EC221: ECONOMIC PERFORMANCE
Despina Kanellou University of Brighton 2017-18
LEARNING OBJECTIVES
§ Understand what economic variables-indicators are important for MNEs when making investment decisions § Understand how to find and interpret the relevant data § Understand some of the limitations of looking at certain variables § Discuss and realise what are the implications of Political Economy Differences for Managers
CONTENTS
1. What to look for 2. GDP
3. Growth 4. Output Gap
5. Limitations
6. Inflation 7. Gini-coefficient
8. Debt 9. Balance of payments
10. Considerations 11. Summary
12. References 13. Reading
14. Seminar work
WHAT TO LOOK FOR
Need to understand macroeconomic fundamentals to make sound investment decisions e.g.
Size of economy Income Potential to grow Distribution of income Cost of living International trade and investment Debt
GROSS DOMESTIC PRODUCT
The total market value of all goods and services produced within a country in a given period of time.
Production=expenditure=income Expenditure approach GDP = C+ I + G + (X – M)
Per capita Purchasing Power Parity (PPP) can then adjust that to factor in different costs of living e.g., Norway, Switzerland & Denmark – highest cost of living – need to adjust GDP for this.
GROSS DOMESTIC PRODUCT 2015
0.00
100.00
200.00
300.00
400.00
500.00
600.00
Tr ill
io ns
GDP in 2015, national currency, trillions
United Kingdom Japan
Germany United States
China
Source: World Bank, 2016
0.00
5.00
10.00
15.00
20.00
Tr ill
io ns
GDP in 2015, US dollars, trillions
United Kingdom Japan Germany
United States China
GDP PER CAPITA PPP 2015, NATIONAL CURRENCY
0.00
10000.00
20000.00
30000.00
40000.00
50000.00
60000.00
GDP per capita , PPP, 2015
United Kingdom Japan Germany United States China
Source: World Bank, 2016
NOMINAL VS REAL GDP (ADJUSTED FOR INFLATION)
1,400.00
1,450.00
1,500.00
1,550.00
1,600.00
1,650.00
1,700.00
1,750.00
1,800.00
1,850.00
1,900.00
2010 2011 2012 2013 2014 2015
Bi lli
on s
UK GDP 2010-2015, constant and current £
GDP (constant LCU) GDP (current LCU)
Source: World Bank, 2016
3. GROWTH
By how much has GDP changed over time? Usually express the percentage figure rather than levels (dollar amounts)
Recession
GDP GROWTH % 1998-2017
Source: IMF, World Economic Outlook – October 2017
GDP GROWTH % 2011-2015
-2
0
2
4
6
8
10
2011 2012 2013 2014 2015
GDP growth % 2011-2015
United Kingdom Japan Germany United States China
Source: World Bank, 2016
PRODUCTIVITY GROWTH BY COUNTRY GROUP-1990-2016
STAFF PAPER SUMMARY
Gone with the
Headwinds: Global
Productivity
Productivity growth—a key driver of living standards—was already in decline in advanced economies before the global financial crisis drove it down sharply.
Productivity growth has slowed significantly around the world since
the 2008 global financial crisis.
It was already in decline in advanced economies before the crisis drove
it down sharply. Structural forces and demographic factors also
contributed to the trend.
This pattern has been visible in
labor productivity (output per
worker) as well as total factor
productivity, which measures the
overall efficiency of an economy’s
use of labor, capital, and elements
such as technology. If the trend
continues, it would threaten
progress in raising global living
standards, addressing private and
GROWTH DOES NOT HELP ALL LOW INCOME DEVELOPING COUNTRIES GROWTH AND INEQUALITY 1996-2013
The Fund now is shifting its work toward the concrete ways in which this
deeper understanding of the roots of inequality can translate into
policies that advance inclusive growth—with a focus on equitable ways
to tax and spend. Decisions in this area need to be made by country
authorities.
For the past two years, the IMF staff has worked with a group of pilot
countries spread across all regions and income groups to bring
inequality issues and policy responses into discussions during the IMF
annual health checkup with its member countries. The issues are now
featured in the reports prepared as part of the so-called Article IV
consultation process.
Growth does not help all
GINI CO-EFFICIENT
Measures inequality of income distribution in an economy Varies from zero to one [however, sometimes reported as 0 – 100 or percentage]
Zero indicates perfect equality, with every household earning exactly the same
One (or 100) indicates absolute inequality, with a single household earning a country’s entire income
Pre tax, post tax, individual, family, income, consumption, etc.
