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Macro Roundup


Monday, October 6, 2014

AI Summary. Europe's weak domestic demand since the Eurozone crisis has produced a current account surplus of roughly $400bn a year, making it the world's largest capital exporter. With the European Central Bank holding real yields down, the resulting excess savings are expected to drive large capital outflows that shape global asset prices.

Izabella Kaminska FT Alphaville
Date Posted:
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The Euroglut, a significant global imbalance, stems from Europe’s lack of domestic demand post-Eurozone crisis, evidenced by high unemployment & a record current account surplus of around 400bn USD annually.

Does Europe's weak domestic demand make it the world's largest capital exporter?

Core argument: Europe runs a record current account surplus of roughly $400bn a year, larger than China's in the 2000s, positioning it as the 21st century's largest capital exporter, according to the "Euroglut" thesis.

The Euroglut, a significant global imbalance, stems from Europe's lack of domestic demand post-Eurozone crisis, evidenced by high unemployment and a record current account surplus of around 400bn USD annually. This surplus, larger than China's in the 2000s, positions Europe as the 21st century's largest capital exporter, driving international capital flow trends. The European Central Bank (ECB) exacerbates this by lowering real yields, creating a domestic asset shortage and incentivizing foreign asset purchases. Consequently, Europe’s excess savings and ECB policies are expected to lead to substantial capital outflows, influencing global asset prices and yield curves. As European countries adopt negative rates or FX managed regimes to counteract these imbalances, Europe emerges as a dominant force in global financial markets, akin to China in the previous decade.

Takeaways by Macro Roundup® AI

  1. Europe runs a record current account surplus of roughly $400bn a year, larger than China's in the 2000s, positioning it as the 21st century's largest capital exporter, according to the "Euroglut" thesis.
  2. The Euroglut stems from Europe's lack of domestic demand following the Eurozone crisis, evidenced by high unemployment, with the ECB compounding it by lowering real yields and creating a domestic asset shortage that incentivizes foreign asset purchases.
  3. Europe's excess savings and ECB policy are expected to produce substantial capital outflows that influence global asset prices and yield curves, with European countries adopting negative rates or FX managed regimes in response.

"...Euroglut is a global imbalances problem. It refers to the lack of European domestic demand caused by the Eurozone crisis. The clearest evidence of Euroglut is Europe’s high unemployment rate combined with a record current account surplus.Both are a reflection of the same problem: an excess of savings over investment opportunities.Euroglut is special for one and only reason: it is very, very big. At around 400bn USD each year, Europe’s current account surplus is bigger than China’s in the 2000s. If sustained, it would be the largest surplus ever generated in the history of global financial markets. This matters....Euroglut means that as the world’s biggest savers, Europeans will drive international capital flow trends for the rest of this decade. Europe will become the 21st century’s largest capital exporter. This statement is close to an accounting identity - a surplus on the current account implies capital outflows elsewhere.Our premise is that the next few years will mark the beginning of very large European purchases of foreign assets. The ECB plays a fundamental role here: by pushing down real yields and creating a domestic “asset shortage”, it is incentivizing European reach for yield abroad...."Behold the EuroglutLearn moreFollow @izakaminska| Oct 06 14:26 |

As for the global impact (our emphasis):

Euroglut means that as the world’s biggest savers, Europeans will drive international capital flow trends for the rest of this decade. Europe will become the 21st century’s largest capital exporter. This statement is close to an accounting identity - a surplus on the current account implies capital outflows elsewhere.

Our premise is that the next few years will mark the beginning of very large European purchases of foreign assets. The ECB plays a fundamental role here: by pushing down real yields and creating a domestic “asset shortage”, it is incentivizing European reach for yield abroad.

Think about policy over the next few years: at least 500bn-1 trillion of excess cash will be sitting in European bank accounts “earning” a negative rate of 20bps. In the meantime, asset-purchases will drive yields down across the board - there will be nothing with yield left to buy.

Here, meanwhile, is the global imbalance picture in chart form:

So, the basic argument here is that while China’s surplus drove Asian policy in the 2000s, the Euroglut will now become the key determining factor driving European policy from now on.

And extrapolating forwards, Saravelos warns there’s not much that other European countries that also run current account surpluses can do about it other than impose their own negative-yielding/fx floor policies to prevent the hot potato coming to them. In fact, they may just end up compounding the hot potato problem, by effectively being forced to tie their policies in reactive style to that of the Eurozone’s.

On that basis, Saravelos predicts most of the European continent could end up with negative rates or FX managed-regimes in no time at all.

Or as he puts it:

Europe is the new China, and via large demand for foreign assets, it will play a dominant role in driving global asset price trends for the remainder of this decade.

Kaminska, Izabella, "Behold the Euroglut," FT Alphaville, October 6, 2014. Available at:http://ftalphaville.ft.com/2014/10/06/1996952/behold-the-euroglut/

Euroglut is a global imbalances problem. It refers to the lack of European domestic demand caused by the Eurozone crisis. The clearest evidence of Euroglut is Europe’s high unemployment rate combined with a record current account surplus. Both are a reflection of the same problem: an excess of savings over investment opportunities.Euroglut is special for one and only reason: it is very, very big.At around 400bn USD each year, Europe’s current account surplus is bigger than China’s in the 2000s. If sustained, it would be the largest surplus ever generated in the history of global financial markets. This matters.

As he explains on Monday:

In short, Saravelos argues that Europe’s huge excess savings combined with aggressive ECB easing will lead to some of the largest capital outflows in the history of financial markets.

