The Big Mac index is back

Big currency devaluations are not boosting exports as much as they used to

In Malta the price for a Big Mac is $ 4.1, move to Malta to live, work and invest with MALTAway…number 1 in Europe

Economia di strada a Malta, Big Mac Index per capire il valore di una valuta, costo della vita e potere di acquisto

Per scoprire quanto costa un Big Mac a Malta, Leggi il nostro articolo per confrontare il costo della vita a Malta  con un raffronto tra Sliema e Milano e se vuoi venire a fare un viaggio a Malta, chiedi un preventivo con tariffe web e che sia il primo passo per trasferire la residenza, comprare una casa, vivere e lavorare a Malta

L’indice Big Mac (o Big Mac index in inglese) è uno strumento informale di comparazione del potere d’acquisto di una valuta. Questa misurazione assume come valida la teoria della parità dei poteri di acquisto.

L’assunto centrale della “parità dei poteri di acquisto” è che il tasso di cambio tra due valute dovrebbe tendere naturalmente ad aggiustarsi in modo che un paniere di beni abbia lo stesso costo in entrambe le valute. Nell’indice Big Mac, il “paniere” è composto da un singolo Big Mac, così come viene venduto dalla catena di fast food della McDonald’s. Il Big Mac è stato scelto perché è disponibile con le stesse specifiche in diverse nazioni del mondo, e i franchise McDonald’s locali hanno una notevole responsabilità nella negoziazione dei prezzi. Per questi motivi, l’indice permette una comparazione significativa tra le valute di molte nazioni.

Il rapporto della parità di potere d’acquisto del Big Mac tra due valute si ottiene dividendo il costo di un Big Mac in una nazione (nella sua valuta) per il costo di un Big Mac nell’altra nazione (nella sua valuta). Questo valore viene confrontato con il tasso di cambio attuale; se è più basso, allora la prima valuta è sottovalutata (secondo la teoria della parità del potere d’acquisto) rispetto alla seconda, mentre se è più alto, allora la prima valuta è sopravvalutata.

Ad esempio, supponiamo che un Big Mac costi 2,00 sterline nel Regno Unito e 2,50 dollari negli USA; quindi il tasso della parità di potere d’acquisto è 2,00/2,50 = 0,8. Se, il tasso di cambio ufficiale è 1 dollaro statunitense per 0,55 sterline inglesi, allora la sterlina è sopravvalutata rispetto al dollaro.

MIGHT “Made in Russia” labels become common? If currency depreciation alone could boost exports, then yes. According to our latest Big Mac index, the Russian rouble is one of the cheapest currencies around, 69% undervalued against the dollar. The index compares the cost of the famous burger at McDonalds outlets in different countries by converting local prices into dollars using market exchange rates (as of January 6th, see chart 1). It is based on the idea that in the long-run, exchange rates ought to adjust so that one dollar buys the same amount everywhere. If a burger looks like a bargain in one currency, that currency could be undervalued.

Americans hunting for cut-price burgers abroad are spoilt for choice: the index shows most currencies to be cheap relative to the greenback. This is partly owing to the Federal Reserve’s decision to raise interest rates when the central banks of the euro zone and Japan are loosening monetary policy. The euro is 19% undervalued against the dollar, according to the index, and the yen 37%. Another force weakening many currencies, including the rouble, has been the ongoing slump in commodity prices since mid-2014. Shrinking demand from China and a glut of supply have sapped the value of exports from Australia, Brazil and Canada, among other places, causing their currencies to wilt, too. By the index, they are respectively 24%, 32% and 16% undervalued. If commodity prices continue to fall, they could slide even further.

These large currency devaluations can hurt, by raising the price of imports and spurring inflation. But although devaluations may not be pleasant, they are meant to be nutritious. Pricier imports should encourage consumers to switch towards domestic products and stimulate local production. A cheaper currency should also boost growth by spurring exports.

Between 1980 and 2014, according to an analysis of 60 economies by the IMF, a 10% depreciation relative to the currencies of trading partners boosted net exports by 1.5% of GDP over the long term, on average. Most of the improvement came within the first year.

But devaluations do not seem to have provided quite the same boost recently. Japan is the best example. The yen has been depreciating rapidly. A Big Mac was 20% cheaper in Japan than in America in 2013; now it is 37% cheaper. Yet export volumes have barely budged (see chart 2). This is a surprise: the IMF calculates that Japanese exports are around 20% lower than it would have expected, given how the yen has weakened. Devaluations in other countries, including South Africa and Turkey, have also disappointed.

A global contraction of trade in dollar terms may be obscuring devaluation’s benefits. Although exports from countries with weakening currencies may look limp, many of them are still securing a bigger slice of the shrinking pie. The collapse in commodity prices is also masking some signs of life. Take Brazil, where the volume of exports rose by 10% in 2015 even as their value plunged by 22%. Some of that is caused by commodity exporters compensating for falling revenue by selling ever more minerals and oil. But not all of it. In Australia, for instance, exports of goods other than raw materials jumped by around 6% in mid-2015, according to the Commonwealth Bank of Australia.

But there are also signs that “Dutch disease” has taken a toll on the capacity of commodity-producing countries to ramp up other exports. When prices were high, capital flowed in, pushing up their currencies and thus making their other exports less competitive. Labour and investment flowed mainly to commodity firms. That has left other industries too weak to pick up the slack now that these once-soaring currencies have fallen back to earth.

Russia is a good example. Non-energy exporters appear to be struggling despite the rouble’s plunge. Over the first half of 2015, as the volume of energy exports surged, non-energy exports fell, according to Birgit Hansl of the World Bank. She points out that it is not enough to have a price change: “First you have to produce something that someone wants to buy.” The rouble’s weakness is an opportunity for industries that already export, such as chemicals and fertiliser. But boosting other exports requires investment in new production, which takes time.

