GED Under the Radar – July Edition

Every month there are some economic stories that fall through the cracks. In this segment,  the GED Team will present to you those economic stories, which we found most interesting each month but felt received less popular media attention than they actually deserved. These stories can come from all over the world. They can be relevant and important for the global economic system as a whole or just affect a select group of few, they can be serious or they can be humorous. In any case they will be interesting. This is “GED Under the Radar”!

July’s Radar Stories in Short:

• Increasing Venezuela’s Minimum Wage – The Desperate Fight Against Inflation!
  
• Burgernomics – A Look at the Newest Findings From the Big Mac Index!
  
• Rising Breakfast Prices in Europe and the UK – One Phenomenom, Two Causes!
  

Raising the minimum wage – Venezuela’s desperate fight against inflation

This month’s announcement by Venezuelan president, Nicolas Maduro, to yet again raise the minimum wage in his country – for the third time this year now – came as little surprise to anyone. Venezuela has had a catastrophic first half of 2017 so far. Years of economic mismanagement by the government have culminated in widespread food shortages, disastrous unemployment numbers, a sharp rise in crime and rampant inflation. Raising the minimum wage shall at least combat the latter of those problems while hopefully, from Maduro’s perspective, put a stop to the ongoing mass protests that continue against his government. Whether this will work, however, is more than doubtful.

Let’s look at the numbers. Venezuela’s latest wage increase of 50% brings the country’s minimum wage to 97,531 bolivars a month – the equivalent to $12.53. Add to that the government’s food stapmps program and the total pay package comes to 250,531 bolivars, or $32.19 a month. But while an increase of the minimum wage by 50% might sound like a lot, the dollar equivalent of the wage package at the time the government last raised the wage in April was $46.70, showing that real prices for food, medicine and other important goods for the Venezuelan people are rising at drastically higher rates. The IMF estimates that inflation in Venezuela could in fact skyrocket to 720% this year.

The wage raise then seems like nothing more than the proverbial drop on the hot stone. And so the protests continue in Caracas while more and more Venezuelans are fleeing their own country as they can no longer feed their own families there. For those that are staying a larger structural change the country’s political and economic system seems inevitable.

Food for thought – A look at the newest results from the Big Mac Index

The Big Mac Index, for those not familiar with it already, was first invented 31 years ago by the British weekly paper, The Economist, as an over simplified tool to measure and compare countries’ exchange rates with one another by comparing the price of a McDonalds Big Mac in all those countries. The Index has been published ever since in a bi-annually format, with this month marking the newest release of its findings. While certainly not the most scientifically in-depth tool in an economist’s arsenal, “Burgernomics” can still reveal a lot about the state of the world we live in. Let’s take a closer look!

The way the index works is simple. McDonalds’, and therefore Bic Macs, can be found and bought in almost all countries and due to company policy, their composition remains nearly identical across all those countries with only minor divergences in some of them. It is therefore reasonable to assume, the logic of the index goes, that the translated value of the Bic Mac should be equal in all these countries. If then, for example, a Bic Mac in the US costs $5.00 while the Bic Mac of country B costs only an equivalent of $4.00 under its current exchange rate, then country B’s currency is undervalued by 20% against the US Dollar.

Looking at this month’s results and taking the dollar as our base we can see that the US American currency continues to stand very strong in the international Burger comparison. Only three countries’ currencies – Switzerland’s, Norway’s and Sweden’s – are currently overvalued against the dollar. Still, since the last update of the index in January 2017, a lot of other countries have also gained some ground on the USD. In Egypt (the index’s taillight), a decision by the government last November to let its currency float freely has led to a significant drop in value of the Egyptian pound and the corresponding rise in inflation raised Big Mac prices to move the Egyptian currency from 71% undervalued against the USD in January to 67% today. The Euro, too, has gained ground, going from 20% undervalued to 16% within the last half year, mostly due to substantial growth in the euro zone, less political anxiety compared to the previous year and first signs by the European Central Bank to not endlessly continue their high monetary stimuli.

Meanwhile, one of the biggest winner in the index over the last six months has been the Mexican Peso as initial fears last year of President Trump’s menaced trade threads have by now mostly made way to healthy skepticism as to what America’s new president can and will actually do on the topic. If this is taken as a somewhat recurring theme across the index – and you know if we actually want to put our trust into an economic forecast based on burgers – the US Dollar might have further to fall in future analyses.

Rising breakfast prices in the EU and across the English Channel – One phenomenon, two explanations

This month brought to our attention the analysis of two similar economic developments. While in Germany butter prices are climbing to a historic all-time high, a new KPMG report in the United Kingdom warns that on top of already increasing grocery prices, the Brits might have to face an even more drastic price jump for a traditional English breakfast in the near future. So what is going on here? Is Breakfast under attack? Well not quite. In reality the two countries’ economic breakfast developments stem from two very different causes but both are symptomatic of a larger underlying problem. Let’s look at the cases one by one.

First the historic rise of butter prices in Germany. While a year ago a 250 g package of butter cost only 72 Cent, consumers now have to pay a whole 1.75 Euros for the same quantity. How did it come to this heavy increase? The price hike comes a good year after falling milk prices had led to large protests of German dairy farmers. Being politically well organized, it wasn’t long before those protests were meeting open ears both in Germany and the EU. The EU alone pledged a total of 500 Mio. Euros in subsidies for the farmers. The wheels of Bureaucracy turn slowly though and by the time the first programs actually paid out any money to the farmers, the milk price had already left its low point behind it all on its own and was already on the way up to a stable level. Instead of stabilizing natural price fluctuations, the delayed subsidy response actually boosted the variation. In the first half of 2017, an already back to normal consumer demand for milk, met a decreased supply by subsidized farmers and prices rose accordingly. Butter was hit especially hard due to its high milk demand for production as a rough 20 kg of milk are needed to make only 1 kg of butter. Politics should look at this and maybe reconsider their over willingness to step in every few years to help out dairy farmers in the EU. They hardly do it for any other agricultural industry on this level and fluctuations have been less severe in those industries because of it.

Secondly we have the rise of breakfast costs in the UK. As with almost all economic news from across the channel nowadays it basically boils down to this: Brexit. More specifically, up till now, a devaluation of the British Pound has made foreign food imports more expansive in British stores, thus raising the price for a traditional English breakfast. According to a new report by KPMG however, this would only be a relatively minor change in prices, compared to a hard Brexit scenario in which the UK is unable to agree on a new trade deal with the EU within the next two years and will default back to TWO set customs rules. The report calculates that in such a scenario the British people would have to pay a whole 3 pounds more for one of their beloved traditional fry-ups.

For their calculations KPMG created an average basket of mid-range cost ingredients for a family breakfast on the island and then reapplied WTO tariffs on those products, typically not produced in the UK. The report found that a 79 p litre of orange juice from spain and bottled in Ireland would rise to 93 p, Italian olive oil would jump from 3.60 pounds to 4.68 and of course French butter, already on an all-time high as we know, too, would increase in price by a whole quarter to 4.08 pounds. The total basket of goods’ price would increase from 23.59 pounds to 26.61.

The Report concludes that if no deal was struck before March 2019, imported food and drink items would be among the goods hardest hit by reinstated tariffs. Together with already weakened wage growth, the iron grip on household finances in Britain will therefore not let up anytime soon it seems.