Bernardo & Félix López Martínez – 31st of December, 2015

Professor Michael Pettis has recently published another brilliant post on the Chinese rebalancing issue. We regularly follow Pettis’ views on the Chinese economy, which we consider valuable if one wants to understand the macro management dilemmas China will have to face. In his post, Pettis does not address how the rebalancing process should be ideally done (something which he has explained on several ocassions), but rather how much time China has in order to accomplish it successfully. Pettis says that:

Credit growth in China is too high as are current debt levels, and the sooner Beijing gets credit growth under control, the better. This latter statement in itself is not controversial of course, but my simple debt model shows just how urgent it is for Beijing to get credit growth under control. It clearly does not have ten years or even seven years. It might have five years, but only if the markets – Chinese investors, businesses, and savers, both wealthy and middle class – are convinced that it is moving in the right direction.

In other words, the current high levels of debt can derail the rebalancing process if it is not done quick enough. In order to understand the link between debt levels and GDP, Pettis proposes a simple model that captures their dynamics over the long run (up to 2023). In his baseline scenario, Pettis assumes (following the trend of the last few years) that nominal debt initially grows twice as fast as nominal GDP (notice the use of nominal values), but gradually converging in a linear way to the growth rate of GDP by the end of 2023 – at that moment the economy reaches a steady-state position, and GDP and debt grow at the same pace. Depending on the GDP growth rate assumed, Pettis’ model projects debt-to-GDP ratios from 251% (with a 3% growth in GDP) to 274% (with a 6% growth) by the end of the period, too high in comparison to other economies. He then proposes alternative scenarios, but the result is the same: unless Beijing advances more radical measures to curb debt growth and improve the efficiency of the financial system, the growth in debt will derail the rebalancing process.

And because China does not have too much time, Pettis concludes that:

In every one of its economic policymaking choices, Beijing must ultimately choose between higher debt, higher unemployment, or higher transfers of wealth from the state sector to the household sector. Every single policy results in some combination of the three. The time frame within which this must be resolved is set by debt capacity limits, and as my model shows, Beijing probably has no more than five years, perhaps much less, within which to resolve the rebalancing if it wants to avoid a disruptive rebalancing.

Although Pettis’ model captures vividly the long-run dynamics between debt and growth, we think that his model suffers from one major drawback: his model simply tracks the ratio of total debt to GDP. However, nothing is said about how this debt is spread across sectors. In particular, it is obvious that how much debt each sector holds should play a central role in any analysis of the rebalancing process, because if China has to rebalance it can only be, by definition, through huge economic transfers from the corporate sector to the household sector. But given the already high amount of debt in the balance-sheets of corporations, these transfers will create further strain in firms’ financial statements. Therefore, although the debt-to-GDP ratio may be important from a long-run perspective, we believe that it is the corporate debt-to-cash flow ratio the one that is crucial for the rebalancing process. In our story, corporations are the weakest link in the Chinese rebalancing.

On the other hand, although Beijing could engineer (political considerations aside) a process to transfer resources to the household sector as a way to speed up the rebalancing as Pettis argues, we believe that, in the end, if China has still any option for a smooth rebalancing (which we highly doubt), it will have to come about through high levels of inflation (probably higher than 4-5%), eroding thus the current pile of debt. In our model corporations have an easier life during the rebalancing with high nominal GDP growth rates, and because such rates will unlikely be unattainable with high real GDP growth rates, high inflation is the only way to square the circle.

In the rest of the post we will go through our simple model with corporate debt, discussing carefully at the same time the assumptions of the model.

The rebalancing timetable for corporate debt: a baseline scenario

Instead of assuming that debt will grow at a certain pace in relation to GDP as Pettis does, we rather start with assumptions about the behaviour of the main GDP components if any meaningful rebalancing has to be achieved at the end of the forecasting period (which in our case is, for convenience, 2025). In other words, we simply project the main GDP components using average growth rates that ensure that China reaches a value of around 70% for the share of consumption (private plus public) to GDP and a value of around 30% of investment (private plus public) to GDP. As we explained in a previous post, we regard these values as the minimum acceptable threshold for the completion of the rebalancing process. Although the evidence for developed and developing economies suggests lower investment-GDP shares than our target share for China, we prefer to be conservative in our exercise and to ask for a less demanding rebalancing target.

Because we want to focus on corporate debt and not on the debt of the economy as a whole, we need numbers for the debt in the corporate sector and not total social financing (TSF). For convenience, we start with a corporate debt level (as a share of GDP) of 180%, which includes both non-financial and financial corporations. This number has been taken from a McKinsey report. In any case, there is a huge uncertainty about the real value of such a ratio; for instance, data from the BIS shows that the ‘total credit to non-financial corporations’ reached 163.1% in the second quarter of 2015, which would imply higher levels for the corporate sector (with financials now) than those given by McKinsey. Again, we want to be conservative and that’s why we choose the lower end of the estimates.

In Exhibit 1 we present our baseline scenario for the rebalancing timetable (for interested readers, the model is available upon request in a friendly spreadsheet). For convenience, we have normalised the values setting GDP to be 100 in 2015. The shares of the various flow components for 2015 have been taken from the most recent Chinese statistics when possible, but most of them come from the 2012 version of the flow-of-funds accounts – alas, the most recent one. We have projected the Levy-Kalecki profit equation for the Chinese corporate sector to gauge the amount of cash Chinese corporations will have at their disposal during our hypothetical rebalancing process (see here for details on the LK equation). Because in our Levy-Kalecki profit equation we are using gross corporate investment (instead of net investment, as it should be if one is interested in net profits), we are effectively getting a cash measure, the relevant measure for debt repayment issues. In our model, we assume that corporations will only issue debt for covering the gap between outlays for investment projects and internal resources. We know, again, that this is a conservative assumption (a quick glance at the flow-of-funds tells us that corporations have employed their resources for other uses), but will be enough for our purposes – i.e. the debt numbers will be very high even with conservative assumptions. Beyond that, we have implicitly assumed that dividend payments will be matched by the issue of new shares (and that’s why the evolution of debt can be expressed as the difference between investment and internal resources). All in all, our baseline scenario is as follows:

baseline

We have assumed that nominal GDP grows at 5% for the rest of the decade (alternatively, we could have assumed some sort of linear trend, as Pettis does, but we have preferred to keep things simple). It should be stressed again that nominal GDP is used instead of real GDP, as debt -our subject of interest- is a nominal variable. We use the same rate for the growth of the main government expenditure components, because we want to project no change in the government financial position relative to GDP. On the other hand, the trade balance (net exports) simply fills the gap between the imposed GDP growth rate and the consumption and investment growth rates needed to rebalance the economy. Because we have assumed that private investment will not grow in nominal terms, it logically implies that private consumption will grow at 10% on average for the rest of the decade. Finally, we have assumed that wages grows at 7%, higher than GDP but lower than private consumption: this implies that households will be reducing their savings rate, which will be a boost for corporate profits.

We should remark that the use of a 5% nominal GDP growth rate (and the same applies for the rest of our assumptions) in our baseline scenario does not imply by any means that we believe this is the most likely rate at which China will grow over the next decade. It rather should be interpreted as a counterfactual exercise that tries to ask: what conditions have to be met if China has to grow at 5%? The question then allows us to assess whether these conditions are realistic or not.

