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Don’t take life too seriously

You will never get out of it alive.

-Elbert Hubbard

Russia is in serious trouble.  Is there a need to take it seriously or we can keep laughing and let it slide?

I want to provide an overview about current problems in Russia and to say a few words about what is likely to be intriguing for a lot of people from all countries.

First of all, I cannot stress this highly enough: we all hope for the best but we also have to be prepared for the worst.   But all of us have to take this situation seriously and try to do our best to decide problems that surround us.

Inflation in Russia is rising at a rate of 12.5% per annum. This is maximum inflation since last seven years. According to Russia’s economic news, in the month December, 2014 the inflation was 2.6%, and the yearly inflation for 2014 was 11.4%. The highest level of growth in consumer prices was recorded in 2008 and amounted to 13.3% (http://www.vestifinance.ru/articles/66050). Also significantly important is the price fluctuation factor on the oil (frequently termed as black-gold) market. The year 2015 became a record year for Russian oil prices. There was production of 534 million tons of oil, almost one and a half per cent more than in 2014. Russia now shares the top place with Saudi Arabia in terms oil production. Export of oil has also grown up at once by 10%.

It is worth mentioning that almost all the major producers of “black gold” are increasing production in pursuit of retaining its market share. This is one of the reasons why prices for oil are falling down. http://www.vestifinance.ru/articles/66059

According to Forbes.com the biggest problem for Russian people is inflation. Levada recently conducted a poll on Russia’s most serious concerns, and inflation as a serious concern was shared by an overwhelming 71% of respondents. This was more than 30 points ahead of the next most frequently cited problems like poverty and growing economic inequality, and was ranked several points higher than in 2013. Inflation has been remarkably consistent as a source of concern over the past 8 years, ranking first among Russia’s biggest worries.

Why is inflation such a concern? Large numbers of Russians, including the legions of pensioners, live on fixed incomes that, while higher than they were in the past, don’t leave much room for maneuver. And, on an average, Russians spend relatively large amounts of their income on perishable items (like food) that are notoriously prone to rapid price shifts. (Source)

In its December monetary policy, the Central Bank indicated that it expects inflation to end 2016 at around 6.0% per annum and that it will be on track to reach the 4.0% per year inflation target in 2017. But, Panelists see inflation ending 2016 at 7.4%, which is unchanged from last month’s forecast. For 2017, participants expect inflation to ease to 6.0%. https://www.focus-economics.com/country-indicator/russia/inflation

Inflation is a long sleeping giant. Even some developed economies are seeing rising prices. How can a country grow with inflation? Well, it needs the participation of the citizens to achieve a good growth rate. There are lots of ways around you which directly or indirectly affect the country’s growth rate like investing correctly, saving rate, working hard, and giving people the best quality of your products or services. Try to control your life and don’t let it slide.

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Kseniya takes a lot of interest in global diplomacy. She is a teacher of English as second language and is a professional interpreter in Russian, Chinese and English languages. She has translated a number of articles for various Russian military journals.

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Economy

Sterling Whipsaws as Brexit Negotiations Fall Flag

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brexit

Sterling whipsawed on Thursday, first tumbling and then rallying, and experiencing robust volatility. The GBP/JPY also experienced a wild ride as the yen increased in value on safe-haven flows. Sterling has been trading under pressure following news that the European Union has no plans for further Brexit discussions. May is now stuck between a rock and a hard place and may have to exit from the EC without an agreement.

The EU Has No Plans to Continue Brexit Talks

The European Union announced through a spokesperson saying that they had no plan on further Brexit discussions with the UK. The British had hoped for additional assurances on the contested Irish backstop. Prime Minister May has been making the rounds with EU leaders ahead of this month’s vote in parliament, but her diplomacy appears to have failed to change any minds.

The Financial Times reports that a EU source said no dialogue has occurred over the past 10-days and that PM May spoke to the EC head Donald Tusk on January 2. The EU is sticking to their word and appears to reflect the view that EU officials have gone as far as they can as it relates to the Irish backstop. They also revealed that if a backstop was triggered that EU negotiators would use “best endeavors” to negotiate a replacement agreement.

