Tuesday, June 26, 2007
Monday, June 25, 2007
Modigliani on Deflation and Housing
I have this old interview between Roach and Modigliani (from 2002) on my site. The grand old man has one or two things to say about housing:
While it may seem that way right now, I have my doubts. I am suspicious of those studies that find the wealth effect is larger from real estate than equities. Theory tells me it should actually be the opposite. That's because the house in part, produces a consumer good -- housing services, which we consume. When the value of the house I inhabit goes up, its implied rental value increases. But that does not significantly improve my spending power, because my imputed rent has gone up as much. Any wealth effect on individually-owned property must net out the consumption of the service we derive from living in our homes. Those adjustments need not be made for stock portfolios. It is possible that new refinancing instruments, such as home equity loans may have temporarily distorted this relationship. But I would view this as a one-time shift, not as a permanent realignment of the link between wealth and consumption.
While it may seem that way right now, I have my doubts. I am suspicious of those studies that find the wealth effect is larger from real estate than equities. Theory tells me it should actually be the opposite. That's because the house in part, produces a consumer good -- housing services, which we consume. When the value of the house I inhabit goes up, its implied rental value increases. But that does not significantly improve my spending power, because my imputed rent has gone up as much. Any wealth effect on individually-owned property must net out the consumption of the service we derive from living in our homes. Those adjustments need not be made for stock portfolios. It is possible that new refinancing instruments, such as home equity loans may have temporarily distorted this relationship. But I would view this as a one-time shift, not as a permanent realignment of the link between wealth and consumption.
Bis Quarterly Review June 2007
The latest issue of the BIS quarterly review is out. The FT covers it here, and the official press release is here.
Quarterly Review, June 2007
The BIS Quarterly Review released today is divided into two parts. The first presents an overview of recent developments in financial markets, before turning in more detail to highlights from the latest BIS data on international banking and financial market activity. The second part presents four special feature articles: one on the bond market term premium; another on the BIS statistics on payments and settlements; a third on recent episodes of credit card distress in Asia; and a fourth on liquidity in the Brazilian domestic government bond market.
The Full Text (PDF) is here.
Quarterly Review, June 2007
The BIS Quarterly Review released today is divided into two parts. The first presents an overview of recent developments in financial markets, before turning in more detail to highlights from the latest BIS data on international banking and financial market activity. The second part presents four special feature articles: one on the bond market term premium; another on the BIS statistics on payments and settlements; a third on recent episodes of credit card distress in Asia; and a fourth on liquidity in the Brazilian domestic government bond market.
The Full Text (PDF) is here.
Economic Growth in Estonia
And this from Bloomberg:
Estonia Revises Down Economic Growth to 9.8 Percent
Estonia, the European Union's second fastest growing economy, revised down its economic growth rate in the first quarter to an annual 9.8 percent as the property market cooled and export growth slowed.
The pace of growth was revised from the preliminary estimate of 9.9 percent released May 15, the Tallinn-based statistics office, Statistikaamet, said on its Web site today. The annual rate was the slowest in two years. The Baltic country's economy grew a revised 10.9 percent for the previous three months.
``Domestic demand weakened mainly due to slowing investment growth, even as the warm winter benefited construction,'' Maris Lauri, the chief economist with Hansabank Markets, said in e- mailed comment. ``The worst hit came from modest export growth and continued strong import rise.''
The $15.1 billion economy is poised for a ``soft landing,'' according to the central bank, after rising house prices and higher interest rates slowed growth in the property market in the first quarter and banks including the Baltic region's biggest lender AS Hansapank set stricter mortgage lending criteria.
Unemployment at a 15-year low and a 20 percent increase in wages during the first quarter are still boosting spending power and pushing up inflation, which stood at 5.7 percent in May and forced the government last month to postpone its target for meeting euro-adoption criteria to 2011.
May Overheat
Estonia's inflation and widening current account deficit, at 14.8 percent of GDP in 2006, increased worries among foreign investors and credit agencies earlier this year that the Baltic economy may overheat, similarly to that of neighboring Latvia, and trigger a sharp decline in the growth rate.