Both the IMF and the World Bank have highlighted another possible explanation for the weak performance of exports in countries with falling currencies: the prevalence of global supply chains. Globalisation has turned lots of countries into way-stations in the manufacture of individual products. Components are imported, augmented and re-exported. This means that much of what a country gains through a devaluation in terms of the competitiveness of its exports, it loses through pricier imports. The IMF thinks this accounts for much of the sluggishness of Japan’s exports; the World Bank argues that it explains about 40% of the diminished impact of devaluations globally. That leaves many manufacturing economies in a pickle.

FTSE 100, UK economy, a new way for indexation

Why we should ditch the FTSE 100

Britain’s benchmark index tells us little about the state of the UK economy

For a new year’s resolution, the media, the markets and the stock exchange should ditch the FTSE and find another index instead.

Yes, and here with Maltaway we have the solution with a SMART Fundamentals driven financial product

The economy grew at one of the fastest rates in the developed world. Employment hit record levels. Inflation dropped to 50-year lows. And a pro-business centre-right government was elected with a clear majority for the first time in over two decades.

After so much went right for the UK economy this year, anyone checking their year-end portfolio might expect the FTSE to be comfortably ahead for the last twelve months.

But hold on. With just a few trading days left, the FTSE is likely to end slightly down for the year. Despite a steady recovery in the economy, that will make it three years in a row that the benchmark British index has been essentially flat.

“The FTSE itself only dates back to 1984. We would hardly be losing a long tradition by replacing it”

To some degree that might be telling us that the economy is not quite as strong as it might look on the surface. But, more significantly, it is telling us that the FTSE has become completely unfit for purpose. It no longer reflects what is happening in the British economy.

After all, France’s CAC-40 is comfortably ahead for the year. So is Germany’s DAX, even though neither economy has done as well. As 2016 opens, it is time we retired the index – and came up with something that worked better.

It is hard to argue that the British economy hasn’t had a decent year. You can always pick holes in the performance of any mature nation, and ours is no different.

The yawning trade deficit is worrying, and productivity is stagnant. Even so, the overall performance is very strong. Growth is expected to come in at 2.3pc for the year, after an expansion of 0.5pc in the third quarter. The employment rate has surged to 73.9pc, the highest figure since records began in 1971. Wages are starting to grow again. Price rises are so subdued that the Bank of England is more worried about how to get inflation up rather than down.

You might imagine that would translate into stronger equity markets. After all, if companies can’t make money in that environment, when can they? The trouble is, it hasn’t happened. The FTSE-100 index opened the year at 6,366. It is closing it at around 6,100. Basically it hasn’t moved. That is hardly the first time that has happened.

Re-wind to 2014, and the UK also had a fairly decent year, with the economy recovering. The FTSE, meanwhile, drifted from 6,700 to 6,300. How about 2013? It was slightly better, with the index nothing up gains of close on 10pc, nearly all of which it has since given up. But if you take the last three years as a whole, the index is has been as flat as a pancake.

That is telling us something significant – that the FTSE is not in the least representative of the British economy.

Where has the growth come from in the last three years? It has come from the start-up boom, with more than half a million new businesses being created every year. It has come from a rapidly developing technology sector, and booming professional services, such as consultancy, engineering design and law. And it has come from the rapid growth of self-employment, especially at the top end of the labour market. None of that, however, is reflected in the FTSE.

“Growth is coming from small and medium-sized companies”

Instead, the index is dominated by the sectors you least want to be in right now. The oil and commodity giants such as BP, Rio Tinto and Glencore make up a huge chunk of the index. But the collapse in oil and other raw material prices means those companies have all performed horribly. The banks which make up another big chunk of the index are under pressure from zero interest rates, and assailed by new web-based competitors. High Street retailing is in deep structural decline. True, there are regular re-shuffles. But the new companies are only rarely much better – of the latest additions only the financial technology company WorldPay is at all exciting.

If you look away from the FTSE, you will find that smaller companies are doing much better, and their indexes reflect that.

Take the FTSE-250. It has had another good year in 2015, rising from 16,000 in January to slightly over 17,000 now. If you measure it over the last three years, the performance is even better. It was at 12,600 at the start of 2013, so it has risen by more than 30pc since then. Or take the AIM 100 index, which measures the performance of best small companies that are not yet on the main market. It has risen from slightly over 3,000 at the start of the year, to 3,400 now, a gain of more than 10pc this year. Both are far more representative of how the British economy is doing. Why? Because the growth is coming from small and medium-sized companies.

Other countries don’t have this problem. The Dow is fairly representative of the American economy, and will be even more so if, as many expect, Amazon and Alphabet – as Google now calls itself – are added to the index. The German DAX, with companies such as BMW, Siemens and ThysenKrupp is a pretty good reflection of that country’s mighty manufacturers and exporters. Likewise, France’s CAC-40 reflects an aging but still strong base of luxury good manufacturers and engineering companies. Take a look at any of them, and you get a pretty good idea of how the economy is doing.

That is not true of the FTSE . That matters. The performance of the main index dominates the news. It is what you hear quoted on the TV or radio every day. It is the benchmark for investment, and the standard against which portfolios are measured. The risk is that its dire performance creates a mis-leading impression, deters global investors from the UK, and puts people off saving and investing.

It doesn’t have to be like that. It would be perfectly possible to create a new index that reflected the broad make-up of the British economy, with an emphasis on smaller companies, technology, media, and services, which are our real strengths.

After all, the FTSE itself only dates back to 1984. We would hardly be losing a long tradition by replacing it.

For a new year’s resolution, the media, the markets and the stock exchange should ditch the FTSE and find another index instead.

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