Strong US Private Payrolls Help Buoy US Yields

Sterling was also shaken by a rebound in the dollar which was buoyed by an uptick in US yields. US yields tumbled on Wednesday as traders removed all the potential tightening of interest rates in 2019. In fact, the yield curve shows that 1-year yields are less than current yields. This came despite a stronger than expected private payroll report, released by ADP on January 3.

ADP reported that Private payrolls rose by 271,000 in December, beating expectations that jobs would increase by 178,000. You can follow the private payroll report on Vestle news. The strong jobs numbers should help lift wages which is an argument for why the Fed should remain vigilant. The increase in private payrolls was the largest climb in nearly 2-years and increased the 2018-month average of private payroll gains to 203,000.

The report showed the increase in jobs was mainly drive by professional and business services which increased by a solid 66,000 while education and health services contributed 61,000 and leisure and hospitality added 39,000. In all, service-related industries were responsible for 224,000 of the new hires, while goods producers rose by 47,000. This include an increase in construction which grew by 37,000 and manufacturing added 12,000. Natural resources and mining lost 2,000 positions.

Brexit Graph

Sterling rebounded after making a fresh low of 1.24 which is a 20-month low on sterling versus the greenback. The exchange rate is likely to remain volatile until there is a solution to the UK exit from the EU.  The trend is also downward sloping, and with momentum negative, the path of least resistance is for a lower exchange rate for sterling.

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Economy

Manufactured goods and industry: a symbol of German decline

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German industrial power and quality levels became a national symbol in the latter part of the 20th century, and to some extent the lifeboat of post-war reconstruction. Even throughout the industrial rise of Asia at the end of the century, the German island remained sanctuarize from the competitive attacks of Eastern developing countries. But several German industries have been increasingly struggling in the past decade and gasping for air. Is Germany at the end of its prosperity cycle, for having rested on its laurels?

Germany, along with its wartime Japanese ally, impressed the world with its rise from its ashes in the latter half of the 20th century. Starting with the Marshall plan quickly followed by self-standing growth, Germany speedily re-built its industrial capacity, and its reputation for top-notch quality. As soon as in the 1960s, German brands invaded the global market with their sturdy reputation preceding them: if the product said “Made in Germany” then the customer could feel sure there was nothing better on the market. At the end of the century, a large share of the top global engineering segment was German: BMW, Bosch, Rheinmetall, Merck, the list is endless. Economic historian Werner Abelshauer describes [1] how the label “made in Germany” became a symbol of quality: “The label “Made in Germany” ultimately developed into a sign of quality, though it took a while.” But the era during which Germany levitated above the rest of the industrial world is coming to an end. While Germany remained unharmed by Asian competition for longer than its neighbors, it is now fighting on a level field with all other manufacturers in the field, and worse: it’s not doing all that well. Economic reporter Chris Papadopoullos placed [2] the start of the decline during the year 2015: “Total production, which includes construction, manufacturing and mining, dipped 1.2 per cent in August compared with July, German statistical office Destatis said. The production of capital goods fell 2.1 per cent while consumer goods dipped 0.4 per cent. Construction and energy output also posted declines “.

Of course, the Volkswagen scandal caused a major dent in the image of industrial Germany. Consulting group ALVA published an extensive study of the post-scandal consequences on the image of Volkswagen and German quality altogether, and wrote [3]: “After the emissions scandal revelations, we can see a very different picture, with all Advocacy drivers having moved into negative territory to a greater or lesser extent. This is indicative of a reverse halo effect in which a negative emotional response to a company due to an erosion of trust spills over and clouds rational judgement of all of its traits.” Until then, German car manufacturers had been above suspicion, thanks to their reputation for industrial quality and business performance: when one is the best, there is no need to cheat. Through the fraudulent emissions revelations, Volkswagen, one of Germany’s flagships, showed that “Made in Germany” wasn’t all it was cracked up to be, and that they had flown too high on borrowed wings. The scandal shed doubt over other German flagships in its wake, as reported [4] by automotive journalist James Mills: “German media allege that US authorities have discovered that Daimler, parent of Mercedes, developed software for its diesel-powered vehicles that would shut down vital emissions equipment after driving just a short distance. Daimler is reported to have come up with programs that would shut down certain functions of the selective catalytic reduction filter after just 16g/km of NOx is admitted.” And the damage extended beyond the automobile world, into the whole industry.