``Strong consumer demand coupled with a slowdown in export growth means the external balance is likely to have worsened this quarter,'' Neil Shearing, an economist at Capital Economics in London, said in e-mailed comment. ``We want to see signs that consumption is starting to ease before signaling the all clear on overheating.''
The Finance Ministry said it expected the economy to slow further in the second quarter because order books in construction are declining, retail and service industries are forecasting lower revenue growth and consumer optimism has ``slightly'' declined. A ``consumption boom'' will still persist ``in the near term,'' the ministry said in an e-mailed comment.
Increases
Private consumption jumped 18 percent, the biggest increase in 14 years, according to the ministry. Gross fixed capital formation, which includes investment and stock-building, also increased 18 percent, slowing from previous two quarters. Exports of goods and services grew 5 percent from a year earlier, while imports rose 11 percent.
Exports slowed most in fuel shipments and electronics, the Finance Ministry said. Analysts, including Lauri from Hansabank Markets, have said the decline in electronics trade is due to rising wages which are forcing companies such as Elcoteq SE, a Finnish contract manufacturer with a factory in Tallinn and Estonia's biggest exporter, to move its high-volume production to lower-cost countries.
Latvia's economy grew a revised 11.2 percent in the first quarter, the fastest pace in the European Union. Lithuania's economy grew 8.3 percent.
Estonia Revises Down Economic Growth to 9.8 Percent
Estonia, the European Union's second fastest growing economy, revised down its economic growth rate in the first quarter to an annual 9.8 percent as the property market cooled and export growth slowed.
The pace of growth was revised from the preliminary estimate of 9.9 percent released May 15, the Tallinn-based statistics office, Statistikaamet, said on its Web site today. The annual rate was the slowest in two years. The Baltic country's economy grew a revised 10.9 percent for the previous three months.
``Domestic demand weakened mainly due to slowing investment growth, even as the warm winter benefited construction,'' Maris Lauri, the chief economist with Hansabank Markets, said in e- mailed comment. ``The worst hit came from modest export growth and continued strong import rise.''
The $15.1 billion economy is poised for a ``soft landing,'' according to the central bank, after rising house prices and higher interest rates slowed growth in the property market in the first quarter and banks including the Baltic region's biggest lender AS Hansapank set stricter mortgage lending criteria.
Unemployment at a 15-year low and a 20 percent increase in wages during the first quarter are still boosting spending power and pushing up inflation, which stood at 5.7 percent in May and forced the government last month to postpone its target for meeting euro-adoption criteria to 2011.
May Overheat
Estonia's inflation and widening current account deficit, at 14.8 percent of GDP in 2006, increased worries among foreign investors and credit agencies earlier this year that the Baltic economy may overheat, similarly to that of neighboring Latvia, and trigger a sharp decline in the growth rate.
``Strong consumer demand coupled with a slowdown in export growth means the external balance is likely to have worsened this quarter,'' Neil Shearing, an economist at Capital Economics in London, said in e-mailed comment. ``We want to see signs that consumption is starting to ease before signaling the all clear on overheating.''
The Finance Ministry said it expected the economy to slow further in the second quarter because order books in construction are declining, retail and service industries are forecasting lower revenue growth and consumer optimism has ``slightly'' declined. A ``consumption boom'' will still persist ``in the near term,'' the ministry said in an e-mailed comment.
Increases
Private consumption jumped 18 percent, the biggest increase in 14 years, according to the ministry. Gross fixed capital formation, which includes investment and stock-building, also increased 18 percent, slowing from previous two quarters. Exports of goods and services grew 5 percent from a year earlier, while imports rose 11 percent.
Exports slowed most in fuel shipments and electronics, the Finance Ministry said. Analysts, including Lauri from Hansabank Markets, have said the decline in electronics trade is due to rising wages which are forcing companies such as Elcoteq SE, a Finnish contract manufacturer with a factory in Tallinn and Estonia's biggest exporter, to move its high-volume production to lower-cost countries.
Latvia's economy grew a revised 11.2 percent in the first quarter, the fastest pace in the European Union. Lithuania's economy grew 8.3 percent.
