For most of my life in macroeconomics, I have tended to be very dismissive of anecdotes from the world of business. They run the risk of exaggerating the importance of specific experiences in a small number of companies, and behavioural finance warns us that human beings tend to over-estimate the significance of events which happen directly to them, rather than to others. I also believe that business people are no better than anyone else at predicting the economy (which in my mind is tit-for-tat, since they certainly believe that economists cannot do it either). With that warning, here are a couple of anecdotes from my recent meetings with Nick Evans and Spencer Skinner, my partners at Active Private Equity. Maybe they are straws in the wind.
The first concerns the acquisition by western companies of manufactured goods from China. I have now heard from several sources that this is rapidly becoming much more problematic, and more expensive, than it has been in the last decade. Chinese urban wages are clearly rising at a much faster rate than before. Operatives are being shifted from manufacturing plants to work instead on large public infrastructure projects. And the one child policy is said to be leading to a shortage of young female workers in manufacturing. These young women have previously been crucial in producing low cost products for western retailers.
If these observations are valid, then at least part of the coming rise in the real value of the yuan will happen because of rising labour costs in China, leaving less to happen through a rise in the nominal exchange rate. That is what happened in Japan in the 1970s. In addition, it will cause a shift in western purchases away from China towards other economies in Asia and Africa which are earlier in their economic development. And it will raise living standards and boost consumer demand inside China itself. All good things, and signs of growing economic maturity in China, I believe.
The second series of anecdotes concerns UK consumer activity in the UK. This seems to have been very weak in the run up to the chancellor’s announcement on spending cuts on October 20th, especially in household goods and other consumer durables. Since then , however, things seem to have brightened up considerably. Maybe the press coverage of the impending cuts made people nervous, and maybe the reality was not as bad as people had feared.
Or maybe I am just exaggerating the importance of a few straws in the wind, which I always told people not to do.
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