The baseline scenario shows crystal clear that the rebalancing in the GDP expenditure components necessarily implies a shift in income distribution: Levy-Kalecki profits fall from 21.5% to 10.7% over the simulation. The reduction in the cash-flow generation (both in absolute and in relative terms), coupled with constant investment needs, increase firms’ debt burden. However, by the end of the simulation, if you look at the corporate debt-to-GDP ratio, you might conclude that firms’ financial situation is not so bad: they have been able to go through the rebalancing process with even a reduction in that ratio (from 180% to 176.8%). But that would be misleading: firms have to service their debt (and interest payments) with actual cash-flows, not with GDP. For that reason, we have created an additional ratio (debt to cash-flows) that captures that. The ratio is already very high for the ratios observed at the firm level in developed economies, 8.4x, but it soars to 16.5x by the end of the simulation. It is clear that Chinese corporations will not have to reach that point, because their dire financial situation will become unsustainable much earlier, but this is what the rebalancing process would logically imply in the end for the Chinese corporate sector.

Other scenarios

We can, of course, run the model as much as we want with different assumptions. We will precisely do that in order to consider the effects of different GDP growth rates on the delicate balance between the rebalancing process, its timing, and the evolution of corporate debt.

The first alternative scenario assumes that the nominal GDP growth rate will be around 3% on average over the next ten years. If one thinks that Chinese real GDP growth rates will not be higher than 2% and that in addition Beijing will have to live in a near zero-inflation environment, then the 3% assumption is not as crazy as it seems. Under these conditions, an (again) if the rebalancing has to take place, we have assumed private consumption growth rates of 7.5% and private investment growth rates of roughly -2%. In a low growth environment we find difficult to swallow the assumption of consumption growth rates higher than 7.5%, so private investment in this environment will have to grow at negative rates if it has to be less than 30% of GDP by 2025.

Scenario 1

The main takeaway from this scenario is that the corporate sector will find much more difficult to handle high levels of debt. Even with our conservative assumptions on how the debt is generated, corporations would add another 25% debt points, whereas the Levy-Kalecki multiple would reach levels close to 20x (by the way, the fact that Levy-Kalecki cash-flows reach 10.5% as in the baseline scenario is not a coincidence, but rather it shows the nature of the rebalancing process).

Finally, we have crunched some more numbers in order to produce a scenario with GDP nominal growth rates of 7%. Make no mistake, we think that the only feasible way China will attain that growth rate is with high levels of inflation, and not through high real GDP growth rates – as many international analysts still seem to imply. But even in this scenario, corporations would still suffer the rebalancing process, and some additional measures by Beijing in form of transfers to the private sector would be needed – as Pettis suggests. These transfers would show up in our scenario as a positive source of corporate profits. In this case, a back-of-the-envelope calculation shows that in order to keep constant firms’ leverage at 8.4x, the government balance should move from zero (the assumption we chose) to roughly a 2.5% deficit (and increasing as the time goes by). But because the current debt levels are already too high, additional government intervention will be needed if the corporate sector has to return to more normal leverage ratios by the end of 2025.

Scenario 2

In order to compare the different results, we have drawn in a couple of graphs the paths of both leverage measures under the different scenarios. As we have remarked, all of them show the difficulties the corporate sector will have to face during the rebalancing process:

Chinese corporate debt-to-GDP under different scenarios

Chinese corporate debt-to-LK under different scenarios

Summing up

If you have been so kind to put up with us so far, then the conclusions are pretty clear. Otherwise, we repeat them here for convenience (with some comments):


The Levy-Kalecki profit equation in action: the Spanish case

Javier López Bernardo – 26th of November, 2015

Martin Wolf has recently reminded us the role that corporate surpluses played during the ‘Great Moderation’. He reports the well-known fact that while corporations saw how their gross savings (i.e. current revenues minus current expenses, capital expenses excluded) rose during this period, the level of corporate investment remained stagnant. This means, as a matter of logical necessity, that corporations were accumulating net assets over the entire period. Wolf concludes that ‘it has to be accepted that, so long as the corporate sector runs a structural financial surplus, macroeconomic balance is likely to require fiscal deficits’, something which I can hardly disagree with.

At the same time, the Spanish press (here, in Spanish) reports that non-financial corporations have seen a growth in profits, during the first three quarters of 2015, of 28.6% (in comparison to the first three quarters of 2014), due mainly to ‘an improvement of the economic activity’ and the impact of some one-off (non-recurrent) revenues. Both articles have nudged me enough to provide an update of the Spanish macroeconomic profit series and to explain their implications for the Spanish macroeconomic performance.

Regular readers of this blog will know that I usually study the profitability of the corporate sector as a whole using the Levy-Kalecki profit equation (see here for a thorough explanation), which is a handy tool to break down macroeconomic profits according to their sources – as we will see in a while. The Levy-Kalecki profit equation has another advantage, an obvious one, but often overlooked by economists: it provides the only measure for the absolute amount of profits using national accounts data. In the US, the lucky land for profit-watchers, the Bureau of Economic Analysis already provides series for corporate profits (NIPA profits, as they are usually known), but that’s an exception, because the rest of countries (that follow the recommendations of the SNA) do not publish this figure, but something that is very close (gross savings), but not the same – true, many statistical agencies report micro-databases at the firm level, as the Bank of Spain does with the Balance Sheet Data Office, but they are outside from the scope of the National Accounts. Therefore, the Levy-Kalecki exercise (i.e. to retrieve profit series) is not only valuable because it provides a macroeconomic breakdown for corporate profits, but also because it can shed some light for these countries that are not in the same favourable situation as the US is.

Levy-Kalecki profits in Spain, 1999-2014

Besides, the Spanish case is an especially instructive case of the usefulness of the Levy-Kalecki profit equation. Actually, I can hardly think of a better application of this tool than the recent economic history of Spain. In a paper that I wrote with two other economists some years ago, we already noted the counterintuitive evolution of LK profits in Spain since 2000. You may be thinking that, roughly speaking, there was an upward trend in the profits series up to 2007, then a decline from 2007 to 2013, and since then more or less they have remained flat. Well, in that case, you would have got right only the last part of the sentence. The following figure shows the evolution of LK profits (non-financial plus financial corporations) since 1999:Levy-Kalecki Spain

Some background is needed. The LK series come from National Accounts, so they do not include unrealised capital gains. The purpose of the National Accounts is, by definition, to measure changes in real production, not in prices, and that’s why unrealised (and most of the realised) capital gains cannot be found in the income and product accounts – they can be found in the revaluation accounts, but that’s another story. In a nutshell, capital gains are not income.

In Spain, during the ‘roaring’ 2000s a huge chunk of profits booked by corporations (especially real estate and financial ones) were of this nature. However, when one looks at the ‘operating’ component of firms’ profits through the LK profit equation, things were a bit different. Profits declined from around 6.7% of GDP in 1999 to 3.3% in 2005 – if you think this evolution is some kind of joke, try to plot the evolution of gross savings of non-financial plus financial corporations as a % of GDP, the closest figure we have in the National Accounts to the profits I am reporting here. For newcomers, this range of numbers (3.3% – 6.7%) is quite low in comparison to other economies. For instance, the US historical average has been around 7.5% and in the UK a bit less. This low number should have warned us about the real profitability of Spanish firms. Since then, profit margins have been climbing up to the current 8%, and they have been quite stable for a few years. This period has coincided with massive write-offs by Spanish financial firms, which have produced exactly the opposite effect that they produced before the crisis. I think that the reason why the LK series seems now to be more reasonable (or at least closer to what one would expect) is that the Spanish pre-crisis business model (over reliance in real estate) has gone, and now that non-income generating activities are coming back to normal levels in the profit and loss statement of Spanish firms, then the importance of income generating activities should be clearly reflected. Summing up, the Spanish case shows that over long periods of time the LK profit series can be more informative on the real health of the corporate sector than measures reported directly by firms.

