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The World Price Index

Released: September 13, 2016
Brazil Overvaluation Rises Despite Weak Economy

  • Brazilian Real rises to 12% overvaluation to the US Dollar
  • British Sterling holds stable at 7% undervaluation
  • German Euro undervaluation at 11%, French Euro overvaluation at 10%

The World Price Index (WPI) data for September shows that sterling remains only 7% undervalued against the dollar in purchasing power parity (PPP) terms. This relative stability leaves the British currency competitive despite the initial turmoil following the result of the referendum on June 23. Germany, benefitting from a competitive undervaluation of 11%, compared to 12% last month continues to run up current account surpluses, but this is at the expense of growth in the rest of the Eurozone. Meanwhile, the ongoing troubles within the Eurozone are keeping German exports competitive.

Brazil Real Overvaluation Rises
In contrast to the Eurozone, the Brazilian Real has continued to appreciate in PPP terms which is likely to harm the country’s exports. The WPI data for September showed that the Brazilian Real increased its overvaluation against the US dollar by 3% to reach 12%. One US dollar bought only R$3.20 on the foreign exchange markets this month compared to R$3.26 in August and as much as R$4.01 in January 2016. In contrast, the WPI PPP rates were R$3.59, R$3.55 and R$3.35 respectively producing an undervaluation of 17% and in the latter case, only nine months ago. The Brazilian economy’s slowing growth and slide into recession, rising public sector deficit and political turmoil had led to a depreciation of its currency on foreign exchange markets from an average level of R$2.31 in the first half of 2014 before the FIFA World Cup was staged, to R$4.01 at the beginning of this year.

Since then, the currency has appreciated and in July passed parity with the US dollar in PPP terms. The replacement of Brazil’s president, slightly improving economic conditions and the hosting of the Olympics have all helped power the currency’s strength. Data from the World Economics Sales Manager’s Index (SMI) for Latin America in July, which is dominated by conditions in Brazil, showed a temporary positive impact of the Olympics. Unfortunately, an overvalued currency with its depressing impact on exports, is unlikely to help a recovery in an economy shackled with a large government deficit, rising public debt and low commodity prices, particularly energy. The current overvaluation of the Brazilian Real is also underpinned by the level of interest rates maintained at 14.25% by the country’s new Central Bank Governor. With inflation falling below 9%, this is providing a real yield differential unavailable in most of the world.

German surpluses put further strain on Euro
Germany is the world’s fifth largest economy measured in GDP (PPP) which means that its twin surpluses, current account and government combined place strains on the global economy and on the Eurozone. The German public sector surplus for the first half of 2016 came in at €18.5 billion, 1.2% of GDP. Although the balance of payments current account surplus for July at €18.6 billion was smaller than expected, these twin imbalances are sucking demand out of the European economy producing insipid growth. The latest WPI data shows that Germany’s public and private thrift is reinforced by large differences in the fundamental value of the so-called common currency among members of the Euro club. One of the strengths of the WPI methodology is that it allows a comparison of the PPP values of a Euro in different countries.

In September, one US dollar bought €0.89 in the foreign exchange market, but the WPI rate based on an average of domestic prices across most of the Eurozone, was one dollar to €0.88 unchanged from August and implying an undervaluation of the Euro against the dollar of 1% in PPP terms. Internal prices in Germany produced a WPI rate of €0.79, implying an undervaluation of German output of 11% in PPP terms. This undervaluation against the Dollar which has persisted since January 2015 makes German exports competitive in global markets at the cost of accumulating trade surpluses. Its main Euro partners, Italy and Spain, are closer to parity with the dollar in PPP terms, being undervalued by 2% and 1% respectively. In contrast, France faces an implicit overvalued exchange rate of 10% and struggling Greece one of 14%. Germany will continue to tolerate weak economic conditions among the other Eurozone countries while its competitive position, bolstered by relative price differences across the Eurozone revealed in WPI data, allows its exporters to benefit. The alternative, a revived Deutsch Mark, would soar against the dollar in PPP terms given the size of the country’s surpluses.

About the World Price Index
The World Price Index (WPI) measures the value of an urban selection of goods and services at purchasing power parity (PPP), reflecting the real purchasing power of different nations, allowing for rapid and accurate international price comparisons. Under/Over valuation data is based on the difference between the exchange rate value of a currency and that of the US Dollar in relation to the World Price Index calculated exchange rate. Based on WPI global data the degree of currency under or over valuation in PPP terms by country is provided in the table and chart below.

Over/under valuation - all major currencies

Notes to Editors
  • The World Price Index is based on original data collected by World Economics.
  • The World Price Index is released on the 2nd Working Tuesday of each month.
  • Latest month market exchange rates are calculated as an average of daily rates.

About The World Price Index
The World Price Index is calculated monthly from a basket of internationally comparable goods and services. It is designed to alleviate the horrendous problems associated with analysing economic or market data using currency market exchange rates.

Exchange rates vary with extraordinary rapidity, frequently with little obvious link to economic reality, but fatally distorting the perception of value in markets and economies. It is vital when analysing international data, whether for market analysis purposes, or to allocate resources across the globe, to review data using an international yardstick of value. This can only be done using Puchasing Power Parities (PPP), which make allowance for the purchasing power of currencies within individual countries to make comparisons based on a standard currency, usually "international dollars".

There are various sources of PPP data, but most are of only academic interest as they are years out of date. The World Price Index is the only available index updated monthly to provide an easy way of reviewing trends or relative values of market or economic data in realistic terms.

About World Economics
World Economics is an organisation dedicated to producing analysis, insight and data relating to questions of importance in understanding the world economy. Its parent company Information Sciences Ltd has a long history of the development of key business information today used throughout the world, including the origination of the Purchasing Managers Indexes in Europe and Asia (now owned by Markit), and the development of WARC a global information provider for major corporations .

Currently our primary research objective is to encourage and assist the development of better and faster measures of economic activity. In cases where we believe we can contribute directly, as opposed to through highlighting the work of others, we are producing our own measures of economic activity.

Our work is mainly of interest to investors, organisations and individuals in the financial sector and to significant corporations with global operations, as well as governments and academic economists.

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