The Big Mac index

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

Jan 9th 2016



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.


Track global exchange rates over time with The Economist's Big Mac currency index


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.


Oil prices slid more than 4 percent to new 11-year lows on Wednesday as the row between Saudi Arabia and Iran made any cooperation between major exporters to cut output even more unlikely.

The furor over Saudi Arabia's execution of a Shi'ite cleric has stripped nearly 8 percent off the price of oil in the last three trading days, killing speculation that OPEC members might agree to production cuts to lift prices.

"There are rising stockpiles and the tension between Iran and Saudi Arabia make any deal on production unlikely," said Michael Hewson, chief market analyst at CMC Markets.

Evidence of slowing economic growth in China and India has meanwhile fueled fears that even strong demand elsewhere may not be enough to mop up the excess crude that has resulted from near-record production over the last year.

Benchmark Brent crude futures were at $35.07 a barrel at 1318 GMT, down $1.58 on the day, and reached their lowest since early July 2004, having staged their largest one-day drop in percentage terms in nearly five weeks.

U.S. crude futures were down $1.25 cents at $34.72 a barrel after slipping 79 cents the previous day.

Oil has slumped from above $115 in June 2014 as shale oil from the United States has flooded the market, while falling prices have prompted some producers to pump even harder to compensate for lower revenues and to keep market share.

Adding to this oversupply, Iranian oil exports are widely expected to increase in 2016 as Western sanctions against Tehran over its nuclear program are lifted.

"Shale production and increasing capacity from countries like Russia who need to protect revenue combined with expectations of further Iranian supply mean actual production as well as expectations of future production are rising," Hewson said.

Still, a senior Iranian oil official said the country could moderate oil export increases once sanctions are lifted to avoid putting prices under further pressure.

Also feeding into broad market weakness, a survey showed that China's services sector expanded at its slowest pace in 17 months in December, following on from weak factory data on Monday which also knocked markets globally.

The People's Bank of China set a weaker midpoint for the yuan, prompting concerns that the economy of the world's largest energy consumer could be in worse shape than believed.

In the United States, concerns over mounting oil stock levels persisted, with crude inventories likely to have risen by 439,000 barrels last week, according to a Reuters poll of eight analysts.

The U.S. Energy Information Administration (EIA) will publish its closely watched weekly data at 1530 GMT.

Some analysts think oil prices have fallen too far and will stage a sharp recovery later in the year, with Commerzbank targeting $60 per barrel by the end of 2016.

"This looks ambitious from current levels but current prices are unsustainably low," Carsten Fritsch, senior oil analyst at Commerzbank, told the Global Oil Forum. "We are in a speculative exaggeration at the moment."

He added that he expects U.S. oil production to fall at least 1 million bpd by autumn.


(Additional reporting by Henning Gloystein, Jacob Gronholt-Pedersen and Roslan Khasawneh in Singapore, editing by William Hardy and Adrian Croft)


Добивът на руски суров петрол се е увеличил с 1.4% през 2015-а в сравнение с 2014-а – до почти 10.726 млн. барела на ден, по предварителни данни на руското министерство на енергетиката. Пикът на руското производство е бил през декември – 10.825 млн. барела на ден – поредният рекорд от разпадането на СССР насам. Това се е случило въпреки пропадащите цени и санкциите на САЩ и на Европейския съюз, ограничили достъпа на руските производители до чуждестранно финансиране и технологии. Компаниите са успели да "изцедят" повече черно злато от някои полета в западен Сибир и да реализират няколко средно големи нови проекти. Износът на руски нефт е достигнал 5.25 млн. барела на ден през 2015-а, когато доставките за страни извън бившия Съветски съюз са скочили с 11% – до над 4.42 млн. барела дневно. Руското правителство, което разчита на суровия петрол да пълни близо 40% от бюджетните приходи, не очаква спад на добива и през 2016-а. Направените преди две-три години инвестиции в сектора са подкрепяли производството през 2015-а и ще продължат да помагат и през 2016-а. Спад, обаче, има при добива на природен газ заради засилената конкуренция между държавния монополист "Газпром" и местните му съперници и по-ниските продажби в бившите съветски републики. Общото производство на синьо гориво е спаднало с 1% през миналата година – до 635 млрд. куб. м., което е най-малкото количество от 2009-а насам.

Ирак е изнесъл 1.097 млрд. барела нефт през 2015-а при средна цена 44.74 щ. долара за барел. От тези продажби в държавната хазна са влезли 49.079 млрд. щ. долара, по данни на иракското министерство на петрола. Ирак, който притежава петите по големина петролни резерви в света, трябва да качва добива, защото по-ниските цени намаляват приходите в бюджета. Заради падащите нефтени котировки и скъпо струващата война срещу бойците на Ислямска държава инвестициите в местния нефтен сектор ще намалеят, според щатската банка "Моргън Стенли", която прогнозира, че добивът на черно злато в страната ще започне да намалява през 2018-а. 


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