Questions relating to Economics that have been asked by some of our members:
The HICP is 'harmonised index of consumer prices' and is a comparable statistic across all member states of the EU - it makes comparing inflation rates across the various countries easier as you are comparing like with like !
The Bank of England sets official short term rates, but not open market rates. The Bank sets official rates, the gilt mkt sets all other rates though the Bank can influence gilt rates thru the Debt Management Office by controlling supply to various maturities along the curve.
The PPI figure stands for Producer Price Index. Statisticians/economists like to differentiate between input costs of raw materials at the factory gate and the price of the part-finished or finished goods at the exit gate to see whether it is the raw material costs that are increasing PPI output prices or whether it is just manufacturers increasing their margins to the companies/suppliers they sell their good to.
It is termed 'flash', not because it's hip and trendy , but because it is a first guestimate for that month's CPI figure i.e. flash means glimpse here !
The industrial trends survey is a survey undertaken by the Confederation of British Industry of its members and taken into account what heads of industry eg company MDs etc think of the outlook and the current state of their businesses. When taken collectively this gives a broad overview of the state of industrial activity/trends in the UK. It shows what those in charge of industrial companies think of the economic outlook which traders/economists then use to help in market predictions.
Member: "I thought a weak dollar would encourage US exports, so stimulate the economy there and lead to inflation ?"
HH Reply : " ... because they are stupid and all of them like to sensationalize everything ! No, really it really comes from the fact that commodity prices are rather benign and both PPI and CPI are not showing signs of inflation, but rather dis-inflationary tendancies.
What people really fear is a Japan like situation with dis-inflation leading to deflation leading to doom and gloom. The problem really comes should US growth and productivity turn down - so far this is not the case, but as usual everybody panics !
It's important to remember that a large part of the economic condition of deflation initially occurs as a result of negative psychology. It is almost a self-fulfilling prophecy, since as more and more people talk about the spectre of deflation, the more likely it is that we slip into a deflationary environment as consumers all tighten their belts through fear of losing their income. Once in a deflationary environment it is very difficult to quickly escape its clutches and, as demonstrated by the Japanese case, it is hard for the State to break the negative psychological circle. This is why nation states, as a rule, prefer to run at a slight, controlled inflation rate. Inflation can be relatively easily tamed - deflation needs more than a psychologist to break economic agents out of the cycle - it needs time to heal the wounds and can take years of pain to resolve !
Deflation is more of a psychological problem because of human nature than is a situation of inflation. That's why policymakers attempt to keep an element of inflation in the economy eg why the Bank of England has a 2.5% inflation target. The dangers of inflation are a lot less than the economy slipping into a deflationary scenario !
Policymakers attempt to keep an element of inflation in the economy and that is why the Bank of England has a 2.5% inflation target. Whilst there are dangers in running an economy with inherent inflation, the dangers of inflation are a lot less than the economy slipping into a deflationary scenario !
Deflation is not only a serious economic problem, but an even more serious psychological problem because of human nature. This is why it is to be avoided, even at the expense of a mildly inflationary environment.
Monetarists, in simple terms, believe that if you control the money supply through setting interest rates at the appropriate level you can control the level of economic activity given that money is integral to every economic transaction. They also believe in laissez faire economics as opposed to Keynesians who argue in favour of interventionist policies. Both schools of thoughts have their good and bad points and as usual a compromise between the two seems to work best !
A huge budget deficit effectively means that a goverment of a country is spending more money than it is earning. In simple terms governments can run a deficit when in an economic dowturn as they attempt to reflate the economy to stave off deflation which is a nightmare to resolve (eg Japan). This is classic Keynesian economics. As they pump more and more money into the economy you get a situation which Monetarists would describe as 'too much money chasing too few goods'. This leads to price rises, or, in other words inflation.
Running a budget deficit generally leads to higher interest rates than would be the case in a balanced budget scenario. There are 2 main reasons for this:
Net result of budget deficit => a higher general level of interest rates.
What happens, in simple terms (it can always be complicated by other factors) is that when the US imports goods it is invoiced in the currency of the company selling the product to the US. For example, if the US imports from the UK it will be invoiced in sterling (the base currency of the exporter). To settle this invoice the US needs to sell $ on the fx mkt and buy £. It then uses this £ to pay the bills from the UK. As a result, all other things equal, there is selling pressure on the $ and buying pressure on the £, so the $ depreciates and the £ appreciates.
Bear in mind there are a lot of other factors atplay, but this is the crux of the argument.
PSNCR is the Public Sector Net Cash Requirement or basically the shortfall in government revenues vs expenditure or what the government needs to borrow from somewhere !
Durable goods are products with a decent life expectancy eg consumer durables would be things like fridges, washing machines. Industrial durable goods are items like 'planes, industrial plant machinery. Durables last a long time and are termed 'big ticket' items ie they cost a lot ! You may also see a figure 'Durable goods ex. transport' - this strips out the transport component ie if Boeing sell 5 747's - that's quite a large amount of money - so the ex.transport figure strips these items out to try and give a closerreflection of the truth of the underlying state of durable goods.
The problem with the Durable goods data series is that it can be very
volatile ie large movements up/down vs. the previous month. In the data
series you quite often see an 'outlier' i.e. a freak statistical figure.
For example, if we see +15% mom when the data is released people may choose
to ignore it as it's not that representative and just indicates that in
one month a lot of factors colluded to produce a somewhat erroneous total
figure for durables !
