A sobering analysis by the world's central bankers...

The Bank For International Settlements (BIS) is the central bankers' bank. Its Annual Report is an ideal forum in which central bankers can voice concerns they aren't able to express as openly as individuals. The BIS's just published 2014 Annual Report makes for sobering reading. Here are some of the major concerns...

--New asset bubbles are forming -- and the global economy hasn't even fully recovered from the excesses of the financial crisis! With interest rates at record lows, investors aren't paying much attention to risk. Consequently, weak borrowers are able to issue debt at surprisingly low rates, given their underlying fundamentals.
   Does this remind you of the heady days before the PIIGS crisis? The head of the BIS's monetary and economic department said "There is a disappointing element of deja vu in all this... The signs of financial imbalances are there." According to the Annual Report, debt levels in many emerging markets and in Switzerland "are well above the threshold that indicates potential trouble."

--It could be a few more years before the the world recovers from the financial crisis. Europe could experience an especially slow recovery because of high debt levels: "During the boom, resources were misallocated on a huge scale and it will take time to move them to new and more productive uses", according to the text of a speech by the General Manager of the BIS, Jaime Caruana, a former Governor of Spain's central bank. 

--Governments need to take measures to improve their economies, including improving labor mobility. The governments of countries that are growing rapidly need to watch out for overheating.

--There were admonitions for the private sector as well. Banks should raise more capital, both as a cushion against risk and to deal more quickly with portfolio problems. That corporates haven't taken advantage of the boom in stock prices to increase investment is one reason productivity gains have slowed in most developed economies: "Instead of adding to productive capacity, large firms prefer to buy back shares or engage in mergers and acquisitions." 

The BIS sends this message: "...a growth model that relies too much on debt, both private and public, ... over time sows the seeds of its own demise."

Fine tuning US GDP: ouch...

The US releases three estimates of each quarter's GDP. The first is a preliminary estimate; the second and third fine tune it. The latest estimate of the US growth rate in the first quarter was the largest quarterly revision from the second estimate since 1976! 

It now seems the US economy didn't contract 1.0% in the first quarter. It fell 2.9%. Although the number refers to what happened three months ago and signs of recovery are abundant, a contraction that large still has shock value. 

What changed? Personal consumption was much weaker than had been thought: instead of a 3.1% growth rate, personal consumption grew just 1.0%. The fall in exports was larger than in earlier estimates as was the rise in imports, meaning that net exports subtracted more from GDP than we'd thought. The drag from inventories was also larger than estimated earlier. What little good news there was came from the fact that the contractions in business investment and residential investment were smaller than we'd thought. 

How do Mexicans rate public services?

The results of INEGI's second annual survey of Mexicans' perceptions of the quality of government services makes for fascinating reading. (The link is below.) The maps illustrating the differences in perceptions by state are very interesting.

http://www.inegi.org.mx/inegi/contenidos/espanol/prensa/Boletines/Boletin/Comunicados/Especiales/2014/junio/comunica3.pdf

Who's borrowing abroad?

The public sector's net foreign borrowing was much higher in the first quarter of this year than in the first quarter of 2013. Development banks started borrowing instead of repaying debt: in the first three months of this year, development banks took on US$0.3 billion net; a year earlier, they repaid US$0.7 billion. Public sector companies borrowed US$7.5 billion net,  nearly quadrupling their borrowing compared to a year earlier. 

Private firms were also borrowing in foreign currencies. Borrowing by private sector companies (excluding banks) in the first quarter of 2014 was more than six times higher than a year earlier. The percentage increase did benefit from being measured against a low base. Still, net borrowing came to a not insignificant US$2.3 billion.

Foreign investment isn't what it was...

Had foreign investment in Mexico in the first quarter of this year matched that of the first quarter of last year, this year’s first quarter capital account surplus would have exceeded last year’s. It didn't, so foreign investment was just three-fifths of its level a year earlier. Both components of foreign investment -- foreign direct investment (FDI) and portfolio investment (PI) -- were lower.

FDI was US$5.8 billion, 28.4% less than a year earlier. Three-fifths of FDI took the form of reinvested profits; that US$3.5 billion has as its counterpart an outflow of the same size in the current account. The remaining two-fifths of FDI – new investments and net liabilities with parent companies – does not have a mirror counterpart in the current account. New investments accounted for US$1.8 billion (31.4% of total FDI) and increased liabilities (net) with parent companies, US$0.5 billion (8.0% of the total). 

Portfolio investment was half its level of the first quarter of 2013. Foreign investment in equities was more than ten times its first quarter 2013 level. Such impressive growth is much easier to register when measuring against such a low base. And, alas, foreign investment in equities was just 5.9% of PI. Foreign investment in money market instruments -- 94.1% of PI -- was US$4.5 billion, half its level of a year earlier. It was also less than FDI in the quarter. 

Mexico vs. China...

Here's the link to an interesting article from the New York Times on why some companies are choosing to invest in Mexico instead of China.

http://www.nytimes.com/2014/06/01/world/americas/as-ties-with-china-unravel-us-companies-head-to-mexico.html?emc=edit_tnt_20140531&nlid=20064986&tntemail0=y&_r=0