The ‘sources’ of profits can give us some additional insights. Up to the crisis LK profits were driven by investment, notably investment by the household sector (the investment split is not displayed in the graph) and households that were reducing their savings. Government was roughly neutral with some surplus in the years just before the crisis (which indicates, by the way, that the Spanish crisis did not have anything to do with fiscal irresponsibility, as many media outlets want us to believe) and the external sector was a big drag on corporate profitability. One of the main features of the Spanish series is the low contribution of dividends, for in many other countries they fluctuate between 3% and 4.5% of GDP (e.g. US and UK), whereas in Spain they barely reach 2.5%. On the other hand, the post-crisis period has been led by a large government intervention and by the improvement in the current account, which is now a (small) positive contribution to the Spanish profits: these two forces have balanced a sluggish investment and a household sector that has come back to higher levels of savings. Overall, in my opinion, except for the low levels of investment, the post-crisis profit composition of the Spanish economy is a much better one than the one displayed in the pre-crisis period: the post-crisis profit composition can last longer without creating huge (internal and external) imbalances in the Spanish economy.

And the one-million-dollar question is: what about the future? This is a difficult question (you know, economists are good at predicting the past, not the future), but there are two things that something can be said about them. First, the current low levels (from a historical perspective) of investment provide room for further increases in profit margins; an improvement in investment will certainly happen in 2016 given further improvements in national economic activity – our most likely scenario for Spain in 2016 if no big international shock occurs, notably China. And second, the Spanish government is known to be committed to further reductions in the deficit number until (at least) 2018 – although it will depend, of course, on the composition of the new government that will be elected in December. However, it will be crucial as well to follow the current account, given that its evolution can make all the difference and can hinder on the sustainability of Spanish profits. Although the Spanish export performance has been impressive in the last two decades (and there is no reason to believe it will come to an end soon) and the weak euro and oil prices we have seen in 2015 have helped a bit lately, the low growth of Spain’s main trading partners (euro countries) and the halt in world trade are major challenges that Spanish firms are bound to face.


Ingeniería inversa del PIB chino

Félix López & Javier López Bernardo, 19 de Octubre, 2015

Los servicios financieros han crecido considerablemente en el tercer trimestre de 2015, de acuerdo a las estadísticas oficiales chinas

Otro post sobre la situación económica China. Van apareciendo muchos en este blog. Pero como va a ser el predecible tema estelar económico mundial de los próximos meses este post no será el último… ni el penúltimo. Desde nuestro post junto antes del desplome de la bolsa china (timing preciso), en el cual adelantábamos la imposibilidad de un aterrizaje suave de la economía China (léase crisis económica grave -caída del PIB- antes o después) empiezan a abundar los análisis sobre el estado de la economía china: algunos ya contemplan la posibilidad de que el crecimiento esté realmente reduciéndose, en contra de las cifras oficiales de un mantenimiento del crecimiento de alrededor del 7%, dudándose así la fiabilidad de los datos de la contabilidad nacional china. Los últimos datos aparecidos hoy, correspondientes al tercer trimestre de 2015, con un crecimiento del 6,9% del PIB, no hacen sino confirmar lo que comienza a ser algo bastante recurrente.

En el anterior post ya tratábamos de estos temas, haciendo hincapié en un informe de Macquarie sobre el deterioro financiero de las empresas chinas en los sectores más directamente involucrados en el sector de bienes de inversión (industria de construcción y sus materiales -cemento, acero-, bienes de equipo, viviendas, etc.). Para lo que queremos explicar ayudan también las estimaciones de los beneficios de las empresas del sector de inversión compilados por Christopher Balding, profesor de la Universidad de Pekín, y que lleva varios años evaluando la fiabilidad de las estadísticas chinas – y que, sin ir más lejos, ha escrito hoy un post interesante cuestionando los números publicados por las agencias chinas hoy.

¿Es fiable en la actualidad la contabilidad nacional china? ¿Puede estar creciendo la economía china en torno al 7% anual? Si hay dudas sobre esta cifra se puede entonces dudar de los datos oficiales. Hasta hace bien recientemente poco hemos considerados bastante fiables las cifras oficiales, pero ahora tenemos serias dudas sobre su bondad desde principios de este año.

La razón en la siguiente:

La caida en picado de los cash-flows generados por las empresas chinas del sector de las materias primas indican que los volúmenes de inversión implícitos en el crecimiento del PIB chino no se han podido producir. Para mantener un ritmo de crecimiento del 7% del PIB total, la inversión china (aprox 50% del PIB) ha tenido que estar creciendo al menos un 4% (suponiendo que el resto de componentes del PIB esté creciendo al 10%, suposición optimista) Pero si la inversión china esta creciendo un 4% las empresas chinas han tenido que generar beneficios superiores a los del año anterior y no deberían de momento estar atravesando problemas para cumplir con sus compromisos financieros. Recuerden una de nuestras ecuaciones favoritas, la ecuación de beneficios Levy-Kalecki, que dice que a nivel macroeconómico la inversión es a la vez ingreso para las empresas de bienes de capital (en el caso chino, además, el resto de componentes generadores de beneficio, es decir, el déficit público, el sector exterior y el consumo privado no parece hayan tenido oscilaciones relevantes). Con esta sencilla ingeniería inversa, partiendo de los datos de Macquarie y generalizándonos para ver si encajan con la generación de beneficios a nivel macro, la conclusión que hemos sacado es que la inversión china ha tenido que experimentar un frenazo considerable desde el segundo semestre de 2104, con caídas reales sustanciales de los niveles de hace un año. Es cierto que muchas empresas de bienes de capital se habrán visto beneficiadas por las caídas en los precios de las materias primas (recuerden que el informe de Macquarie sólo menciona el sector de materias primas), pero incluso aún así  creemos que el PIB chino probablemente esté creciendo ahora a tasas de alrededor del 3%. De este modo, nos posicionamos en la parte más baja del espectro de analistas que intentan estimar cuánto es realmente el crecimiento actual del PIB chino (véase este enlace): desde un 6,8% que dice el FMI, pasando por un rango de entre el 3% y el 5% que pronostican Citi, Lombard Street y Capital Economics hasta un menos del 3% de acuerdo a los analistas de Fathom consulting.

El frenazo de la inversión que suponemos está ocurriendo produciría en poco tiempo un sustancial rebalancing de la economía a china, derivando a un modelo menos basado en la inversión, a costa de atravesar por una crisis grave, pero que no tiene que ser muy duradera (un par de años). Dicha tesis la hemos venido defendiendo como prácticamente ineludible. Y también encaja con las últimas medidas que parece están tomando las autoridades chinas para postergar el día del juicio final, estudiando la realización de grandes inversiones en sectores anteriormente un tanto abandonados (lo último, desarrollo rural, presas y regadíos) En realidad, esto si pueden todavía hacerlo, a expensas de afrontar una crisis más grave dentro de un par de años, con el incremento de deuda que esta política de inversiones produce.


The ugly Minskyan microstructure of the Chinese economy

Javier López Bernardo – 9th of October, 2015

1280px-Corus_Tata_steel_Velsen_IJmuiden

Macquarie, the Australian investment bank, has published this week a report on the financial state of the Chinese corporate sector. Unfortunately, the report is not public and I will have to rely on the summary written by Tyler Durden.

