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

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

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5.00

10.00

15.00

20.00

Tr ill

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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

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

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

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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

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0

30

20

10

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201420041994

90

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50

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40 2004 20141994

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1994 2004 2014

25

30

0

15

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2004 20141994 0

30

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15

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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/

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(

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

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