0 0.05
0.1 0.15
0.2 0.25
0.3 0.35
0.4 0.45
0.5
D en
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Gini Coefficinet, 2012 or latest year (OECD, 2016)
OECD GINI COEFFICEINTS
THE WEALTHY ARE GETTING WEALTHIER ADVANCED ECONOMIES, PER CAPITA REAL MARKET INCOME 1980-2012
The wealthy are getting wealthier
In advanced economies, the incomes of the top 1 percent have grown
three times faster than those of the rest of the population.
IMF research in this area has shown that rising inequality poses risks to
the durability of economic growth, that the design of government
policies has an impact on income distribution, and that government
also can help address the situation. An IMF paper released in January
2017 extended that research to the impact of macro-structural policies
in low-income developing countries (Figure 1.4). Other research has
focused on the implications of budget deficits, labor market
liberalization, and cross-border capital movements.
LIMITATIONS OF GDP ANALYSIS One dimensional: focuses on production
Silent on how the income is distributed
An imperfect perfect measure of living standards – Human Development Index (HDI) – useful measure
http://hdr.undp.org/en/content/human-development-index-hdi Comparing one % growth rate with another can ignore the dynamics
What is driving growth can be illuminating
INFLATION
At what rate are prices increasing? = At what rate is the purchasing power of money being eroded?
How much inflation is too much or too little? • Phillips Curve: inverse relationship between the rate of inflation and changes in the rate of unemployment. Reflects a tendency for inflation to rise when unemployment is low in the short run.
• What is the central bank target?
INFLATION What goods do we monitor? Consumer Price Index (CPI) Producer Price Indices (PPI) How reliable is the data?
Inflation and monetary policy Interest rate increases are used to slow inflation; interest rate decreases – and low rates of interest
(0.25% Bank of England rate )– are used to stoke inflation (through effects on demand)
Current Inflation in UK 3%
Currency Lower interest rates can weaken currency, exports may rise and imports decline; Higher interest rates can strengthen currency, exports may decline and imports rise.
INFLATION
-2
0
2
4
6
8
10
12
2011 2012 2013 2014 2015
CPI inflation percentage 2011-2015
United Kingdom Japan Germany United States China India
Source: World Bank, 2016
UK INFLATION AND GDP GROWTH http://www.imf.org/external/datamapper/PCPIEPCH@WEO/ ADVEC/GBR/EURO
Source: IMF Data Mapper, 2017
UNEMPLOYMENT RATE
Source: IMF Data Mapper, 2017
International Labour Organisation. Unemployed people are those without a job who have been actively seeking work in the past 4 weeks and are available to start work in the next 2 weeks. It also includes those who are out of work but have found a job and are waiting to start it in the next 2 weeks.
UK EMPLOYMENT RATE The proportion of people aged from 16 to 64 in work is known as the employment rate. The employment rates for people, men and women have been generally increasing since early 2012. For the latest time period, June to August 2017, the employment rate for people was 75.1%, up from 74.5% for a year earlier.
EMPLOYABILITY AND SKILLS
12 McKinsey Global Institute Executive summary
seeking contingent work on online labor platforms.22 However, part-time employment provides fewer hours of work per year and for some workers it remains a stopgap measure; the share of workers in our six sample countries who are working part time involuntarily (that is, they sought full-time employment but accepted part-time work) doubled from 3 percent of the labor force in 1993, on average, to more than 6 percent in 2014.23
Differences in union rates and labor regulation influenced outcomes for some income and demographic segments National labor-market institutions and practices that shaped the outcomes in employment and wages appear to have made a difference in some of our focus countries. For example, the United States is known for its relatively light labor regulation and flexible labor markets compared with most European economies. About 11 percent of private-sector workers
22 See A labor market that works: Connecting talent with opportunity in the digital age, McKinsey Global Institute, June 2015.
23 OECD labor database.
Exhibit E4
Employment rate %
Employment has been lower for low- and medium-skill workers, and they are more likely to be employed on temporary contracts
FranceItaly SwedenUnited Kingdom
Netherlands
Medium skill Low skillHigh skill
Temporary employment Thousand people
Great Recession Axis midpoint
SOURCE: OECD; McKinsey Global Institute analysis
90
80
60
70
50
40 2004 20141994
25
15
0
30
20
10
5
201420041994
90
80
70
50
60
40 2004 20141994
50
70
60
40
80
90
1994 2004 2014
25
30
0
15
10
5
20
2004 20141994 0
30
10
5
25
15
20
2004 20141994
Source: McKinsey 2016
DEBT
How much debt is the nation in? Who is in debt? Government, corporate, consumers?
