Business cycle forecast 2008: German upswing takes a break
Wirtschaft im Wandel,
No. 1,
2008
Abstract
Economic growth in the industrial countries will be much more muted in 2008 than in the past year. One cause is the prolonged oil price hike during 2007. The second and more important cause is the intensification of tensions on world financial markets. Due to problems in the financial sector, credit expansion will slow next year in the euro area as well as in the US. This will dampen demand in the real economy. A significant downswing in the industrial countries, however, is not the most likely scenario: in the US, expansive economic policy and a weak dollar that gives production in the US a competitive edge will prevent the economy from sliding into recession. In the euro area, high profitability of firms and structural improvements in the working of labour markets will help the economy cope with the stronger euro and with higher costs of external financing due to the turmoil in the financial sector. In Germany, the upswing has still not reached the demand of private households. The main reason is that real wages were stagnating in 2007 and will not rise by much in 2008, since inflation has accelerated considerably at the end of last year. In addition, weaker dynamics of external demand will dampen export growth. This and the end of tax incentives for investment at the end of 2007 will dampen investment activity. All in all, the economy will slow down in the first half of 2008. However, chances are good that the upswing will only have taken a break: when the dampening external shocks have ceased, the driving powers of the upswing will prevail; dynamic employment growth is a reflection of the strong confidence of firms. A major risk for employment and for the German economy in general is, however, the possibility that the policy concerning the labour markets changes course; bad omens are the recent the introduction of minimum wages for postal services and the announced extension of unemployment benefits for persons older than 50.
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Deeper, Wider and More Competitive? Monetary Integration, Eastern Enlargement and Competitiveness in the European Union
Gianmarco Ottaviano, Daria Taglioni, Filippo di Mauro
ECB Working Paper,
No. 847,
2008
Abstract
What determines a country’s ability to compete in international markets? What fosters the global competitiveness of its firms? And in the European context, have key elements of the EU strategy such as EMU and enlargement helped or hindered domestic firms’ competitiveness in local and global markets? We address these questions by calibrating and simulating a conceptual framework that, based on Melitz and Ottaviano (2005), predicts that tougher and more transparent international competition forces less productive firms out the market, thereby increasing average productivity as well as reducing average prices and mark-ups. The model also predicts a parallel reduction of price dispersion within sectors. Our conceptual framework allows us to disentangle the effects of technology and freeness of entry from those of accessibility. On the one hand, by controlling for the impact of trade frictions, we are able to construct an index of ‘revealed competitiveness’, which would drive the relative performance of countries in an ideal world in which all faced the same barriers to international transactions. On the other hand, by focusing on the role of accessibility while keeping ‘revealed competitiveness’ as given, we are able to evaluate the impacts of EMU and enlargement on the competitiveness of European firms. We find that EMU positively affects the competitiveness of firms located in participating economies. Enlargement has, instead, two contrasting effects. It improves the accessibility of EU members but it also increases substantially the relative importance of unproductive competitors from Eastern Europe. JEL Classification: F12, R13.
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Poland: Strong Domestic Demand Will Drive Economic Activity
Martina Kämpfe
Wirtschaft im Wandel,
No. 12,
2007
Abstract
Domestic demand was the main force behind growth in 2007. The high level of both, gross fixed investments of firms and private consumption, led to extended industrial production capacities and increased demand of imports. Extraordinarily high was the demand for the output of construction firms. Rising employment and wages and the continuing expansion of loans to the household sector supported the private consumption growth. The high levels of capacity utilization coincide with shortages of labour. First responses to this were wage hikes, which pushed the unit labour costs and led to some increase in consumer price inflation. In 2008, expansion of economic activity will continue at only some lower level, driven by investments and consumption.
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Determinants of International Fragmentation of Production in the European Union
Götz Zeddies
IWH Discussion Papers,
No. 15,
2007
Abstract
The last decades were characterized by large increases in world trade, not only in absolute terms, but also in relation to world GDP. This was in large parts caused by increasing exchanges of parts and components between countries as a consequence of international fragmentation of production. Apparently, greater competition especially from the Newly Industrializing and Post-Communist Economies prompted firms in ‘high-wage’ countries to exploit international factor price differences in order to increase their international competitiveness. However, theory predicts that, beside factor price differences, vertical disintegration of production should be driven by a multitude of additional factors. Against this background, the present paper reveals empirical evidence on parts and components trade as an indicator for international fragmentation of production in the European Union. On the basis of a panel data approach, the main explanatory factors for international fragmentation of production are determined. The results show that, although their influence can not be neglected, factor price differences are only one out of many causes for shifting production to or sourcing components from foreign countries.
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Transport Costs and the Size of Cities: The Case of Russia
Albrecht Kauffmann
Volkswirtschaftliche Diskussionsbeiträge der Wirtschafts- und Sozialwissenschaftlichen Fakultät, Universität Potsdam, Nr. 93,
No. 93,
2007
Abstract
Real costs of freight transportation have strong increased in Russia particularly during the period of price liberalization 1992–93. This paper investigates possible connections between rising transport costs and the evolution of the size structure of the system of cities in the Russian Federation and its federal subjects. Empirical findings suggest that under conditions of a closed system agglomeration processes according to the predictions of the model of Tabuchi et al. (2005) would have taken place especially in the periphere regions of the North and Far East.