M4 is a broad measure of the money supply and put simply the thinking
goes :
'the more economic activity there is the greater the money supply will
be' - so it's a proxy for the underlying state of the economy/can be used
to predict inflation etc. Equities don't generally pay much attention
to it - it's more closely scrutinised by the bond mkt !
The CML figure is the Council of Mortgage Lenders figure and, put simply, the more money being lent to buy homes, the more confident people are of their own finances and the more they are likely to spend, so boosting economic activity in general. This can also be affected, of course, by remortgaging activity, which can slightly cloud the figures ! What is important to markets is the NET lending figure.
It's importance to markets is not as great as some of the other economic releases, but it does add to the overall picture. What it shows is basically what is happening in manufacturing companies and markets extrapolate this info to infer what is happening in the manufacturing sector of the economy as a whole. In the US this sector is a lot more significant than here, so if the data, when released at 1.30 pm, is higher than expectations traders will read into this that the economy is expanding faster than expected and the stock market could be expected to perform better than previously anticipated.
The ZEW survey is a survey of various economists and their views of the
economy in the future are expressed in the form of an index.
As this figure is derived from economists it should be treated with care as we all know they are predominantly Muppets/academics and most of them don't have a clue, tending to be sheep/lemming like in their expectations !
Markets follow this number since it represents a consensus guestimate of what will happen to the economy in the future. It needs to be respected as it can move markets, but I consider an index figure derived from real businessman and their views on the economy to be far more powerful than an index like the ZEW, but that's tainted by my view of the average economist working in a bank !
The actual index figure for industrial production is taken and this figure is then converted into an 'annualised' figure (as they tend to do in the States !).
This annualised figure is then compared to the previous year's IP numbers and the difference is expressed as a percentage ie +1% would imply a 1% increase year-on-year compared to the production figures released this time last year.
The Balance of Trade is simply exports minus imports, so if u import more than u export then u get a trade deficit.
The Balance of Payments accounts of a country records ALL transactions by residents of that country with residents of other countries. If you include all transactions then the payments and receipts must be equal and hence, by definition the BofP must equal zero i.e. no surplus/no balance.
The BofP comprises Current Account transactions and Capital and Financial Account transactions. The Current Account covers transactions in goods, services, income and current transfers. The Capital Account relates to capital transfers and acquisition/disposal of non-produced, non-financial assets. The Financial Account covers transactions in assets and liabilities of direct investment,portfolio investment, financial derivatives, other investment and also official reserve assets.
Although the total BofP has to equate to zero you can have deficits or surpluses in individual items in the BofP statement e.g. you can have a deficit on the trade balance, but a surplus on, say, services or a surplus on flows into government bonds/other financial assets. The statement that a country has a deficit or surplus in its "balance of payments" must refer to some particular class of transactions i.e. one class can be in deficit or surplus, but the overall balance has to do what it says i.e. balance - a bit like company accounts balance, if you like ! So, when somebody talks about a BofP deficit u need to be sure what exact part of the accounts they are discussing.
As the example below shows, the US had a deficit in goods of $73.4 billion
but a surplus in services of $45.3 billion.
TABLE 1
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The U.S. Balance of Payments, 1991
(billion dollars; + is surplus of receipts, - is deficit)
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Merchandise trade -73.4
Services +45.3
Investment income +16.4
Balance on goods, services and income -11.7
Unilateral transfers +8.0
Balance on current account -3.7
Nonofficial capital* -20.5
Official reserve assets +24.2
Balance on capital account +3.7
Total balance 0
SOURCE: U.S. Department of Commerce
"The magnitude of our balance of payments deficit suggests that we are going to have a long and severe correction ahead of us. The influx of capital into the US, which lowered our borrowing costs and led to exorbitant capital expenditures, suggests that we are not merely looking at a recession, but a full-blown depression."
What the commentator means here when he refers to a BofP deficit is actually a deficit on one particular line of the accounts has caused a corresponding and necessary (in accounting terms) inflow on some other line of the accounts. This inflow of capital has caused interest rates to fall as greater and greater capital inflows chase lower and lower rates of return. This has led to lower domestic borrowing rates, which has caused a 'bubble' in terms of credit expansion and consumer borrowing, which at some point has to end. This abrupt end in credit expansion will lead to consumers reining in spending on consumption leading to lower economic activity, which if u take it to its conclusion, leads to a slowdown/recession and in the worst case scenario - a depression.
This ultimate scenario is debatable and economists will argue until the cows come home about the actual state of the economy !
A large deficit on, say, the trade balance can, but doesn't have to, lead to a lower currency value because if, say, Americans are spending more on foreign goods than foreigners are spending on American goods, then, in simplistic terms, Americans are selling more dollars (to pay for these goods in a foreign currency) than foreigners are buying dollars to purchase US exports. Taking an example relating to cars - if say Japan buys nothing from the US, but more and more Americans buy Japanese cars, then Americans will have sell more and more dollars to buy Yen to pay the Japanese makers of those cars. As the selling pressure on the dollar gets heavier, in simple terms, you can expect the dollar to fall. In reality the situation is a lot more complex than this, but that is one way to look at deficits on the trade balance and their effect on the currency - a simple way maybe, but one employed by forex traders and one reason why the trade balance carries so much weight amongst forex dealers. Bond traders on the other hand are quite capable of dismissing the trade balance if they have a more pressing worry e.g. the funding of the budget deficit. So, as ever in economics/markets, nothing is clear cut !