Of course, if the problem were limited to the automobile world, Germany could survive on the others. But the slipping in industrial standards, the resulting loss of performance, and finally the need to resort to unsavory business practices to survive, seems to have contaminated all fields of the German industrial apparatus. German shipbuilder TKMS recently illustrated the downfall: after decades of occupying high grounds on the submarine market, the engineering firm is facing such a severe string of problems that it is facing being sold off entirely and scrapped from the national heritage. After losing a major submarine contract in Australia, it delivered a few corvettes to the German Navy, which simply refused them on the dock, due to quality standards being overstepped. Wall Street Journal William Wilkes reported [5]: “Germany’s naval brass in 2005 dreamed up a warship that could ferry marines into combat anywhere in the world, go up against enemy ships and stay away from home ports for two years with a crew half the size of its predecessor’s. First delivered for sea trials in 2016 after a series of delays, the 7,000-ton Baden-Württemberg F125 frigate was determined last month to have an unexpected design flaw: It doesn’t really work.” Germany’s submarine fleet, also built by the same shipbuilder, is currently completely out of order [6]. In desperate need for new contracts, it resorted to bribing officials, resulting in a political and economic quagmire in Israel. In an attempt to secure a submarine purchasing contract in Tel-Aviv, TKMS allegedly transferred over 10 million dollars through shell companies to a top government Israeli official. News Site Haaretz [7] reports: “At least ten high-powered individuals have been identified as involved in the scandal, including very close associates of Prime Minister Benjamin Netanyahu. A multimillion dollar submarine deal with German shipbuilder ThyssenKrupp is the focus of a police investigation, which is probing possible wrongdoing involving Netanyahu’s personal lawyer and German shipbuilder ThyssenKrupp’s local representative.” For weathered investors, this time in which German manufacturers need to resort to cheating to make up for their slipping industrial standards is something completely new, and in some ways an earthquake. As a result, investments are scarce for start-ups [8], as well as for established businesses [9].

Germany’s downfall in the industrial world isn’t taken lightly by political forces, and the economic problem is turning into a political one, with worker unions stepping up their criticism of management, and politicians scrambling to stop the nosedive. Angela Merkel has been urgently addressing the problem, but so far too little or no avail. “Angela Merkel champions Industry 4.0, urging investment in new technology. German business isn’t heeding the call”, says Politico [10]. Unlike Angela Merkel, many in the country haven’t figured out that Germany had slipped from one industrial model to another: initially known for the superb quality of its products, it was caught up quickly by its direct competitors: United Kingdom, France, Japan and the United States in particular. The core of German’s added value today lies mainly in the machine-tools and high-tech subsystems of German equipment-makers. But as a whole, Germany no longer has the capacity to integrate large and complex systems such as aircrafts, frigates or new-generation submarines.

