Recent commodity price developments : causes and effects

In the past few years, constant price increases have attracted much attention to commodity markets. The nominal prices of oil and most metals reached record levels, and their real prices reached the highest level in many years. The recent price surge was due mainly to a strong increase in demand for commodities. This can be attributed to the strong economic growth of the past few years and to the integration of a substantial part of the world population into the global economy and international trade. The price increase was also partly the result of supply side developments, such as the scarcity of spare production and refining capacity. This made the oil price sensitive to every event that had a negative influence on the oil supply, such as the recurrent geopolitical tensions. In recent years, economic growth and inflation in the oil-importing countries have been fairly resistant to the sharp increase in commodity prices, largely thanks to the changes in the monetary policy framework in comparison to the seventies, structural changes in the developed countries, the effect of globalisation and the favourable economic environment. Financial markets expect oil prices to remain at high levels in the short- and medium term. Moreover, according to the International Energy Agency and other observers, high oil prices are also expected to persist in the long term. Metal prices are forecast to ease from their current high levels, mainly as a result of supply side flexibility, as extra capacity can be added quite quickly. In view of the major economic impact of oil prices and the increasing concern about the effect of energy consumption on climate change, the government has an important role in the energy debate. Over the last couple of years there have been some initiatives to establish a common European energy and climate policy.commodity markets, energy, metals, oil, OPEC.

Rebalancing global demand

The article examines to what extent the recovery of the global economy could gain support from a more balanced growth of global demand than in the past. Despite the gradual recovery of the global economy, it remains highly uncertain when – or even whether – growth can return to the often very vigorous pace prevailing before the crisis, especially as that dynamism was in many countries largely based on macroeconomic distortions which were most clearly apparent in the growing current account surpluses and deficits on the balance of payments, as is evident from our analysis of the figures from 1995 onwards. At the Pittsburgh summit in September 2009, in the Framework for Strong, Sustainable, and Balanced Growth the G20 leaders agreed that deficit countries should support private savings and strive towards fiscal consolidation. They will not only need to modify their spending patterns but will also have to transfer their focus to the export sector. To offset the shortfall in demand from these deficit countries, the surplus countries are called upon to reduce their dependence on exports and tap domestic sources of growth. The authors examine the actual policy implications of this for the US, China and the euro area. Although a number of countries have already adopted a range of policy measures which are a move in the right direction, restoring the balance of global demand remains a major challenge, not least on account of the difficult-to-implement but no less essential structural reforms, or the time required to push those reforms through. It will be no easy task to restore the macroeconomic equilibrium, achieve a broad consensus and create the conditions for strong, sustainable and balanced growth, in line with the G20 aims. The movement towards a new global balance risks becoming a protracted process, with the possibility of a worldwide growth slowdown in the meantime.G20, United States, China, euro area, saving, investment, balance of payments current account

Notable trends in the EU budget

The European Union budget has a number of specific characteristics which make it different from the budgets of the Member States : in principle, it must never be in deficit, and there is a special decision-making procedure. The structure and maximum expenditure are specified for a 7-year period in the Financial Perspective. In relation to GDP and national budgets of the Member States, the EU budget is small. It is increasingly funded on the basis of the size of the gross national income of each Member State whereas import levies and VAT-based transfers from the Member States are becoming less important. The United Kingdom receives a special rebate. The importance of the Common Agricultural Policy, historically the largest EU expenditure item, is steadily diminishing in favour of expenditure on cohesion policy. Since the beginning of the 1990s, the Common Agricultural Policy has undergone a radical reform. Opinions differ on the contribution made by the cohesion policy towards income convergence between regions in the EU. The Commission’s proposals regarding the Financial Perspective for 2007-2013 embodied an important increase in expenditure and placed the emphasis on the attainment of the Lisbon objectives. Protracted negotiations at European Council level led to a compromise in December 2005 and following difficult negotiations with the European Parliament, a new Interinstitutional Agreement was signed on 17 May 2006.European Union, EU budget, Financial Perspective, Common Agricultural Policy, Cohesion policy