The report is especially important because it is based on an analysis of 780 Chinese companies, so, unlike most of the reports on the financial health of the Chinese corporate sector that take a macroeconomic perspective (as we did here), Macquarie’s report takes a microeconomic approach, focusing on the Chinese commodity sector. Given that Chinese national accounts data has been lately under the scrutiny of the international financial community because of its unreliability, the micro approach of the Macquarie report can shed some additional light on the financial health of Chinese corporations.

Now, the numbers (go here for the graphs, which are even more impressive). The total “uncovered” debt of commodity companies in 2014 amounts to CNY5 trillion. Uncovered debt belongs to companies that cannot cover their interest expenses with their operating profits in a single year. In financial jargon, it means that the interest/EBIT ratio (which is a useful guide to measure the ability of a company to meet its interest payments) is above 1. Obviously enough, companies in this group are usually considered to be in a very bad financial health. To see the evolution of the Chinese commodity sector and how it was propelled by the Chinese investment-led growth strategy since 2008, it is worth looking at the evolution of the debt in that sector. According to Macquarie, as of 2007, the amount of uncovered debt in the commodity sector was less tan CNY1 trillion (with just 4 companies being “uncovered”), while in 2013 the amount of uncovered debt soared to CNY4 trillion (with the share of uncovered companies being about a third of all corporations).  And that’s not the end of the story: we are now in 2015, and the Chinese deceleration over the last few months may have posed additional problems for these companies. As Macquarie notes:

Given the slumps in metal and coal prices so far this year, it’s quite likely the curve will have deteriorated further for commodity firms this year, with total debt getting better in the meantime.

In plain English, it is likely than more than 50% of the Chinese commodity sector is in extremely dire financial conditions right now.

A “Minsky” crisis?

In a previous post, we linked the Chinese rebalancing process and its (lack of) prospects for being smooth with the financial health of the corporate sector. We claimed that:

Probably the area in which the corporate sector insufficiency of internal resources will first unfold is in those companies of the construction and capital goods sector, for two reasons: first, these firms exhibit the highest leverage ratio among their peers and, second, because investment will not increase as the economy moves towards higher consumption levels, their cash-flow generation will shrink (firms selling consumption goods will have better prospects). At any rate, the possible channels through which early minor defaults spread to provoke a generalised collapse are multiple and, as in any “Minsky moment” with excessive corporate leverage, of unpredictable nature. Therefore, we conclude that any possible rebalancing scenario will come together with a “Minsky moment”; in that case, financial difficulties in the corporate sector will become crystal clear.

For many readers, the mention of a “Minsky moment” will be a cliché. Nowadays, if you want to seem to be informed about current macroeconomic financial developments, you just have to bring up the word “Minsky”. However, unlike many analysts (and economists), I really think that the examples of typical Minskyan crises are not many; actually, it is quite difficult to find perfect examples of a Minsky crisis in which the past investments of the corporate sector are not validated (as Minsky would say) by the current and future streams of cash-flows. In other words, it is not so easy to find prime examples of crises produced by the corporate sector (in a future post I will explore this topic). Therefore, our paragraph has to be read as implying that the Chinese case will be a prime example of a Minsky crisis.

In any case, I want to pursue here a different issue: the relation in a Minskyan model between debt, profits and investment and its relevance for the Chinese case. In the Minskyan model, higher investment leads to higher leverage ratios in the corporate sector. However, we know (and Minsky knew too) that higher investment expenditures leads also to a higher volumen of profits, through the Levy-Kalecki profit equation. If a higher level of investment leads to higher profits, why firms should see a deterioration in their balance sheets if they still enjoy a healthy generation of profits? To my knowledge, the Canadian economist Marc Lavoie (here and here) was the first one to point out this logical inconsistency in the Minskyan framework. Unless you come up with a different mechanism, it is unlikely that higher levels of investment lead to higher leverage ratios, because, as Kalecki would say, the investment finances itself.

Recently, the British economist Jo Michell (here) has proposed an original explanation for this incompatibility between the Minskyan theory and the Levy-Kalecki profit equation. He argues, using a microfounded agent-based model, that even if the leverage of the corporate sector as a whole does not increase (due to the cash-flows generated by investment expenditures), the distribution of that debt between small and large firms will probably be crucial for the number of bankruptcies taking place in the corporate sector (in Minskyan parlance, firms move from hedge financial structures to Ponzi structures, defined by Minsky as a situation where firms cannot even cover their interest payments). Therefore, even if things are OK at the sectoral level, the dynamics for every firm can be very different, because many of them will become “Ponzi”.

Even after considering how large the ratio of corporate debt to GDP is in China (a number that by itself should be worry), I really thing that the sectoral level, and how the debt is distributed across firms, will also play a major role on how the Chinese crisis will unfold. But rather than being the distinction between small and large firms the relevant one, what will be crucial in the Chinese case will be the distribution of debt across sectors. The reason is that, in China, the dynamics of debt cannot be understood separately from the rebalancing process. As China moves from investment to consumption (and it will certainly move, one way or the other, almost as a matter of arithmetical necessity, as Michael Pettis often points out), the distribution of revenues between firms will also change. As we explained here, even assuming that China can sustain for the next 10 years GDP growth rates of around 5% in average (it would implicitly imply abnormally high consumption growth rates of around 10% together with the assumption of no growth in investment), which is certainly an optimistic scenario at least as far as GDP and consumption growth rates are concerned, firms in the capital goods (and commodity) sector will not generate enough cash-flows in order to keep up with the debt. Therefore, from the point of view of the triad “investment, debt, cash-flows”, the Chinese case does not seem to have a solution. A soft landing for the Chinese economy seems to be very unlikely, once one takes into account the demanding requirements of the rebalancing process for the revenues of a big chunk of the corporate sector.


Costes laborales totales y fiscalidad de las rentas del trabajo en Europa

Félix López – 7 de octubre, 2015

Ayer mismo, en un programa de televisión (que dejamos en el anonimato), se comentaba sobre la fiscalidad del trabajo en España. Alguien (economista tertuliano) indicó que era la más alta -o segunda más alta de Europa, y que había que reducirla sustancialmente (por eso de la competitividad, etc.). Todo el mundo parecía de acuerdo. Otro ejemplo más de como la gente pretende y consigue que le salgan gratis sus imprecisiones. En general, ni se dio información correcta, ni me dio la impresión de que se sabía de qué hablaban.

Aparte de ayudar a clarificar los errores que, como los anteriores, se suelen cometer, el post -pretendemos- puede adicionalmente servir de ayuda a la hora de preparar los estados financieros que los alumnos de la escuela tienen que incorporar en sus proyectos de creación de empresas, sobre todo si se trata de crear empresas en el extranjero (normalmente une empresa filial de la empresa madre española, o una empresa mixta). Un error frecuente, casi siempre fruto de las prisas, es calcular como costes laborales solo los salarios brutos, olvidándose de añadir los costes adicionales que el empresario incurre al contratar un trabajador. Estos costes adicionales, en su gran mayoría, son las contribuciones que tiene que realizar el empresario a los diferentes sistemas de seguridad social europeos para la cobertura adicional al trabajador de sus pensiones de jubilación, desempleo, salud y asimiladas. En algunos casos estos costes adicionales suelen incluir también contribuciones a planes privados de pensiones, costes de despido, gastos de formación profesional y prestaciones adicionales como vales de restaurante o comedores, bonos de transporte, etc. En lo que sigue, y para simplificar, estos últimos costes adicionales no los incluiremos en lo que denominaremos coste laboral.