[1] https://www.dw.com/en/125-years-of-made-in-germany/a-16188583
[2] http://www.cityam.com/226018/german-industrial-production-sees-steep-decline
[3] http://www.alva-group.com/en/reputation-damage-vw-emissions-scandal/
[4] https://www.driving.co.uk/news/emissions-scandal-vw-mercedes-cheat-diesel-tests/
[5] https://www.wsj.com/articles/german-engineering-yields-new-warship-that-isnt-fit-for-sea-1515753000
[6] https://www.defensenews.com/naval/2017/10/20/all-of-germanys-submarines-are-currently-down/
[7] https://www.haaretz.com/israel-news/LIVE-the-israeli-submarine-scandal-what-we-know-1.5626626
[8] https://global.handelsblatt.com/companies/german-startups-drying-up-without-risk-ready-investors-863686
[9]https://www.reuters.com/article/germany-investment/big-investors-cautious-on-german-public-private-partnership-plan-idUSL5N0XK45Q20150423
[10]https://www.politico.eu/article/why-europes-largest-economy-resists-new-industrial-revolution-factories-of-the-future-special-report/

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Economy

Hungary And Poland To Lose Up To 25% Allocation Of EU Funds

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Hungary and Poland are set to be hit with new cuts in cohesion support after EU commission proposed new radical changes. This came to light after a series of propositions were published recently by the EU executive. Eastern European countries will be hard hit by the propositions, but more impact will be felt in Hungary and Poland.

The changes come in light of the immigration policies that certain countries have chosen to adopt. The two most affected countries will lose nearly 25% in cuts due to their problematic policies. The repercussions of the cuts could be felt very soon especially if the Eastern European countries decide to take on Western Europe.

Even though the commission has maintained that the new changes are not meant to be punishment for inconsistency and criticism, there is a general feeling that the countries will not take the changes well. The commission also argued that there is no need to compare the allocations between EU member states as each country has their own share of prosperity.

The proposed changes will also affect more countries in Eastern Europe including Lithuania, Czech Republic, Slovakia, and Malta. Germany will also get a reduction in the allocation to the tune of 20%. There are some countries however that will get a raise in their allocation including Greece, Romania, Bulgaria, and Italy.

The EU commission, through its commissioner for regional development, Corina Cretu, says that the recent changes have no political bearing behind them.

How the commission arrived at the figures

In previous years, the commission had an established formula for calculating the allocation of funds. This year though, it seems like there was a break from tradition since the calculation method was visibly adjusted. The GDP would be used to determine prosperity in the region during the past, for instance. This criterion seems to have been adjusted in addition to the inclusion of other factors like climate, education levels, employment levels, and of course the attitude of the countries towards immigrants.

It is yet not clear how these changes will affect the forex market in Europe. What is clear though is that the aftermaths of major decisions in recent years have often caused some disturbances in the stocks and forex markets. At times like these, stock and forex traders need to be on the lookout for any major breaking news. Admiralmarkets.pl suggests using the current forex and stock platforms to get market feeds in real-time.

The current feeling from the Eastern European countries is that the commission is finding ways of diverting money from the region to other regions that have faced challenges in recent years. The southern part of Europe has for instance been in the red for a couple of years now. The crisis in Greece and Spain is yet to completely settle.  The sentiments of Eastern Europe do not seem to bother the commission, however. The commission argues that these countries have seen major growth in recent years and that they would even handle stiffer cuts. This, the commission argues, would especially be true if issues like GDP per capita were to be considered.

EU officials have spent much of the time explaining how their recent propositions are in no way related to the crisis in the south. Instead, the commission has used every opportunity to highlight the changes in GDP as the key reasons for the allocation cuts. It is indeed easy to find reason in this rationale when you analyze the economies of Eastern European countries.

Poland has for instance seen a lot of positive growth in the past few years. In 2017, the economy grew by 4.6%. This growth came in the backdrop of a similarly strong growth the previous year where the GDP growth was recorded as having been 3%. The forecasts for this year do not look bad either. The GDP is expected to grow by at least 4.3% as per what the commission has established on its forecasts. The growth pattern in Hungary was also comparable, being 3.3% in 2016, 3.45% in 2017 and with a projected growth of 4% year.

Looking south, the economy of Italy recorded growths of 0.9% and 1.5% in 2016 and 2017 respectively. The forecast does not look any different also as a projected growth of 1.5% is expected. In order to argue their case, the commission argued the case of Portugal, which is still struggling but which got some cuts due to its strong performance recently.

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