End of the crisis in the housing markets ? An international survey

The article examines recent developments in international housing markets and makes an assessment of the current situation. The first section demonstrates that the last upward movement in house prices in advanced economies, that started during the mid-1990s, differed from previous upward phases because of its strength, duration and degree of synchronisation across countries. Low interest rates, financial innovation, relaxed credit conditions and demographic factors stimulated housing demand and led to higher prices and investment. The strongest increases were recorded in the UK, Spain, Ireland and France. Starting around the mid-2000s, housing markets increasingly displayed signs of overheating and the American subprime crisis of 2006 triggered a downward correction in the US housing market. Housing markets elsewhere displayed a similar pattern around the same period. Nevertheless, developments were less synchronised during this downturn than during the upturn, as the fall in house prices seems to be over in some countries while the correction continues in other countries. The degree of over- or undervaluation of recent house prices can be calculated on the basis of some frequently used measures. Taking into account fundamental factors like disposable income, population growth and the very low interest rate level, it appears that current prices in most countries are more or less in line with fundamentals. These simple measures have their limitations, and consequently one should be cautious when interpreting the results. Additionally, several common risk factors (normalisation of interest rates, lower potential growth after the economic crisis, fiscal consolidation) and some country-specific risk factors might hinder a further recovery of housing markets. The recent crisis clearly demonstrated the need for stricter rules and control of the financial sector. Various initiatives have already been taken, and international institutions have also formulated recommendations for housing policy reform and the functioning of residential property and mortgage markets. Subsequently, the European government debt crisis that started in 2010 stimulated initiatives to strengthen economic governance in the European Union. In the new surveillance framework, macroeconomic risks will be monitored more closely and more broadly, and this will include the use of indicators related to the housing sector.house prices, investment in housing, interest rates, financial innovation, demography, valuation, disposable income, United States, United Kingdom, euro area, Belgium

The US current account deficit : how did it come about and what are the policy implications

One of the most remarkable characteristics of the world economy today is the enormous, ever worsening US balance of payments current account deficit, which reached a record level of 5.7 p.c. of GDP in 2004. This has given rise to concerns in academic and political circles regarding the sustainability of the current situation and the potential dangers for the global economy of a sudden, disorderly adjustment. The size of the US current account deficit is not only unprecedented in American post-war history, but it also seems to be exceptional from an international perspective. Moreover, the US deficit contrasts with a surplus in virtually every other region and the problem has consequently taken on a global dimension. The increase in the US current account deficit recorded in the nineties reflects an internal American shortfall in savings. Whereas the private savings-investment equilibrium was restored in 2002 and 2003, the same period saw a huge deficit in the public sector budget. The start of the new millennium brought notable changes in the way the US current account deficit was financed since investments by Asian public authorities in American government debt instruments largely took over the position previously occupied by European private foreign direct investments and investments in equities. It is sometimes put forward that the US, unlike other countries facing similar circumstances, is safeguarded from an attack on its currency because of its prominent role in the international financial system. According to an influential school of thought in economic literature, the current international system can even be seen as a “revived” Bretton Woods system. Indeed, a number of East-Asian countries, including China, use a fixed or quasi-fixed exchange rate against the dollar, which brings to mind an informal dollar standard. Although this set of circumstances has undoubtedly offered various regions in the world a number of mutual benefits during recent years, these exchange rate relations may nevertheless have caused some distortions in US spending, whereas Asian countries have to deal with a growing exchange rate risk on their official reserves. Different scenarios are conceivable to deal with the global imbalances. The results of model simulations show the huge effort required to significantly reduce the US current account deficit which highlights the scale of the problem, emphasising the need for simultaneous economic policy measures in the different economies involved. The concern over global imbalances and the development of exchange rates also feature prominently on the agenda of international forums such as the G7 or G20 meetings. In the statements issued at those meetings, the need for a common approach to tackle the global imbalances is given priority and the belief that excessive exchange rate volatility is not desirable is underlined.current account imbalances, United States current account, financial flows into the United States, international monetary system