Estonia
The following from Bloomberg.
Estonia Central Bank Says Wages, Prices Threaten GDP
The Estonian central bank said soaring real estate prices and ``tension'' about wage increases risk destabilizing the economy and fast inflation may keep the Baltic state from adopting the euro before 2011.
The bank forecast in April the $15.1 billion economy will grow 8.4 percent this year, following last year's 11.4 percent expansion, and slow to 6.5 percent in 2008. The central bank today said there was a risk of an even ``sharper'' slowdown in growth.
``Estonia's economic growth'' will ``slow gradually as projected in the forecast,'' the Tallinn-based central bank said in its quarterly economic policy statement. ``However, the risk of a somewhat more abrupt adjustment in the future has increased.''
Estonia's inflation and a widening current-account deficit, at 14.8 percent of gross domestic product in 2006, has raised concern among foreign investors and credit agencies earlier this year that the $15.1 billion economy may overheat, triggering a sudden decline in growth. Estonia delayed euro adoption twice last year as economic growth caused inflation to accelerate.
Prime Minister Andrus Ansip said last month in an interview that he expects the country to slow inflation enough by 2010 to switch to Europe's common currency in 2011.
Wage Risk
The central bank also said that the inflation rate, at 5.7 percent in May, is still too high and the risk of a slowdown in wage growth has increased after a 20 percent increase in average wages in the first quarter. It expects consumer prices to rise 5.1 percent this year, well above euro entry criteria, after 4.4 percent in 2006.
``The `soft landing' is still a much more probable scenario than a `hard landing,' '' Deputy Governor Andres Sutt said in an interview today.
He said that a ``soft landing'' would require wage growth to fall into line with productivity increases and credit market growth to become more sustainable.
``We will know by the autumn whether the adjustment of the economy has become permanent,'' he said.
The central bank said labor costs grew ``considerably faster'' than the economy in the first quarter of 2007, which ``refers to decreasing competitiveness and possible stronger inflationary pressures.''
Real Estate Risk
The real estate market was most at risk because of high indebtedness, while developers may have overestimated the strength of demand during the period of rapid growth, it added.
House prices in Estonia's capital, Tallinn, jumped 24.5 percent in the first quarter from a year earlier, the second- fastest growth globally after neighboring Latvia, according to data published last month by Knight Frank residential research in London.
The central bank also said that the government's budget strategy is too ``lax.''
Last month, the cabinet approved a four-year spending plan last week, cutting budget surplus targets in 2008-2011 from 1.5 percent of GDP, announced during a visit by the International Monetary Fund's mission, to 0.5 percent of GDP.
Estonia Central Bank Says Wages, Prices Threaten GDP
The Estonian central bank said soaring real estate prices and ``tension'' about wage increases risk destabilizing the economy and fast inflation may keep the Baltic state from adopting the euro before 2011.
The bank forecast in April the $15.1 billion economy will grow 8.4 percent this year, following last year's 11.4 percent expansion, and slow to 6.5 percent in 2008. The central bank today said there was a risk of an even ``sharper'' slowdown in growth.
``Estonia's economic growth'' will ``slow gradually as projected in the forecast,'' the Tallinn-based central bank said in its quarterly economic policy statement. ``However, the risk of a somewhat more abrupt adjustment in the future has increased.''
Estonia's inflation and a widening current-account deficit, at 14.8 percent of gross domestic product in 2006, has raised concern among foreign investors and credit agencies earlier this year that the $15.1 billion economy may overheat, triggering a sudden decline in growth. Estonia delayed euro adoption twice last year as economic growth caused inflation to accelerate.
Prime Minister Andrus Ansip said last month in an interview that he expects the country to slow inflation enough by 2010 to switch to Europe's common currency in 2011.
Wage Risk
The central bank also said that the inflation rate, at 5.7 percent in May, is still too high and the risk of a slowdown in wage growth has increased after a 20 percent increase in average wages in the first quarter. It expects consumer prices to rise 5.1 percent this year, well above euro entry criteria, after 4.4 percent in 2006.