Who holds the debt Domestic or foreign
What currency is the debt in? Governments can tax/print their own currency
Can spell future austerity measures Tax and spending cuts
Low consumer debt levels may mean a saving culture Keynes’ ‘paradox of thrift’
May mean capital flight, currency crash and crisis
IMF DATAMAPPER®, PUBLIC DEBT TO GDP, (IMF, 2015)
BALANCE OF PAYMENTS Records a nation’s trade with abroad The BOP consists of three main accounts: Current Account – records sales/purchases of goods and services Financial Account – records flows of money in and out of financial assets: shares, bank accounts,
government bonds etc. Capital Account – records flows relating to sales and purchases of fixed assets (e.g. land)
These must balance, but individual accounts can be in deficit/surplus E.g US – current account deficit balanced by surplus in capital account The accounts have to balance but how is the interesting question Visible and invisible
Exchange rates
CONSIDERATIONS To what extent the government intervenes in the economy?
How fully is the market is allowed to operate? Transition between command and free market economies is rarely smooth
Politics, culture and legal systems matter More to this than a sheet of numbers
THE RISKS OF DOING BUSINESS IN A COUNTRY ….
are a function of Economic risk – the likelihood that economic
mismanagement will cause drastic changes in a country’s business environment that adversely affects the profit and other goals of a business enterprise
Political risk – the likelihood that political forces and cultural differences will cause drastic changes in a country’s business environment that adversely affects the profit and other goals of a business enterprise
Legal risk – the likelihood that a trading partner will opportunistically break a contract or expropriate property rights
it can be more costly to do business in countries with dramatically different product, workplace, and pollution standards, or where there is poor legal protection for property rights
HOW CAN MANAGERS DETERMINE A MARKET’S OVERALL ATTRACTIVENESS?
The overall attractiveness of a country as a potential market and/or investment site for an international business depends on balancing the benefits, costs, and risks associated with doing business in that country
Other things being equal, the benefit-cost-risk trade-off is likely to be most favorable in politically stable developed and developing nations that have free market systems and no dramatic upsurge in either inflation rates or private sector debt
CAUTION!
Crucial to understand macroeconomic performance of target markets A small number of key variables is all you need
Anyone can pull the numbers, but not many can interpret them Trends and comparisons
Keep up-to-date
Watch your sources Just one variable can be misleading…is the combination of them that will give you the tools for your analysis
REFERENCES
Hill (2013), International Business, 9e, McGrawHill Human Development Report (2016), UNDP
IMF (2017), World Economic Outlook, IMF IMF (2017), IMF Annual Report, IMF
McKinsey (2016), Poorer than their Parents? Flat or Falling incomes in advanced economies, July 2016 McKinsey & Company 2016
World Bank (2013), World Development Indicators, World Bank
SEMINAR WORK 1. Collect the following data for a country of your choice
GDP, unemployment, inflation, debt, exports and imports Time series: 2007-2017 Source: IMF World Economic Outlook or World Bank WDI
Gini coefficient Latest available Source: World Bank
What cautions do we need to exercise with regards to our data?
2. Study the IMF WEO July update and Infographic Apply the ‘risks to growth’ section of the infographic to your chosen country Are the risks pertinent for your chosen country? How about the policy actions? Are they already in place?
ASSESSMENT: THIS WEEK YOU NEED TO CHOOSE YOUR GROUP DURING YOUR SEMINAR SESSIONS 1. Group presentation (25%) -15 minute group presentation Global industry analysis (Lecture 7, week starting 20/11) Macroeconomic analyses of biggest markets (Lecture 5, TODAY) Submission deadline for your presentation slides is 23:59 on Saturday 13th
January 2018, Presentations: Week commencing 15th January
2. Group written report (25%) 1500 word report on global industry, focusing on Mode of entry (Lecture 8) Political and legal factors (Lecture 6) Ethics in international business (Lecture 9) Submission deadline is Monday 5th February 2018.
3. Individual report (50%) 2000 word corporate analysis from chosen industry
Mainly based on Financial Ratios Analysis and Comparisons Provisional hand-in date: Monday 14th May 2018.