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Market Follows Standards
Ulrich Blum
Wirtschaft im Wandel,
No. 10,
2007
Abstract
Standards are an important part of the codified knowledge of a society. In contrast to industry standards, formal standards are created in a consensus-based procedure open to all interested parties. Only if an economic interest for application exists will formal standards be produced. Interested parties have to shoulder participation costs themselves, which enforces economic interest. Up to a certain extent, governments also trigger and finance formal standardisation processes through the new approach, which creates a framework that is filled by private activity. Standards stand at the end of intellectual property rights if the totality of the value chain of knowledge production is looked at. One important aspect is their accessibility and the inclusion of all necessary intellectual property rights, especially patents, at reasonable prices. Conversely, consortia may exclude groups from the use of their standards. By preventing the licensing of those patents included in a standard, they can effectively block market entry. Thus, “successful” standards often face antitrust problems. Formal standards reduce costs of production through economies of scale, economies of scope and network-economies. Goods and processes that are standardized signal quality, the inclusion of high technological standards and permanent presence in the markets, which again accelerates market dissemination. Firms face a dilemma: On the one hand, the penetration of a markets with industry standards offers potentials for high profits; on the other hand, this has to be balanced against the risk of failure, especially if clients are hesitant because they do not know which standard will be successful in the end. Formal standards create and stabilize trust markets. This is especially true in the area of globalisation. Europe, which has to face an enormous competition in the international knowledge economy, needs an institutionally efficient approach to formal standardisation. This contribution addresses future problems of the European standardisation that have been developed within the framework of a working group of the European Standardisation Organisation called Future Landscape of European Standardisation (FLES).
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Inflation and the Divergence of Relative Prices: Evidence from a Cointegration Analysis
Juliane Scharff
AStA - Advances in Statistical Analysis,
No. 2,
2007
Abstract
The relation between inflation and RPV plays a prominent role in explaining the costs of inflation. This study investigates whether the CPI subcategories drift apart more over a period of high inflation rates than during one of low inflation. The wider dispersion of the subcategories is reflected in an increasing number of common stochastic trends in the system of sub price indices. The results for US data as well as for cross-country comparisons indicate that the influence of inflation on the dispersion of relative prices cannot be revealed by counting cointegrating relations. Thus, the number of stochastic trends or cointegrating relations is not a reliable indicator for the distorting effect of inflation on the dispersion of relative prices.
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Institutionelle Defizite und wachsende Spannungen in der Euro-Zone
Hubert Gabrisch
Wirtschaft im Wandel,
No. 7,
2007
Abstract
The introduction of the Euro was certainly a success. Nevertheless, behind this success one may find some increasing asymmetries and imbalances across member countries, which may undermine the stability of the common currency in the long run. Tensions include the paralysis of fiscal policy, increasing divergence in per capita income, a high volatility of real state prices, and diverging unit labour cost developments. The given forms of macroeconomic coordination seem not to be appropriate to mitigate the problems. Obviously, countries can compete with wage policy only after currencies and their exchange rates were abolished, and the use of fiscal policy has been restricted. In particular, Germany and Austria were successful in competitive wage policy, while countries like Spain, Greece, Portugal, Italy, and also France did not yet use the competitiveness channel. Germany was able to reduce its unit labour costs more than other countries by labour market reforms and higher indirect taxes in replacing social taxes. However, the advantage may proof to be temporary only, for other countries will be forced to follow the German example. Given an ECB inflation target of 2 %, more competitive wage policy in the Euro area might jeopardize the stability of the currency through deflation and higher unemployment. It does not wonder that the discussion on other and new forms of macroeconomic coordination revived recently. This debate does not only include the introduction of a central EU budget with anti-cyclical effects, but also forms of direct and indirect coordination of national wage policies. In any case, it would be useful to oblige national wage policies to obey the common interest of the Union.
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Russia: Importance of the Energy Sector for the Economic Growth Remains High
Martina Kämpfe
Wirtschaft im Wandel,
No. 7,
2007
Abstract
In 2006, Russian economic growth was once more driven by surging private consumption and investment. Thanks to the high energy prices, the boom in export revenues continued. Enterprises had increased earnings from oil and other natural resources, and also the government budget had high surpluses. Both led to significantly faster growth of investments. Construction sector and industry benefited from rising investments, but domestic demand of investment and consumption also covered by increased imports. The importance of the energy sector for the economy remains high. But sustainable long-term growth will require even more investment as well as substantial improvements in economic restructuring.
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Broadband Investment and the Threat of Regulation: Preventing Monopoly Exploitation or Infrastructure Construction?
Ulrich Blum, Christian Growitsch, Niels Krap
Review of Network Economics,
2007
Abstract
Recently, investments in new generation networks in Germany have been curtailed, since potential investors required this new network be unregulated. To develop a regulator's strategy that allows investments to occur but prevents monopolistic prices, we model an investor's decision problem under a threat of regulation. We show that the mere threat of a regulator's intervention may prevent supernormal profits without actual price regulation. The regulator, on the other hand, can influence both the investment decision and the investor's price via her signals on regulation probability and price.
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