Home' Trinidad and Tobago Guardian : January 9th 2014 Contents BG22 | THE ECONOMIST
BUSINESS GUARDIAN www.guardian.co.tt JANUARY 2014 • WEEK TWO
Any American who bought a top-
of-the-line Maytag Maxima
front-loading washing machine
a few years ago contributed in
his own small way to the coun-
try s persistent trade deficit: The machine was
made in Germany. Not so anyone who has
bought one in the past six months, however,
because since then Whirlpool, the manufacturer,
has moved production to a plant in Clyde, Ohio.
That shift helps explain a remarkable
improvement in America s external accounts.
At the end of 2005, the nation s current-account
deficit reached 6.2 per cent of GDP, the sign
of a society living dangerously beyond its means.
By the third quarter of 2013, however, that
number had dropped to 2.2 per cent, the lowest
since 1998, a level it could easily sustain indef-
The deficit has narrowed, in part, thanks to
a rising surplus in investment income and
growth in the traditional surplus in services
trade, such as royalties. The biggest factor, how-
ever, has been the deficit in trade in goods,
which has shrunk by 2.2 per cent of gross
domestic product (GDP).
In previous expansions the deficit widened
as the domestic appetite of households and
businesses for foreign-made stuff outpaced
exports. This time, though exports and imports
both fell during the recession, exports have
rebounded more strongly---exceeding nine per
cent of GDP in the third quarter, above pre-
recession levels---whereas imports have stabilised
around their pre-recession level, slightly below
14 per cent of GDP.
David Woo, a currency-and-bond strategist
at Bank of America Merrill Lynch, thinks that
three distinct factors are at work. One is the
surge in domestically produced oil and gas from
shale-rock formations. Americans produced
70 per cent of the energy they consumed in
2008, but since then that has risen to 89 per
Another factor is demographics. As baby
boomers age they spend less on products, many
of them imported, and more on services, which
mostly are produced at home. Woo reckons
that medical care, recreation, restaurant meals
and hotels now take up almost 27 per cent of
household budgets, as opposed to 25 per cent
six years ago.
Finally, American manufacturers seem to
have stopped losing market share at home.
They may even be regaining it.
The proportion of domestic car sales held
by cars made in America slid from above 85
per cent in the mid-1990s to around 65 per
cent during the recession, but it has since
rebounded to 73 per cent. Woo reckons that
the share of durable goods, excluding cars, con-
sumed by American households that is account-
ed for by imports has flattened since the reces-
sion and fallen in real terms.
A lower dollar and the rising cost of foreign
labor, in China and elsewhere, have weakened
the case for sending American manufacturing
Whirlpool cites higher transport costs and
improved American productivity as the reasons
for bringing production of various appliances
back home from China, Germany and Mexico.
Meanwhile the federal government, acting
on a complaint by Whirlpool, has imposed
antidumping duties on washing machines from
Mexico and South Korea.
Tastes also favour star-spangled appliances,
however. Once "people never asked and never
cared" where an appliance was made, says Sam
Abdelnour, head of Whirlpool s North American
sales. Then, a few years ago, retailers began
asking where the company made its machines.
The answer: mostly in America.
"Very few of our competitors can say that,"
@2014 The Economist Newspaper Ltd.
Distributed by the New York Times Syndi-
Home prices now are rising in 18 of the 23 countries The
Economist tracks across the globe, compared with only 12 a
year ago. America tops our table: The Case-Shiller index
released on New Year s Eve reported price increases of 13.6
per cent in the year to October 2013. Homes have risen in
value by 24 per cent since their March 2012 trough, but remain
20 per cent below their peak in April 2006.
American builders started work on more than one million
new homes in the year to November, for only the second time
since the financial crisis ended. This is far short of the 2.3
million recorded in January 2006, however, and below the
long-run average of 1.5 million. In all, American property is
enjoying a recovery, but not a bubble.
The Federal Reserve s decision to start tapering its buying
of bonds with newly created money -- that is, to scale back
the policy commonly known as quantitative easing or "QE"
-- by US$10 billion to US$75 billion a month, starting in January,
may take some wind out of home sales. Although mortgage
rates are rising, thanks to higher bond yields, housing remains
affordable. Prices are now at or around fair value according
to The Economist s measure, which compares prices with the
long-run average of rents and personal incomes.
Prices in Britain increased at their fastest rate in the past
three years in October, fueling fears of a housing bubble and
a subsequent crash, particularly in London, where prices
increased by 12 per cent. Although by The Economist s measure
British housing is overvalued against both rents and income,
Britain did not suffer a housing crash on the scale of America s
in 2008, largely because supply is so tight.
Britain s government scrapped house-building targets in
2010. Projections of new-household formation suggest that
290,000 new homes will need to be built every year through
2031, but in the 12 months to March 2013 housing completions
fell to only 135,000, their lowest level since record keeping
began in 1949.
The north-south divide in the euro area continues. In Greece,
Italy and Spain, home prices declined by between five per
cent and ten per cent. However, the market finally has bottomed
out in Ireland: After halving during a six-year span, prices are
now nine per cent above their March low. Prices in Germany,
which has the lowest homeownership rate in the European
Union at 53 per cent, are rising at the fastest rate since reuni-
fication, although housing is still undervalued against both
rents and income.
Brazil, which will host the soccer World Cup in June, also
is having a housing boom. Prices increased 13 per cent in the
12 months to November, and in Rio de Janeiro, which will host
the Olympics in 2016, they have trebled since 2008.
Fears grow of a bubble in China, however, led by overde-
velopment and low occupancy. According to The Economist s
index, based on official figures from 70 Chinese cities, prices
increased by 8.7 per cent in the year to November 2013. India
may follow suit, with its prices across 15 cities with a total
population of 100 million having increased seven per cent in
the third quarter of 2013.
Canada appears to have been successful in cooling its market,
however. Its home-price inflation has dropped to 3.4 per cent,
though homes still look expensive.
@2014 The Economist Newspaper Ltd. Distributed by the
New York Times Syndicate
Castles made of sand
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