Category: Current Affairs

New orders at the country’s engineering companies, long a bellwether for the health of Germany Inc., have been dropping like a stone, falling 10 percent in May alone, the eighth consecutive decline. Similar weakness is apparent across the German economy, from construction to chemicals.

Foreign interest in Germany as a place to invest is also receding. The number of new foreign investments in Germany fell in 2022 for the fifth year in a row, hitting the lowest point since 2013.

“One sometimes hears about ‘creeping deindustrialization — well, it’s not just creeping anymore,” said Hans-Jürgen Völz, chief economist at BVMW, an association that lobbies for Germany’s Mittelstand, the thousands of small- and medium-sized firms that form the backbone of the country’s economy.

And this:

Only four of the 100 most-cited scientific papers on AI in 2022 were German. That compares with 68 for the U.S. and 27 for China.

“Germany has nothing to offer in any of the most important future-oriented sectors,” said Marcel Fratzscher, the head of Germany’s DIW economic institute. “What exists is old industry.”

The power of technology to transform an economy — or leave it behind — is apparent when comparing the trajectories of Germany and the U.S. over the past 15 years. During that period, the U.S. economy, driven by a boom in Silicon Valley, expanded by 76 percent to $25.5 trillion. Germany’s economy grew by 19 percent to $4.1 trillion. In dollar terms, the U.S. added the equivalent of nearly three Germanys to its economy over that period.

Here is more from Matthew Karnitschnig at Politico.

That is the theme of my latest Bloomberg column, score one for the Quantity Theory as well, here is one excerpt:

Enter the notion of “credibility.” A long-standing tradition in macroeconomics, sometimes called rational expectations, suggests that a truly credible central bank can lower inflation rates without a recession. If the central bank announces a lower inflation target, and most people believe the central bank, wages and prices adjust in rough sync with demand. All nominal variables move upward at a slower pace, markets continue to clear, and the economy keeps chugging along. Because individuals in markets believe the disinflation process is for real, they are willing to act in accordance with it in their pricing and wage-demand decisions.

Although rational expectations theory has undergirded several Nobel Prizes (see Robert E. Lucas and Thomas Sargent, for example), most mainstream economists these days do not believe in it as a general approach. The critics might be behavioral economists who scorn the notion that individuals are rational in their market decisions, or they might believe that full credibility is rarely if ever present. After all, do we not live in an age of low trust and mixed quality governance? Over the last year, for instance, I have been party to numerous conversations suggesting the Fed will be afraid to pursue disinflation out of fear of inducing a recession and indirectly electing Donald Trump as president.

And yet it seems the credibility has been there, and so we can give plaudits to various parts of the federal government, including President Biden, for supporting Powell and the Fed. At no point did the president intervene to bash the central bank or send a mixed message, and so the disinflation had implicit stamps of approval from majorities in both parties. It is often the job of Congress to complain, but there were no serious moves made against the independence of the Fed, even if Elizabeth Warren and a few others squawked.

As for the commentariat, a diverse array of economists ranging from the Keynesian Paul Krugman to many conservative economists recognized that rate increases and disinflation were necessary and had to be done with promptness and fortitude. And so credibility reigned.

Granted, the rational expectations view is not always correct — and a recession somewhere down the road isn’t out of the question — but at least in this instance America pulled together and did the job. This sequence of events, which is continuing, should serve as a lesson to those predicting either the decline of America or the creeping polarization and paralysis of our politics. The disinflation can serve as Exhibit A for American optimism and a demonstration that we are still capable of making our own future.

Can the UK and EU pull off the same?

Do I dare say it? Transitory inflation for the win? https://t.co/E4g9OaO8Gw

— David Beckworth (@DavidBeckworth) July 12, 2023

Monetarism and break even rates, however imperfect they may be in some regards, should rise in status as well.

With cyclical and Covid-related variations, of course, Kenya has been running a 5%+ GDP average annual growth rate for two decades. Since 1994, South Africa’s has, with an average of 2.4% per annum, not achieved half that. The contrast in performance is even more stark since 2011: in that year, South Africa’s GDP was 10.2 times Kenya’s; a decade later, in 2021, this ratio had fallen to 3.8. Meanwhile, according to Trading Economics, as South Africa’s current unemployment rate is 33%, Kenya’s is 5%…

And:

The first item to note in Kenya’s favour is the extraordinary “can do” commercial attitude that prevails no matter which political party is in power. Of course, there have been, are and will be differences in emphasis, but whether it is Team Uhuru Kenyatta or Team William Ruto that is calling the shots, both sides are unashamedly pro-business.

And before assuming that this means they are therefore anti-labour, that is simply not the case: more than halving unemployment to under 5% during the last decade is evidence of that. It helps that 86% of Kenya’s workforce now has some post-secondary education.

Kenya’s informal economy is vibrant, solutions-oriented and celebrated — far more than pooh-poohed — by politicians of every persuasion. Called in Swahili “jua kali” — “hot sun”, or, literally, “sun hot” — it operates outdoors and amounts to a training ground for industrial labourers, many of whom have gone on to “graduate” into more formal manufacturing activities, a form of tropical apprenticeship that even the Germans would applaud.

On a drive into the City Centre from Nairobi Airport — now much faster thanks to a Chinese-built highway — you can see roadside manufacture of beds, buckets, furniture, tin trunks, lamps, kitchen pots, jikos (ovens), coffins… you name it. And this is all happening at 8pm, well after the jua has gone down!

And:

GDP-adjusted, Kenya now receives more venture capital investment than anywhere else in Africa; its ratio of VC-to-GDP is more than triple “rivals” Nigeria, Egypt and South Africa. Unsurprisingly, these money inflows have helped reinforce Nairobi’s long-held status as East Africa’s financial capital.

And:

Remoteness in Kenya is no longer a barrier to generating power: a flight over arid northern Kenya on a sunny day gives the impression of a country littered with “glittering diamonds”. On-grid electricity has benefitted from solar too, as well as wind and thermal with over 90% of power generated now coming from these sources.

The 2030 target — which is well within reach as the country is ahead of its interim targets — is to generate 100% of power from renewable sources.

As noted above, for renewable energy projects, private sector financing is everywhere to be seen, from the single solar panel on a house to the giant wind farms of Kipeto and Lake Turkana: Blackrock is an investor in the latter with the US government helping fund the former.

And Kenya’s thermal endowment — born of the country’s geological position astride the hot steam vents of the Great Rift Valley — is the original underpinning of its renewable energy story: here it has benefitted hugely from best-in-class Icelandic technical support and finance.

Kenya still has major problems with foreign investment, as I have noted, but the Power piece is interesting on numerous fronts.

Inflation targets are not supposed to be mere fair weather friends. They serve at all times to reduce arbitrary and undemocratic redistributions of income and wealth and stealthy forms of “hidden” taxation, all of which monarchs, despots, autocrats and, yes, democratically elected governments have, via the printing press, exploited. While there’s nothing wrong with debating the correct target “number”, choosing to raise targets when inflation has persistently surprised on the upside smacks of no more than short-run political opportunism — precisely what central bank independence was supposed to avoid.

There is more, here is the full FT link.