EC221ASSESSMENT PART I
You must deliver a presentation containing the following:
Global industry analysis (approx. 9 minutes) Lecture 7
Individual macroeconomic analyses of chosen countries. It is recommended you make use of the key macroeconomic variables used in Lecture 5 Economic Performance. (approx. 6 minutes for 4 countries) Concluding remarks (1 minute)
Your presentation time is 15 minutes . You will be penalised for exceeding, or failing to reach, your allocated time. However, plus/minus 1 minute error is allowed.
MACROECONOMIC ANALYSIS
‘Rate an economy’
Analysing key macroeconomic indicators to assess the health of an economy
GDP, unemployment, inflation, debt etc. …. Look at this week’s lecture and at the seminar work.
Do this for the ‘4 or 5 biggest consumer markets (countries) in your industry’ and for a 10 year period
WHERE TO GO? Yahoo! Finance Industry Centre http://biz.yahoo.com/ic/
IMF: http://www.imf.org/external/datamapper/index.php World Bank: http://data.worldbank.org/about/get-started
Office for National Statistics: https://www.ons.gov.uk/ Passport (f/k/a Global Markets Information Database SC à Online Library à A-Z Resources à Passport
• Need to register
FT, Economist, Reuters
SCREENSHOT FROM IMF DATA MAPPER
EC221ASSESSMENT PART I
Select a global industry from the list at the bottom of this section à get it approved.
Conduct an industry analysis, similar to that shown in Lecture 5 Multinationals, industries and strategy.
Select the biggest /or healthiest consumer market (country) in your industry and carry out an in-depth assessment of its macroeconomic performance. You first look at the 4 or 5 biggest consumer markets (countries) in your industry, depending on whether there are 4 or 5 students in your group.
Pre$approved*Global%industries%(whole%industry%or%subsection%thereof)%
• • Automobiles( • Textiles( • Smartphones( • Mining(
• Oil(&(gas( • Telecommunications( • Aerospace(and(defence( • Pharmaceuticals
%
%
%
Part%2%–%Group%written%report%(25%)%
• This(report(is(worth(25%(of(the(module.((
Your(employer(was(intrigued(by(your(industry(analysis(and(macroeconomic(presentation(and(wants(
to(know(more(with( the(view(of(making(an(overseas( investment.(You(are(now(assigned(the( task(of(
reporting(on( three(key(aspects(of(a(potential(overseas( investment( into(your( industry.( These( three(
aspects( are( critical( success( factors( of( international( ventures;( be( sure( to( report( accurately( from(
reliable(sources.(
Instructions:(
In(your(existing(groups,(keeping(the(same(global(industry(as(in(Part(1,(you(must(write(a(report(on(the(
three(aspects(of(an(international(investment(into(your(chosen(industry:(
• Mode(of(entry( • Political(factors( • Ethics(in(international(business(
(
Mode+of+entry+ What+ is+ the+ most+ appropriate+ mode+ of+ entry+ for+ an+ international+ investment+ into+ your+ chosen+ industry?+ Why+ is+ it+ the+ most+ appropriate+ mode?+ Discuss+ advantages+ and+ disadvantages.+ What+ investments+risk+will+your+employer+be+exposed+to?+ + Political+factors+ What+ political+ obstacles+ lie+ in+ your+way?+How+ can+ they+ be+ effectively+ dealt+with?+ Is+ corruption+ an+ issue+to+contend+with?+Might+bribes+need+to+be+paid?+Is+this+acceptable?+Are+we+at+the+bottom+of+the+ peckingDorder?+Do+we+have,+or+do+we+need,+inside+contacts?+Is+there+a+threat+of+war+or+expropriation+ of+assets+in+the+country?+ + +
+ +
INDUSTRIES An industry can be defined as, “The production of raw materials (basic materials used in manufacturing) and of goods. “Businesses that produce a particular type of thing or provide a particular service.” FT.com Lexicon
Examples of industry groupings: Basic industries (those not depending on other industries), e.g. Agriculture, fishing, mining, petroleum Key industries: (those crucial to a country’s economy), e.g. Gas in Russia, Financial services in the UK High-tech industries: (those using advanced methods and modern equipment), e.g. 3D printing and biotech Infant industries: (those requiring government protection from foreign competitors), e.g. Brazilian car industry? Global industries: (those which criss-cross the globe in production and consumption), e.g. Global car industry