The Interest Rate and Credit Channels in Belgium: An Investigation with Micro-Level Firm Data

This paper investigates the effects of monetary policy on firms' investment behaviour. The analysis relies on a comprehensive database of Belgian firms covering all sectors of economic activity and firms of all sizes. We proceed in two steps. First, we estimate a reduced-form investment equation derived from the neo-classical model, augmented by cash flow. This equation is estimated by the Arellano and Bond (1991) GMM procedure. Second, we compute the elasticity of the user cost of capital and the cash flow/capital ratio to the policy-controlled interest rate. We estimate the model for various sample splits according to sectors and sizes. Our results indicate that small firms are more sensitive to monetary policy than large firms, and that services are almost unaffected. Since the impact differs across sectors and sizes, we can conclude that monetary policy produces distributional effects

The Swiss Mass Immigration Initiative: The Impact of Increased Policy Uncertainty on Expected Firm Behaviour

In Switzerland a sudden policy uncertainty shock happened in February 2014 with the close and largely unexpected acceptance of a referendum aiming at limiting free movement of persons. The referendum requires Switzerland to reintroduce annual quotas for immigrants within three years. The referendum is vaguely formulated and its actual consequences are largely unknown. Yet, the vote reduced the expected future availability of qualified labour, put at stake several economically important agreements between Switzerland and the European Union, and reduced expected future domestic demand for firms. This paper uses a special survey conducted by the KOF Swiss Economic Institute to analyse the short- to medium-run expected consequences of this substantial policy uncertainty shock on firms' private fixed investment and employment plans. We find that those firms that believe that potential growth in Switzerland will deteriorate and those that report that investment uncertainty has increased are also the ones that see a significant reduction in their future investment activities and their expected employment due to the vote, so that an uncertainty effect is present. We also provide evidence that the short-term effect of policy uncertainty on investment is economically significant.Die knappe Annahme der Initiative gegen Masseneinwanderung im Februar 2014 führte zu einem unerwarteten Anstieg der Unsicherheit über die zukünftigen politischen Rahmenbedingen in der Schweiz. Die Initiative verpflichtet den Bundesrat zur gesetzlichen Einführung fixer Kontingente innerhalb der nächsten drei Jahre. Die weit gefasste Formulierung des Initiativtextes verhindert jedoch das Vorhersehen der genauen Umsetzung und erhöht damit den Spielraum möglicher Auswirkungen, was letztlich in einem Anstieg der Unsicherheit resultiert. Die geforderten Kontingente beschränken den Zugang Schweizer Firmen zu ausländischen Arbeitskräften und erhöhen die Gefahr eines zukünftigen Mangels an Fachkräften. Zudem sind Kontingente mit dem bestehenden Vertrag der Personenfreizügigkeit unvereinbar, bei dessen Auflösung käme es zur Kündigung aller mit der Personenfreizügigkeit verbunden bilateralen Abkommen. Die Aussicht auf die Kündigung der bilateralen Verträge erhöht die Unsicherheit über den Zugang Schweizer Unternehmen zum Binnenmarkt der Europäischen Union und senkt letztlich die Erwartungen der zukünftigen Gesamtnachfrage. In diesem Artikel untersuchen wir die kurz- bis mittelfristigen Auswirkungen der Annahme der Initiative auf Beschäftigung und Investitionen. Unsere Analysen basieren auf einer Sonderumfrage der KOF Konjunkturforschungsstelle und zeigen, dass die gestiegene Unsicherheit bereits jetzt zu einer Reduktion der Investitionspläne und zukünftigen Beschäftigung führt