His argument relates to the idea that the global imbalances which were created by Europe’s massive current account surplus are becoming the defining variables which will drive a weaker euro, low long-end yields and exceptionally flat global yield curves, as well as ongoing inflows into “good” EM assets.

So, at least, says George Saravelos at Deutsche Bank.

What ails Europe is not “secular stagnation” or “normalisation”, but rather the much more specific problem of a “Euroglut”.

Izabella Kaminska joined FT Alphaville in October 2008. Before that she worked as a producer at CNBC, a natural gas reporter at Platts and an associate editor of BP's internal magazine.

Friday, October 24, 2014

AI Summary. McKinsey estimates that 330m urban households worldwide either lack adequate housing or must cut essential spending to afford it, amounting to $650bn a year in unaffordable housing costs, a figure it projects will reach 440m households. Land can account for up to 60% of new home construction costs.

Kate Allen Financial Times
Date Posted:
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Urban households globally are burdened with $650bn in unaffordable housing costs annually, driven by rapid urbanization & limited housing supply. @KateAllen reports for @FinancialTimes.

How much are urban households worldwide overpaying for housing?

Core argument: McKinsey estimates urban households worldwide bear $650bn annually in unaffordable housing costs, with 330m households either lacking adequate housing or cutting essential spending to cover housing expenses.

Urban households globally are burdened with $650bn in unaffordable housing costs annually, driven by rapid urbanization and limited housing supply. McKinsey's report highlights that 330m urban households either lack adequate housing or must reduce essential spending to meet housing expenses, a figure projected to rise to 440m by 2025. Major cities like New York, Tokyo, and London are among the hardest hit, with land costs comprising up to 60% of new home construction expenses. The report suggests that governments should facilitate site development and reduce building and finance costs to alleviate this economic strain.

Takeaways by Macro Roundup® AI

  1. McKinsey estimates urban households worldwide bear $650bn annually in unaffordable housing costs, with 330m households either lacking adequate housing or cutting essential spending to cover housing expenses.
  2. McKinsey projects the number of urban households without adequate housing or forced to reduce essential spending will rise from 330m to 440m by 2025, driven by rapid urbanization and limited housing supply.
  3. Land costs account for up to 60% of new home construction expenses, and McKinsey recommends that governments facilitate site development and reduce building and finance costs.

"...City dwellers around the world pay $650bn more in housing costs than they can afford yearly, as rapid urban growth meets a constrained supply, according to a new report....McKinsey looked at the cost ofhousing as a proportion of household incomearound the world, showing the extent to which a city’s residents are under financial pressure...."

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LATEST ARTICLESWorld’s city dwellers paying out $650bn more than they can afford

Allen, Kate, "World’s city dwellers paying out $650bn more than they can afford,"The Financial Times, October 24, 2014. Available at:http://www.ft.com/cms/s/0/3df85be6-5abf-11e4-b449-00144feab7de.html

“It is not fully effective in Seoul because it has greenbelt around it but in the country as a whole prices have been stable,” Mr Muellbauer said.

Mr Muellbauer cited South Korea as an example of a country that has avoided housing affordability problems through government action. Its state-run land bank helps to smooth the supply of new housing, while macroeconomic regulations on mortgage lending, including loan to value ratios, have had a damping effect on demand.

“People look at recent rises in house prices and tend to extrapolate forward, so some price appreciation tends to create further appreciation,” he said.

John Muellbauer, an economist at Oxford university, said one of the factors behind the affordability crunch was speculative investment.

Andy Martin, chairman of ULI UK, said cities such as London and New York were “victims of their own success”. “These cities are under significant pressure because they are engine rooms for growth. Cities cannot survive unless they have adequate provision for key workers like teachers, nurses, bus drivers and cleaners to live within commuting distance of their work.”

The Urban Land Institute, a US-based think-tank, said global “gateway” cities, the world’s leading urban areas, were struggling to provide affordable housing for their workforces.

Some cities are taking steps to mitigate housing costs, Mr Mischke said, singling out New York mayorBill De Blasio’s planto build 200,000 new homes in the next decade, andGermany’s system of rent controls.

“This is not by any means an effective, well-functioning market,” he said. “Land markets tend to be government-controlled, either directly, for example Singapore, or as in London and New York where the government is a significant landowner and the prime actor in regulating land use.”

Governments should also do more to free up sites for development, with land costs in leading cities accounting for up to 60 per cent of the cost of building a new home, Mr Mischke said.

The study recommends reducing building and maintenance costs and cutting the cost of finance for both home buyers and housing developers.

Around the world, 330m urban households lack decent housing or are cutting back on basic spending to cover housing costs, McKinsey found. By 2025, this number will grow to 440m - a third of the world’s urban population - unless governments do more to build and subsidise housing, the report said.

Housing affordability has become “a huge social and economic issue affecting billions”, said Jan Mischke, a senior fellow at McKinsey Global Institute and one of the report’s authors. “More and more cities are growing fast, they are quite likely competing for talent and workers.”

McKinsey looked at the cost ofhousing as a proportion of household incomearound the world, showing the extent to which a city’s residents are under financial pressure. For the first time in human history more thanhalf the world’s population live in urbanareas and the proportion is set to rise to two-thirds by 2050 according to the UN.

Some of the world’s leading urban areas face the biggest housing cost problems, withNew York, TokyoandLondonamong the worst affected, the McKinsey Global Institute said.Beijing, São Paulo and Buenos Aires are among those facing the biggest crunch amid lower income cities.

City dwellers around the world pay $650bn more in housing costs than they can afford yearly, as rapid urban growth meets a constrained supply, according to a new report.

Kate Allen in London