Will China crash?

A tongue-in-cheek economic indicator with an uncanny track record of accuracy is that any country building the world’s tallest building will shortly thereafter enter recession. Malaysia completed the Petronas Towers in 1998, just in time for the Asian financial crisis. In 2000, the US took the top spot by adding an antenna to the Willis Tower. The global financial crisis was not far away; but more importantly, the building was originally completed (as the Sears Tower) in 1973, and the US entered recession a year later, in 1974. The commencement of construction on the building that is currently the world’s tallest, the Burj Khalifa in the UAE, was followed in short order by the bursting of that country’s real estate bubble and a deep recession. There is a good reason the indicator works so well: the taller a building is, the more of its lower floors are lost to elevator space (because every elevator shaft needs to reach the ground). There are ways around this problem, most recently elevators that decide for themselves on which floors they will stop (in case you have not visited New York recently, you key in your desired floor on a keypad, and a display shows you which elevator car to take). Despite such advances, constructing tall buildings tends to be uneconomic, and so it only happens when a country is in the throes of an asset price bubble – usually, a bubble that is about to burst. Of course, there are countries that have defied the fates. Specifically, there are two: Taiwan, which, despite the construction of Taipei 101 in 2003, has so...

Brazil walks a tightrope to the World Cup

To the great annoyance of longtime Brazil analysts, presentations on Brazil inevitably tend to start with the cutting remark generally ascribed (probably incorrectly) to French President General Charles de Gaulle: “Brazil is the country of the future and always will be”. With the World Cup kicking off shortly, and the Olympics to be held in Rio in summer 2016, Brazil’s historic moment appears at last to have arrived. Perhaps it has. Brazil is already showing a natural showman’s ability to ratchet up the suspense. Leaving venue construction to the last possible moment is only one element in this high-wire act. Brazil is also teetering on the edge of an economic precipice. S&P recently downgraded the country’s sovereign bonds to BBB minus, one step above junk. A Brazilian property bubble – a 414 percent increase in property prices over the past 10 years – exceeds even the pre-crisis house-price run-ups in the US (+92%), Ireland (+287%), and Spain (+193%). (See chart below.) Brazil got itself into this position by pursuing rapid economic growth without taking the hard decisions necessary to make this growth sustainable. The Brazilian political system tends to protect vested interests, including labour unions, big businesses, government employees, and agricultural landlords. As a result, Brazilian policy tends to be twisted in favour of these interests, and reforms are badly needed (and always ongoing) in areas including public pensions, labour law, and taxation. The result is a business environment that is relatively hostile to small businesses – Brazil ranks not even among the top 100 countries in the World Bank’s Ease of Doing Business Index – but favourable to...