Así, en los países europeos (salvo en el caso danés) el coste laboral para el empresario está compuesto del salario bruto del trabajador más las cotizaciones adicionales a la seguridad social por parte del empresario, que no hay que olvidarse incluir. En las cuentas de gasto de la empresa conviene desglosar bien el coste laboral en estos dos componentes.

Los trabajadores, por su cuenta, y en todos los países de Europa, deben también cotizar a la seguridad social y pagar sus impuestos sobre sus ingresos del trabajo, lo que suele calcularse haciendo referencia a su salario bruto. Esto normalmente se realiza por medio de retenciones en la fuente. Es el empresario el que deduce estos pagos por cuenta del trabajador del salario bruto que le corresponda, los ingresa en las cuentas de la autoridad fiscal y seguridad social, y paga el resto -salario neto- al trabajador. Se produce así una diferencia (normalmente grande) entre lo que le cuesta un trabajador a la empresa de lo que recibe el trabajador como salario neto. A esta diferencia se la denomina “cuña fiscal”, traducción del término “tax wedge”. Esta cuña está compuesta toda de impuestos: cotizaciones a la seguridad social por el trabajador y empresario más los impuestos a la renta de las rentas del trabajo del trabajador; de ahí lo de cuña fiscal. Y no cabe duda de que es una buena aproximación de los impuestos que se cargan al trabajo. Aunque una buena parte de estos pagos (en España, una mayoría, las cotizaciones del empresario) los realiza el empresario por su cuenta a la seguridad social, es mejor considerarlos como si todos los pagos (impuestos) son a cuenta del trabajador. El equivalente conceptualmente sería (como en Dinamarca) un mayor sueldo bruto, compensado con mayores impuestos o cotizaciones a la seguridad social por parte del trabajador.

En este documento, Tax Reforms in EU Members states 2015, que es en conjunto una buena descripción de la situación impositiva en los diferentes países de la Unión Europea, aparece un cálculo de las cuñas fiscales en los diferentes países de la Unión Europea. Estamos así en condiciones de poder resolver la fiscalidad comparativa de las rentas del trabajo en Europa. He recogido en el siguiente cuadro los datos correspondientes del estudio. Corresponden a la carga fiscal de un trabajador que tributa individualmente y que tiene los ingresos laborales medios (en realidad, si se hace bien, debería ser coste laboral total medio; no me queda claro si se precisa bien esto en todos los casos) en diversos países europeos (he eliminado algunos países pequeños para no hacer la tabla demasiado extensa)

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Fiscalmente, contratar a un trabajador sale por un ojo de la cara en Bélgica. En Irlanda y Reino Unido es donde esto es más llevadero. Vemos que la cuña fiscal española es bastante media; ni muy alta ni muy baja. La afirmación de que la fiscalidad del trabajo en España es la más alta de Europa (o segunda) es, pues, falsa.

Resulta interesante comprobar como esta cuña fiscal se divide entre sus diferentes componentes. En algunos países (Francia, Italia, Suecia, República Checa, podríamos decir también España) las cotizaciones a cargo del empresario acaparan una mayoría de la carga fiscal. Es quizás este dato el que se utiliza para situar a España en la comparativa internacional. Este análisis superficial puede así inducir a pensar, si se tiene en cuenta solo este componente, que la carga fiscal española sobre el trabajo es de las más altas de Europa. Pero esto oculta que los otros componentes en España son comparativamente muy bajas. En casi todos los principales países europeos los trabajadores contribuyen a la seguridad social con cargo a sus salario bruto bastante más que los españoles. Y algo más, en promedio, como impuesto sobre la renta. Y tampoco utilizando este criterio de las cotizaciones sociales a cargo del empresario somos los españoles los número uno en cuanto a carga fiscal sobre el trabajo.

El caso de Dinamarca es muy relevante. ¿Por qué los daneses se desmarcan de la practica generalizada en Europa de no realizar cargos por seguridad social a sus trabajadores (casi) y a sus empresarios. La seguridad social danesa (incluidas las pensiones, claro) se financia prácticamente en su totalidad con cargo a los impuestos sobre la renta y sobre el consumo (IVA). Unos impuestos muy altos (casi un 40%) sobre unos salarios brutos altos que ya llevan incorporados como ingreso lo que sus empresarios hubieran debido de pagar por su cuenta en el caso de seguir un esquema parecido, por ejemplo, al español. Este enfoque danés tiene la ventaja de dejar bien claro que las pensiones que los pensionistas reciben el año en curso se financian con los ingresos fiscales (impuestos) del año en curso (en una primera aproximación). En España es lo mismo; las pensiones se financian con cargo a los ingresos fiscales. Pero como estos se dividen en impuestos y cotizaciones a la seguridad social puede dar lugar a interpretar que las pensiones se reciben con cargo a los pagos que los pensionistas realizaron en el pasado, y que los pagos que realizan van a algún tipo de “fondo” del cual se cobrarán en el futuro. En la reciente y muy estéril discusión sobre los pagos de las pensiones a los jubilados catalanes en caso de una hipotética independencia de Cataluña se dejó entrever, por parte de economistas y autoridades políticas independentistas, que la seguridad social española debería de hacerse cargo de las pensiones catalanas dado que los beneficiarios habían cotizado en el pasado y consolidado así unos derechos. Queda claro que el argumento es erróneo. Los pensionistas catalanes, en esa situación, se cobrarían de las cotizaciones sociales o impuestos (si siguen el ejemplo danés que tanto les gusta) de los trabajadores catalanes del año en curso.

Los daneses prefieren su manera de hacer porque -y eso igual lo explicamos otro día- se puede demostrar que al imponer un impuesto al trabajo en base a cotizaciones a cargo de empresarios en vez de un impuesto sobre la renta, el funcionamiento del mercado de trabajo puede ser otro, con mayores posibilidades de generar desempleo. En el resto de países, el mantenimiento así de un esquema más ineficiente de recaudación parece justificarse por lo conveniente de dar la impresión de que los trabajadores soportan menos impuestos.

Bueno, ¿cual es la utilidad de la anterior tabla a la hora de preparar cuentas de resultados de potenciales filiales europeas? Nos puede ayudar bastante, dado que nos permite calcular los costes de la seguridad social a cargo de la empresa. Normalmente los salarios brutos según empleos suelen obtenerse con facilidad, pero para calcular las cotizaciones sociales es algo más complicado. No muy complicado, pero se necesita buscar bien la información y realizar cálculos adecuados. Con los anteriores datos sabemos que en Alemania, para un sueldo medio bruto, las cotizaciones a la seguridad social por cuenta del empresario son el 17,1% del coste laboral total. Con un poco de cuidado se puede calcular que porcentaje sobre el salario bruto (que conocemos) hay que utilizar para computar los costes de seguridad social por cuenta del empresario y así, sumado al salario bruto, obtener el coste laboral total. Hemos dicho que con un poco de cuidado… sería así, que tantas columnas puede dar lugar a crear confusión: el 17,1% del total de coste laboral son cotizaciones a la seguridad social por cuenta del empresario, el resto, 82,9%, sería el salario bruto (salario neto, más impuestos sobre la renta más cotizaciones a la seguridad social a cargo del trabajador). 17,1 es el 20,6% de 82,9. Así, si sumamos un 20,6% al salario bruto obtenemos el coste laboral total. Práctico, para una primera aproximación… pero si nuestra plantilla es de sueldos bajos (o altos) estas cifras habría que modificarlas algo al alza (o a la baja)


Do we need an investment function for China?

