A Bite-Sized Look at Global Economics
A Bite-Sized Look at Global Economics
In the build-up to the end of the year, with plenty of uncertainties hanging over the future of the global economy, we've heard and written a lot about inflation, interest rates, economic growth, wars, and artificial intelligence. So why not write about something a bit more offbeat and fun, like the Big Mac Index?
The Big Mac Index, a lighthearted yet insightful economic tool, was first introduced by The Economist magazine in 1986. This index leverages the ubiquitous McDonald's Big Mac to measure Purchasing Power Parity (PPP) between different currencies.
Purchasing Power Parity (PPP) is an economic theory that suggests exchange rates should adjust to equalise the price of a basket of goods and services across different countries. In simpler terms, if a Big Mac costs $5 in the US and £4 in the UK, PPP suggests the exchange rate should be such that the Big Mac is equally priced in both countries.
While dividing the price of a UK Big Mac by a US one doesn't directly give the GBP/USD currency exchange rate, the correlation between price movements and exchange rates is strong
Source: Artorius, Bloomberg
A more expensive Big Mac in one country relative to another may indicate an overvalued currency, while a cheaper one may suggest an undervalued currency; buying a Big Mac in Switzerland will set you back significantly more than it would in India
Source: Artorius, Bloomberg (as at July 2024)
Based on a straightforward interpretation of the Index and the accompanying chart, it appears that the Swiss Franc is significantly overvalued. When compared to India, the Swiss Franc seems to be overvalued by nearly 300%. While India might be considered an outlier, even when compared to developed economies like the US, UK, and the Euro Area, the Swiss Franc still appears overvalued by approximately 40%.
While the Big Mac Index offers a fun and accessible way to understand PPP, it's important to note its reliance on McDonald's presence. For example, only 4 countries in Africa have McDonalds, and the varying costs of non-tradable goods and services can skew the results. Additionally, differences in local market conditions, such as advertising costs and consumer preferences, can impact the price of a Big Mac, making it less reliable as an accurate indicator of currency valuation.
But the index has caused issues over the years, especially in Argentina where it highlighted the nation's complex economic landscape and attempts to manipulate economic data. Facing significant economic challenges, including high inflation and currency devaluation, the Argentinian government allegedly attempted to mask the true extent of these issues by manipulating the price of the Big Mac.
Despite its limitations, the Big Mac Index remains a popular and engaging way to illustrate the concept of Purchasing Power Parity. It highlights how economic factors can influence the relative value of currencies, while providing a lighthearted perspective on international economics.
Back to earth with a bump
Away from Big Macs, politics continues to steal the headlines across the world, with Donald Trump continuing to announce his preferred candidates to form his government. Robert F. Kennedy Jr. has become a particular focal point following his appointment as 'Health Czar.' Known for being an anti-vaccine activist, many stocks in the healthcare sector saw a significant drop in share price upon the announcement.
Under pressure, European governments again hit the headlines this week as the French Prime Minister used special powers to push through a social security budget bill without a vote by MPs, in a move that has triggered a vote of no confidence in the minority government, which at the time of writing looks likely to succeed. If successful, President Emmanuel Macron will be forced to name a new government, adding further instability to an already murky French political backdrop.
Bond yields in France are now at the same level as Greece’s, reflecting the extent to which bond investors’ faith in French credit has been reduced. The challenge facing the core European economies to restore fiscal credibility in the face of prolonged economic weakness and structural issues (low productivity and aging populations) remains significant and the political choices difficult.
With ongoing recessionary conditions in Germany and France, the European Central Bank is likely to continue cutting interest rates to stimulate the economy. This is likely to weaken the Euro currency, especially against the US Dollar, as the US economy remains resilient, and the Federal Reserve may be less inclined to cut interest rates than its European counterpart.
While it is sometimes nice to step back and enjoy something fun and light-hearted, it is important to remain aware of global events, even as Christmas approaches and people’s attention begins to drift towards the holiday period.
Josh Young de Ferrer
Portfolio Manager
*Any feedback provided can be anonymous
Important Information
All expressions of opinion reflect the judgment of Artorius at 4th December 2024 and are subject to change, without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete; we do not accept any liability for any errors or omissions, nor for any actions taken based on its content. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. Past performance is not a reliable indicator of future results. Nothing in this document is intended to be, or should be construed as, regulated advice. Artorius provides this document in good faith and for information purposes only. Reliance should not be placed on the information contained within this document when taking individual investments or strategic decisions.
Artorius Wealth Management Limited is authorised and regulated by the Financial Conduct Authority. Artorius is a trading name of Artorius Wealth Management Limited.
FP20241204001