Bloomberg News

Online Buoys Global Growth by Paring Distance: Cutting Research

August 23, 2012

The EBay Inc Logo

Four economists used data from San Jose, California-based retailer EBay Inc. to “breathe new life into the ‘death of distance’ hypothesis,” which maintains advances in transportation and communication should make international trade cheaper and easier. Photographer: Chris Ratcliffe/Bloomberg

Trading more online could help boost global economic growth, according to a paper published this week by the Centre for Economic Policy Research.

Four economists used data from San Jose, California-based retailer EBay Inc. (EBAY:US) to “breathe new life into the ‘death of distance’ hypothesis,” which maintains advances in transportation and communication should make international trade cheaper and easier.

Their study of transactions featuring 40 product categories and 62 countries from 2004 to 2007 shows the impact of distance on trade to be 65 percent smaller when business is conducted online.

Reducing trade frictions to the Internet level by, for example, paring the need for multiple telephone calls, improving access to information or reducing the need to attend trade fairs would increase real income by 29 percent in an average country, said the University of Oxford’s Pierre-Louis Vezina and Switzerland-based economists Andreas Lendle, Marcelo Olarreaga and Simon Schropp.

Remote countries with high levels of income inequality and inefficient ports would benefit the most as online business would help overcome market and governance weaknesses, they said.

“In a world where search costs are greatly reduced, the role of distance in explaining trade flows is smaller,” the economists wrote.

* * *

International companies are hunkering down again after rebuilding leverage following the financial crisis.

Zurich-based UBS’s World Inc., which consolidates the balance sheets of the companies the Swiss bank monitors, suggests forecasts for 2012 dividend growth of 5 percent and capital spending of 8 percent, both slowing from 15 percent last year. Share buybacks are set to shrink by more than 30 percent after firms repurchased nearly 200 percent more stock last year than in 2010. Companies are also slowing merger activity and some are selling assets.

Europe’s debt crisis, doubt about the strength of the global economy and the appeal of conservative cash management explain the “stalling out of the re-leveraging cycle,” said strategists Christopher Ferrarone, Nick Nelson and Jerry McGuire in the Aug. 20 study.

The slowing in leverage helps explain why returns on capital may decline this year for the first time since the financial crisis, they said, adding that a recovery is imperative for earnings growth.

UBS’s World Inc. features about 1,000 companies, which represent about 70 percent of the market capitalization of the world’s non-financial companies.

* * *

The European Central Bank may draw on lessons learned in the 1990s and avoid enforcing explicit targets to restrain surging bond yields.

So says Goldman Sachs Group Inc. London-based economist Huw Pill, a former ECB official, as the Frankfurt-based central bank prepares for a Sept. 6 meeting of policy makers. Maintaining specific caps would leave the ECB in a bind if governments reneged on austerity commitments, handing investors a “one way bet” in which the central bank would be purchasing large amounts of debt just as its value would be deteriorating, he said in an Aug. 22 report.

The ECB could avoid that fate by taking inspiration from the 1990s when central banks were trying to protect the Exchange Rate Mechanism, a precursor to the euro. They replaced narrow target zones for currencies with wider bands and kept exchange rates close to the center of the range with occasional interventions.

“The system was reconstituted to avoid offering the market a ‘one way bet’ situation on the exchange rate, making the system more resilient,” Pill said. “Over time, governments’ pursuit of macroeconomic policies convinced the markets that a single currency was a viable project.”

Pill predicts the ECB will now eschew narrow target zones for debt yields and instead establish “softer and wider” ranges to go with broader guidance on the market borrowing costs they deem appropriate. “The ECB is likely to signal a willingness to steer market rates in that direction over time,” he said.

* * *

The recession-hit U.K. economy isn’t finding much uplift from a decline in its currency.

While sterling has fallen about 20 percent since the financial crisis began in 2007, U.K. exports have risen only about 5 percent, about a third of Germany’s gains over the same period and below the increase of the euro area as a whole, said Bank of America Merrill Lynch economist Nick Bate in an Aug. 17 report.

Pricing behavior explains part of the puzzle as British traders have raised prices more than 25 percent over the period, five times the rate of euro-area rivals, Bate said in London. That means little improvement in the country’s competitiveness even if profit margins are increased.

Although bigger margins may have helped support employment and investment, the boost will have been smaller than higher export volumes would provide, the report said.

The economy is also being hurt by the way the weaker pound boosted consumer prices about 7 percentage points since 2007, Bate said. That may be curbing output by as much as 5 percentage points, he said.

The U.K.’s experience highlights issues facing euro-area members considering an exit from the 17-nation currency bloc, the report said. Some Southern European countries may struggle to contain prices following devaluation and lack the flexibility in capital and labor markets needed to harness export-led growth, it said.

“Those factors, taken alongside the U.K.’s experience in recent years, pose risks that the assumed benefits to a country from leaving the euro and having a materially weaker currency could often be overstated,” Bate wrote.

* * *

Investors may still have a taste for risky assets such as stocks even if the euro-zone crisis intensifies.

That’s the conclusion of an Aug. 21 report titled “Does Europe Matter?” by Nomura Holdings Inc. New York-based currency strategists Jens Nordvig and Charles St-Arnaud.

They compared recent revisions to growth forecasts and found economies such as the U.S., Japan, Australia and Canada experienced only moderate cuts even as the euro area slumped. That’s different from 2009 when declines were more synchronized.

One explanation is that financial conditions tightened globally in 2009, while the current contraction has been more concentrated in the euro area.

Reasons cited by Nomura for why euro-zone shocks have had a declining impact on investors worldwide include the ECB’s shoring up of banks, the length of the crisis and the expectation it won’t spread.

While the euro’s woes will still pose a threat to global growth and trade, “from a trading perspective, Europe is likely to be a less dominant driver,” said Nordvig and St-Arnaud.

They suggest investors may favor buying stocks and selling the yen, while saying that Spanish and Italian bonds could offer value.

* * *

The third surge in food prices in five years is set to pressure inflation and household budgets, dealing a blow to global economic growth, according to HSBC Holdings Plc.

The worst U.S. drought in decades, weak rainfall in India and poor harvests in Russia and Ukraine have helped propel the price of wheat about 30 percent higher since the start of the year and the cost of corn 25 percent.

The biggest losers will be emerging markets, where food plays a bigger role in budgets and inflation measures. Food forms 31 percent of China’s consumer price index basket, double the U.S proportion.

Policy makers will nevertheless probably view the food shock as a threat to growth rather than inflation, HSBC London- based economists Karen Ward and Zoe Knight said Aug. 20. Workers are unlikely to be confident enough in their jobs to seek wage hikes, they said.

“In this environment, policy makers are less likely to respond with higher interest rates,” said the economists, who added the greater inflation threat may still be a barrier to aggressive monetary easing.

To contact the reporter on this story: Simon Kennedy in London at skennedy4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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