Javier López Bernardo – 25th of September, 2015

Krugman has just published a post that addresses the economic situation in China. He thinks (as many other economists) that we should not be very worried about the possible side effects of China on the rest of the world. Well, the Chinese economic performance is already hitting many economies (mainly through commodity prices) around the world (has anyone said Brazil?), so maybe the “price effects” that Krugman mentions are larger than what he thinks they are.

But here I don’t want to attack Krugman (because overall he seems quite mild about Chinese prospects), but rather I would like to comment very briefly on a report mentioned by him and published by Willem Buiter at City. The report is worth reading, because it makes the case for a global slowdown driven by the (under)performance of the Chinese economy.

There are many sentences in the report I would largely agree with. For instance, when talking about why China’s government debt burden is not as rosy as it seems, Buiter mentions that:

the soaring non-financial private sector debt burden and the matching soaring banking and shadow banking sector balance sheets suggest that a future financial rescue of systemically important and/or politically well-connected insolvent private entities and SOEs by the central government is likely. This could seriously strain even the fiscal capacity of the central government.

However, few pages later, one can find the following remark:

Very little equity funding of capital expenditure takes place in China, and with future profitable investments likely to be found in sectors and industries very different from those in the past, average Tobin’s q (the ratio of market capitalization of existing capital to the current reproduction cost of capital) is bound to be less that marginal Tobin’s q (the ratio of the NPV of future profits on new capital expenditure to the current reproduction costs of capital). And it is marginal Tobin’s q that drives investment.

Not quite. And not because the theoretical argument is wrong in its own terms (which it is, because in the neoclassical model that Buiter is having in mind, all that matters is marginal q: higher marginal q values will imply higher levels of investment, being the difference between marginal and average q given by adjustment costs and other “imperfections”, so mentioning average q for the investment argument is simply noise), but because in advanced capitalist economies with proper financial markets (or at least the most advanced ones on earth), many empirical studies have found the poor performance of “q models” in predicting investment performance (see here, for instance). Many reasons can be adduced for such a poor performance: marginal q is not observable (so managers have a hard time using it for investment decisions), stock markets are not perfectly efficient and stock prices can carry some noise and not only fundamental information (so managers are misled by market prices), and so on. Anyway, these considerations are for developed economies (economies where one would expect q theory to pass with flying colours), and even in these economies the q theory is not very promising. But in China, who cares? Investment has been clearly driven by government policy, so even more reasonable investment theories (cash-flows, capacity utilization, etc.) will not apply either in the Chinese case (personally, I would bet that q has not even mentioned once in the Chinese government as rationale for investment decisions).

This does not mean that Tobin’s q, as an economic indicator, does not have any use at all. It does, but not as a driver of investment (as we explain here), but rather as a financial indicator of the relative dearness of the stock market, a use that has already been advocated by many financial market practitioners (and that I elaborate and substantially expand here for the Chinese case).

So, keep simple the investment drivers in the Chinese case.


Las cuentas y los cuentos de las balanzas fiscales catalanas

Félix López & Javier López Bernardo – 21 de Septiembre, 2015

En vísperas de las elecciones al Parlamento de Cataluña que se celebrarán el próximo 27 de Septiembre, Josep Borrell ha publicado recientemente un libro titulado “Las cuentas y los cuentos de la independencia”. Como menciona, una de las tesis sobre las que se ha apoyado el independentismo ha sido la idea de que la independencia es económicamente positiva – idea materializada en el eslogan “España nos roba”. Dicha idea ha venido siendo analizada a través de las “balanzas fiscales”, instrumentos contables aparentemente no politizados que recogen (como veremos, de un modo u otro) las relaciones económicas de Cataluña con el resto de España. En este post se explica qué son dichas balanzas, cómo se han venido haciendo en España y por qué la más usada por el independentismo catalán es metodológicamente incorrecta.

Ante todo, debe mencionarse que la elaboración de balanzas fiscales es una actividad muy limitada a una serie de países. No puede decirse que exista una metodología mundialmente aceptada para la realización de las mismas, como las que existen para la elaboración de las cuentas nacionales (realizada por las Naciones Unidas) o la balanza de pagos (realizada por el FMI). En los pocos países donde se han venido realizando balanzas fiscales (como Canadá, España, Bélgica, Reino Unido y Australia) los enfoques son diversos, pero los investigadores se decantan en su mayoría por el enfoque llamado “carga-beneficio”. Pero de nuevo, no existe nada que se pueda denominar “oficial” y que pueda ser el germen para la creación de un estándar internacional propiamente definido al que se puedan adherir posteriormente otros países. La razón es que la mayoría de estos estudios son, en el mejor de los casos, semioficiales, realizados por organismos públicos nacionales y regionales pero sin ninguna pretensión de sanción oficial. En el caso de España, el Instituto de Estudios Fiscales (IEF) ha sido el encargado de “oficializar” la manera de cómo computar las balanzas fiscales en este documento – sobre la bochornosa historia del documento hablaremos en otro post más adelante.

¿En qué consiste pues el enfoque carga beneficio? En pocas palabras, es una balanza de transferencias. ¿Qué es una transferencia? Ingresos y gastos sin ninguna relación a pagos por bienes y servicios por operaciones de mercado. Por ejemplo, el volumen de sanidad pública no tiene ningún coste directo para el que la recibe. Los pagos que realizamos por impuestos individualmente no tienen ninguna relación con los servicios que vamos a recibir. A nivel colectivo español, dichas transferencias se agrupan en: a) transferencias de particulares de una región al gobierno central, como los impuestos y las cotizaciones a la Seguridad Social b) transferencias más o menos directas del gobierno central a particulares o gobierno regional y c) transferencias imputadas en especie, como el prorrateo de los servicios públicos centrales (defensa, justicia, etc.) En este enfoque, si uno recibe más transferencias de las que paga, el saldo es (obviamente) un balance fiscal positivo. En Cataluña, dicho saldo ha venido siendo negativo, alcanzando aproximadamente la cifra de 11.000 millones de euros anuales (período 2007-2012), lo que representa un 5,5% del PIB catalán.

Los defectos del enfoque flujo monetario

Sin embargo, dicho saldo no es el que declaran los independentistas catalanes como el correcto. Según ellos, el saldo es de 16.000 millones, o alrededor de un 8% del PIB catalán – el origen del “España nos roba”. Este nuevo saldo es el resultado derivado de otra metodología: el enfoque “flujo monetario”. Dicho enfoque consiste en asignar las transferencias imputadas en especie del método beneficio (fundamentalmente servicios de defensa y organismos centrales) no a quién se beneficia de las mismas (toda la sociedad española), sino a quién las recibe en forma de ingreso (en el caso del ejército en función de su distribución por España, organismos centrales en su mayoría en Madrid). Bajo esta metodología, Cataluña recibe menos pagos directos que las transferencias imputadas bajo el método carga-beneficio, con lo que el déficit de su balanza fiscal es mayor – en concreto, un 2,5% del PIB mayor que respecto al enfoque carga beneficio.