``The `soft landing' is still a much more probable scenario than a `hard landing,' '' Deputy Governor Andres Sutt said in an interview today.
He said that a ``soft landing'' would require wage growth to fall into line with productivity increases and credit market growth to become more sustainable.
``We will know by the autumn whether the adjustment of the economy has become permanent,'' he said.
The central bank said labor costs grew ``considerably faster'' than the economy in the first quarter of 2007, which ``refers to decreasing competitiveness and possible stronger inflationary pressures.''
Real Estate Risk
The real estate market was most at risk because of high indebtedness, while developers may have overestimated the strength of demand during the period of rapid growth, it added.
House prices in Estonia's capital, Tallinn, jumped 24.5 percent in the first quarter from a year earlier, the second- fastest growth globally after neighboring Latvia, according to data published last month by Knight Frank residential research in London.
The central bank also said that the government's budget strategy is too ``lax.''
Last month, the cabinet approved a four-year spending plan last week, cutting budget surplus targets in 2008-2011 from 1.5 percent of GDP, announced during a visit by the International Monetary Fund's mission, to 0.5 percent of GDP.
Romanian Rate Cuts
Bloomberg this morning:
Romania's central bank will probably cut its benchmark interest rate for a fourth time this year to slow appreciation of the leu and help narrow the current-account deficit, a survey of economists showed.
The bank will lower the monetary policy rate to 7 percent from 7.25 percent, according to all seven economists in a Bloomberg survey. An announcement is expected late this afternoon in Bucharest.
The leu has appreciated 2.5 percent against the dollar and 4 percent against the euro since the last reduction on May 2. The annual inflation rate has hovered near post-communist lows while the current account gap is expected to widen in 2007 to 12 percent of gross domestic product from 10 percent last year.
The bank has cut its key rate three times this year from 8.75 percent at the end of last year as the annual inflation rate slowed to 3.8 percent in May from 4.9 percent in December. The central bank targets a year-end annual inflation rate of 4 percent, plus or minus 1 percentage point, this year.
So far this year, the leu has gained 7.5 percent against the dollar and 5.8 percent against the euro, making it the world's 10th-best performing currency. The gains helped widen the current- account deficit to 4.5 billion euros ($6 billion) in the first four months of this year from 2.5 billion euros a year earlier.
Another cut would run contrary to advice from the International Monetary Fund, which said in a report at the end of May that the reductions this year were ``premature.''
The IMF predicted much of the inflationary pressure will come from the government's plans to increase spending, widening its budget deficit to 2.8 percent of GDP this year. It says it needs to boost spending on infrastructure and social programs to help catch up with standards in other EU nations.
Romania's central bank will probably cut its benchmark interest rate for a fourth time this year to slow appreciation of the leu and help narrow the current-account deficit, a survey of economists showed.
The bank will lower the monetary policy rate to 7 percent from 7.25 percent, according to all seven economists in a Bloomberg survey. An announcement is expected late this afternoon in Bucharest.
The leu has appreciated 2.5 percent against the dollar and 4 percent against the euro since the last reduction on May 2. The annual inflation rate has hovered near post-communist lows while the current account gap is expected to widen in 2007 to 12 percent of gross domestic product from 10 percent last year.
The bank has cut its key rate three times this year from 8.75 percent at the end of last year as the annual inflation rate slowed to 3.8 percent in May from 4.9 percent in December. The central bank targets a year-end annual inflation rate of 4 percent, plus or minus 1 percentage point, this year.
So far this year, the leu has gained 7.5 percent against the dollar and 5.8 percent against the euro, making it the world's 10th-best performing currency. The gains helped widen the current- account deficit to 4.5 billion euros ($6 billion) in the first four months of this year from 2.5 billion euros a year earlier.
Another cut would run contrary to advice from the International Monetary Fund, which said in a report at the end of May that the reductions this year were ``premature.''
The IMF predicted much of the inflationary pressure will come from the government's plans to increase spending, widening its budget deficit to 2.8 percent of GDP this year. It says it needs to boost spending on infrastructure and social programs to help catch up with standards in other EU nations.
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