Es sorprendente el poco análisis que han realizado los economistas de este país a la metodología para computar el saldo fiscal por el método del flujo monetario. La justificación para la inclusión del enfoque monetario como balanza fiscal es que dicho indicador debe medir la incidencia del gasto fiscal en las diferentes regiones respecto a su impacto sobre la producción y generación de riqueza. Así, en el informe antes mencionado del IEF se dice: “el criterio del flujo monetario es más correcto para analizar la influencia que tiene la acción del sector público sobre el crecimiento económico de un territorio” o, como expresan claramente Guillem López-Casasnovas  y Joan Rosselló Villalonga, defensores del enfoque flujo monetario: “la pregunta a la que se intentan dirigir, al menos en este país, las balanzas fiscales: cuántos recursos salen de Catalunya y cuántos regresan como para impactar en el bienestar y la creación de riqueza.”

El problema es que las balanzas fiscales bajo el enfoque flujo monetario no indican “cuántos recursos salen de Cataluña y cuántos regresan como para impactar en el bienestar y la creación de riqueza”, dado que una gran parte de los ingresos que regresan a Cataluña no están computados bajo el enfoque flujo monetario. El enfoque monetario solo contempla los pagos que realiza el gobierno central, pero no incluye los pagos entre las diversas autonomías. Sin embargo, en un país como España, la mayor parte del gasto público lo realizan las CCAA y CCLL (Comunidades autónomas y locales) El sector público central es muy poco representativo del gasto total. Por ejemplo, buena parte del gasto de las CCAA y CCLL es para la provisión de servicios de sanidad y educación (medicinas, equipamiento médico y escolar, equipos, productos y servicios para los proyectos de I+D, equipamiento urbano, etc.), cuyos ingresos los recibe desproporcionadamente el sector empresarial catalán. En total, calculamos que pueden ser entre 14,000 y 16,000 millones de euros. Para que se hagan una idea, sólo en compras de la sanidad pública española se gastaron en Cataluña alrededor de 8.000 millones de euros en 2009. ¿Acaso ese gasto público no tiene ninguna incidencia sobre la actividad y empleo de Cataluña?

A diferencia de los economistas independentistas y el gobierno de Mas, que han optado por excluirlos de “su” balanza fiscal”, los empresarios catalanes sí son conscientes de la importancia de estos ingresos – ingresos que quedarían muy reducidos tras una hipotética independencia (¿cuánto suministra actualmente, por ejemplo, el sector farmacéutico catalán al sector público francés? Probablemente algo cercano a cero). De acuerdo a las cifras anteriores, el saldo correcto que debería computarse bajo el enfoque flujo monetario sería cercano a cero. Los 16,000 millones actualmente computados como déficit catalán bajo el enfoque flujo monetario quedarían compensados con los 14,000 – 16,000 millones anteriormente citados – en concepto, como recordemos, de compras del sector público autonómico y de comunidades locales a residentes catalanes. Es decir, una vez tenidas en cuenta estas partidas, el sector público español es neutro con respecto a la cantidad de ingresos que se inyectan y se detraen de Cataluña – que es, lo que según los profesores Casasnovas y Villalonga, debería medir una balanza fiscal por el flujo monetario.

En conclusión, el enfoque del flujo monetario utilizado por los independentistas catalanes carece de fundamentos teóricos válidos y además no se utiliza en ninguna otra parte del mundo – y, vistas sus deficiencias, seguramente ni se utilizará en un futuro. Como explicaremos en un post posterior, es un enfoque diseñado a la carta por el independentismo catalán. Estos son las cuentas y cuentos tan dudosamente científicos sobre los que se ha construido el “España nos roba”.


Further considerations on the Chinese rebalancing

Javier López Bernardo & Félix López –  9th of September, 2015

The last few months have witnessed a series of ever-increasing problems for the Chinese economy. The stock market crash, the devaluation of the currency (and the prospects for additional rounds), the lacklustre performance of the Chinese export sector and the likely deceleration of the economy, just to name a few problems, have provoked general turmoil in financial markets and have created a widespread sense of skepticism in the global media. It has also propelled the idea that a major Chinese slowdown could have serious consequences for the global economy. However, most of these articles get very specific about this or that problem, and they miss the real and broader problem that the Chinese rebalancing process poses. In this article, we will see that the implications of the stock market crash and of the devaluation of the renmimbi for the rebalancing process are not as important as many believe.

The stock market crash has been the most prominent phenomenon in the financial press. The Shanghai Index, for instance, stood at 3,350 points at the beginning of 2015, peaked around 5,100 in the middle of June and since then has lost the staggering amount of 40% (yesterday closed at 3,170). For Western standards, that correction has been brutal. But it is also widely known that government ownership in many companies is high and that households have invested very little in stocks so far. So, beyond firms that may have posted some shares as collateral for their loans, the direct impact of the stock market on the Chinese economy should be very limited- actually, a bulk of the losses have already been anticipated by international investors. We think that the stock market crash should thus be interpreted as a sign that the perception of the Chinese economy is changing, rather than as a first cause for further financial distress.

However, the devaluation of the remimbi should be viewed slightly different. The Chinese renmimbi has been pegged to the dollar in the last few years; while this fixed exchange rate regime turned out to be particularly favourable since 2004, the recent appreciation of the dollar against a broad currency index has carried the yuan along, as we can see in the following graph:

China real effective exchange rate (basket)

This unfavourable evolution must have been a source of concern for Chinese authorities. As we explained in our previous post on the Chinese rebalancing, we think that:

Regarding the external sector, a comeback to the period 2003-2007, when the balance of payments largely contributed to Chinese growth, would be very welcome by Chinese authorities. It is paradoxical that an attempt to rebalancing may rest on a comeback to the export-led growth model. Internal pressures for a strong devaluation of the yuan will be significant, and it remains to be seen the impact of such a decision in China’s international commercial partners.

For such a goal, the devaluation made so far has been minimal; we reckon that a devaluation of an additional 20% (ballpark figure) would be necessary to make a real impact. We thus consider the devaluation movements seen in August as a modest test of things to come – i.e. to test trading partners’ reactions to further devaluation rounds.

What does it all mean for the rebalancing process?

In a recent post, professor Michael Pettis has followed similar lines in explaining the relative importance of recent events for the long-term dynamics of the Chinese economy. Although we would partially disagree with him on the role the external sector will play for alleviating the pressures the Chinese economy will have to face (Pettis argues that the recent devaluation has been done in order to qualify for SDR, rather than for trade purposes), we agree with him that these events should be put into context. There is especially one paragraph (which we fully subscribe) that summarises in a neat way the nature of the Chinese rebalancing process:

a) imbalances could persist and grow for many years before eventually rebalancing, b) the more rigid the institutional structure of the economy, the deeper imbalances were likely to get, c) the longer they persisted, the more disruptive the rebalancing was likely to be, and the less significant the “trigger” that set it off, and d) there are many ways rebalancing can occur, and the way it actually occurs depends on institutional constraints and rigidities.

However, when it comes to the conclusions, we differ with professor Pettis on how the rebalancing process will develop. We certainly agree that the rebalancing process will take place, for sure, sooner or later – almost as a matter of arithmetical necessity. But it seems that Pettis has in mind a long-landing scenario where the Chinese economy will follow a sort of Japanese path, where the recognition of losses in the balance sheets takes times and the growth in GDP can still be well above zero:

In fact I fully agree with him that a banking crisis is unlikely, and have written many times that while it is possible, and the risk of its happening should not be dismissed out of hand, I do not think China is likely to have a banking collapse, any more than Japan in the late 1980s and early 1990s was ever likely to have a banking collapse.

To clarify our differences with Pettis in how the rebalancing process will take place, in our previous post on the arithmetic of the Chinese rebalancing we concluded that:

As a conclusion, we can venture that a Chinese soft landing towards a less investment oriented model is highly unlikely. The only chance is through a large increase in government spending and exports, which we think is not feasible. The change to a consumption-led model is bound to produce severe problems in the Chinese economy. The temptation to stick with the current model is thus irresistible – this is very evident given the latest attempts to promote mammoth investments in telecommunications and internet – something that will compound the problems later. When investment stops in China, the lack of alternatives in the short-run will be evident. At that moment China will have its severe crisis; it will overcome it, and then will be able to keep growing in a more balanced way.

As of today, we still stick with this position. In other words, we believe that a financial crisis (with negative GDP growth rates) is the way the Chinese economy will rebalance and we do not expect a Japanese path. First, although the GDP growth rates in Japan were positive as Pettis says, there was a banking crisis in Japan (see here), which spanned over the 90s. But beyond that, there are many important differences between the Japanese experience in the 80s and the Chinese one nowadays. The main one is that the Japanese economy never reached the astonishing levels of fixed investment reached by China recently – Japan peaked “only” 32% in 1990 and 1991, while China has surpassed the level of 50%. So the Japanese economy was accumulating less debt for capital formation than China now. Most of the Japanese debt bubble was related to finance the purchase of “second-hand” real estate properties and financial assets (both items by definition contribute very little to the GDP figure), so when the crisis struck the financing needs for capital formation were not as great as we envisage in the Chinese case – in 1994, four years after the Japanese crisis struck, the investment share still stood at 28% of GDP.

Summing up, the problems that the Chinese economy faces right now go well beyond the stock market correction, the renmimbi devaluation and the progressive slowdown of economic activity. As soon as the reduction in capital formation takes place and thus the rebalancing process moves forward, the financial situation of capital goods and construction industries will be unsustainable and all the bad loans granted to them in the last few years will sit heavily on the balance sheet of the banking sector. From this point, there are many ways a financial crisis can take shape, but for sure they will depend on the choices (some of them political) the government will have to make.


The economic consequences of Mr. Osborne – or rather, of Mr. Godley

Javier López Bernardo  9th of August, 2015

Just ten years ago, the British economist Wynne Godley, distinguished scholar at the Levy Institute at the time, published a short policy note entitled “Some Unpleasant American Arithmetic”, which addressed the problems the American economy was going to face in the near future (for a more in-depth discussion, see this report he co-authored the same year with some Levy scholars). It is worth quoting one of the paragraphs in full:

“The private sector balance was negative 2.2 percent in the first quarter of 2005 – some 4 percent below its long-term average – mainly because there has been a furious housing boom financed by exceptionally high borrowing. It is noteworthy that between 1952 and 1997, there was not a single whole year during which the private sector balance was negative. If, during the next four years, the private sector balance were to recover halfway to normal (i.e., to zero), implying a large fall in private expenditure relative to income, and if the deficit in the current account remains at 6 percent, the general government deficit must rise to equal the current account deficit, that is, it must rise to 6 percent. This number follows arithmetically because, as already pointed out, the budget deficit is equal, by definition, to the current account deficit plus the private sector balance. If the private sector balance were to return to its long-term average (plus 1.8 percent), as might easily happen if the housing boom were to collapse, the government deficit would have to rise to nearly 8 percent of GDP.”

For readers not accustomed to financial balances language, remember that by definition the balances of the three main sectors of the economy (private, government and foreign) have to add up to zero. What Godley was saying then is that with a 2.2% deficit (as a percentage of GDP) in the private sector and a 6.0% deficit in the current account, then the government was at the time running a deficit of around 3.8%. Nothing surprising so far. But Godley’s point was that government budget forecasts, which were projecting to “cut the federal deficit in half during the next four years”, were simply untenable: as the previous paragraph shows, Godley was expecting something closer to a deficit of 8%, otherwise “United States will, at best, encounter a prolonged growth recession under the (conservative) stated assumptions about international trade and the private sector balance.” The balance of payments was a powerful constraint on the ability of government to cut its deficits, if a recession had to be avoided. And, as it happens, he was quite right about the gloomy prospects for the US, especially at a time when apparently the “state of macro” was good and depressions were supposed to be a thing of the past.

UK at a crossroads – or some lessons from recent history

Ten years after Godley’s report the UK economy faces similar dilemmas. The recently elected conservative government has promised, among other things, to reduce the government deficit from the current -5% (ballpark figure) to nil by the year 2019 – 2020 (see the OBR report, page 12, for the projections). It has even pushed for a law to ban government deficits in “normal times” and it seems to be actively involved in the sell-off of many assets. The overall government plan has already received the disapproval (to put it mildly) of several leading economists. To get an overall sense of what the Tory government plan really means, it may be worth taking a look at my update of the financial balances of the UK and GDP growth up to the first quarter of 2015 (see a previous post for additional explanations):UK Financial Balances, three sectors, 1987-2015'1qIn terms of financial balances, the situation in UK is strikingly similar to the one described by Godley ten years ago for the US economy. First of all, the deficit in the current account is completely out of control since 2012: as soon as the economy grows at a bit faster pace, the current account deteriorates enough in order to prevent further sustainable expansion – and that’s why, maybe, I think we have seen some improvement in the latest figures of trade deficit, because of lower GDP growth. Second, Godley’s observation that “there has been a furious housing boom” certainly applies to the UK. And third, the government is running a deficit and will try to eliminate it in the next few years; however, it seems that the projected path is much more aggressive than the one planned at the time for the US – eliminating around a 5% government deficit in 4 years in the UK. Actually, we can already see the first effects of the reduction of government deficit: the private sector has been worsening its financial position lately and is already running a 2% deficit. Now, if you are a superstitious person, you will see that private sector deficits have always coincided with bad times – and because of a natural reason, for it means that private sector is taking on debt. However, one important difference regarding the US is the role played by the exchange rates: whereas the US enjoyed a prolonged period of a declining dollar up to the crisis (and, apparently, with little effect on the ever-increasing current account deficit), the UK is now starting to suffer the consequences of the appreciation in the pound. Both stories can be seen in the following graph:
Effective exchange rates, dollar and poundI think that the real estate bubble (which I dubbed in a previous post, quite poetically, the “exorbitant burden of living in Mayfair”) is playing a major role in sustaining a high level for the pound despite the lacklustre performance of UK exports of goods, and therefore on the big deficit on the current account. Europe, with its new German economic model of keeping surpluses with the rest of the world at any cost and exporting deflation abroad, is surely playing a major role too. But the main point is that if, for whatever reason we assume (as Godley did for the US) that the UK will be unable to reduce its foreign deficit by at least 3-4% in the short-term (a reduction that would be quite something by historical standards), then it follows that by the end of its term the government will be unable to reduce the government deficit much more. Actually, I think that a more conservative (and probably accurate) assumption would be to assume that, given rates of unemployment of around 6%, the deficit will be around at least current levels by the end of the government term – no matter how hard the current government tries to push for fiscal consolidation. The unemployment generated by tough fiscal consolidation would be enough to deter government in pursuing additional rounds of fiscal consolidation. And finally, any attempt to rein in the real estate bubble could produce some improvement in the medium term in the balance of payments (and in other important issues such as income distribution), but with unpredictable consequences for the economy – well, you know, bubbles never have a happy ending. It will be interesting to see then how the UK economy will fit (or how it won’t) all the pieces of the puzzle together.



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