North Korea, one of former President George Bush’s “axis of evil” countries and one of the few remaining Stalinist states, deserves to be re-evaluated given the prospect of a power succession and the changing economic landscape in the region, according to Goldman Sachs.

Apart from the robust military establishment (absorbing at least 20-30% of GDP vs 3% of GDP in South Korea),  Goldman says North Korea has large untapped potential, including rich human capital, abundant mineral resources (valued at around 140 times 2008 GDP) and significant room for productivity gains.

“We project that the GDP of a united Korea in dollar terms could exceed that of France, Germany and possibly Japan in 30-40 years, should the growth potential of North Korea, notably its rich mineral wealth, be realised,” the bank’s economist Goohoon Kwon says in a paper.

“This projection would put the size of a united Korea in 2050 firmly on a par with, or in excess of, that of most G7 countries, except for the U.S.

Readers of Global Investing may be aware that there are investors who are already looking at North Korea’s potential.

Chosun Fund, for instance, targets North Korea’s extractive industries and energy sector.

David Bowers, the one-time Merrill Lynch strategist who now co-drives consultancy Absolute Strategy Research, reckons policymakers and financial analysts have got it wrong about the credit crunch. It is not a consumer event, he says, it is a corporate one.

As evidence, Bowers’ ASR notes that of the roughly 4 percent decline in U.S. economic growth this year, around 85 percent can be attributed to a decline in the capex and inventory contribution. A similar picture can be found in the euro zone — where some  60 percent of a near 5 percent decline is from corporate. There is less of a case in Japan, but at roughly 40 percent of a more than 6 percent decline it is still a sizeabe chunk.

Bowers believes this huge decline is going to force companies to resume output because there will be shortages.  On the one hand, this will lead to improved corporate cash flows, narrrowing credit spreads. On the other a combination of inventory shortages, supply chain bottlenecks and base effects suggest to ASR that inflation is on the way.

 ”Get set for a ‘bear flattening’ in U.S. yield curve with two-year Treasuries most at risk,” ASR says.

Britain’s Association of Investment Companies has UK investors who run Japanese equity funds whether they think the general election on Sunday will have a positive impact on the country, which is slowly emerging from recession.

Their answers can be found here, but the consensus was that the Democratic Party of Japan would defeat the ruling Liberal Democrat Party and that this would result in more consumer friendly policy or economic revival through higher living standards.

Managers were more divided on how long-lived any positive impact on stock market would be.

Our unscientific mini-poll below gives you the chance to vote on the issue — but as ever your comments are also welcome.

Financial journalists spend a lot of time surveying market economists ahead of macro-economic data releases to find out how they think the next CPI or GDP number is going to turn out. A poll 20 or 30 economists gives a market median forecast, which will determine how traders react when the data comes out. If the figure beats expectations and points to a strong economy and likely rate rises, the currency will jump, and vice versa.

But how good are these forecasts? Why react if there’s no track record for accuracy? Economists have a pretty good feel for how reliable forecasts are for different indicators, but it would easier to have a number that tells us how reliable forecasts are for data such as GDP, jobs data or the CPI?

Forecast accuracy is a live topic in academic journals. There’s the MAE and the MSE, the sMAPE and the MAD/Mean ratio among others. Some measures depend on scale so they can’t be used to compare different series of data, such as GDP and the jobless rate. Using percentage error — the MAPE — can overcome this but it gives whacky results with outcomes of zero or near zero. One possible solution is to use the mean absolute scaled error – or MASE – suggested by Professor Rob Hyndman at Australia’s Monash University and colleague Anne Koehler from Miami University, Ohio in 2006.

The MASE measures how forecasters have performed against a so-called naïve forecast — simply forecasting that next month’s result will be the same as last month’s. The lower the result, the better the forecast. So 0 is a perfect forecast, while a score above 1 means the forecast is worse than a naïve forecast.

Applying the test to some Japanese economic indicators, we can rank forecasts of the different data series according to how much better they are than a naïve forecast. So from best to worst:

Industrial output Score 0.25 - Economists are very good at forecasting industrial production, which measures the output of items such as flat-screen TVs, automobiles and electric machinery. Apart from manufacturer’s own forecasts, economists can monitor export data, electricity usage and steel and auto output figures for clues.

CPI Score 0.29 – Deflation has been accelerating due to falling oil costs and weak domestic demand. National CPI tends to track Tokyo CPI, which is released a month in advance and forms the basis for forecast numbers.

Machinery orders Score 0.43 - Core machinery orders is a highly volatile series, which is seen as an indicator of capital spending in the coming six to nine months. Analysts are actually pretty good at forecasting its ups and downs, if not at getting the exact levels.

Household spending Score 0.78 - Household spending is a measure of consumption, which has recently been affected by the government’s one-time payouts to households. Economists track retailers’ sales figure, but the result is fairly poor.

If it takes two successive quarters of falling GDP to enter a recession, how can a country emerge from recession with only one quarter of growth?  In the past week or so, journalists have declared the recession over in France, Germany and now Japan.  Of course, most reports rightly ask how long this will last and stress that a genuine recovery is far from certain.

Some people regard the two quarters definition of a recession as arbitrary and a bit silly, something supposedly cooked up by one of Lyndon Johnson’s economic advisers  to avoid acknowledging a downturn until after the next election.

But it does serve a serious purpose: At least it reduces the risk that we’ll be misled by a statistical blip in one quarter’s data which might be revised away in the next release.

Regardless of its murky origins, economists and lay people around the world use the two quarters recession rule. So why not be consistent?  Why not wait another quarter before we declare the French, German and Japanese recessions over?

MacroScope is pleased to post the following from guest blogger Ian Bright. Bright is senior economist at ING and winner of the 2008 Rybczynski Prize from the UK Society of Business Economists. He says here that bank lending’s future can be seen in Japan’s past — and it is not good for the would-be borrower. 

“There is anger in many countries that banks are not lending money. Or more correctly, they are lending less than people want.

There is nothing new in this. Even before the failure of Lehman Brothers and the collapse of the global financial system, banks were tightening lending criteria. We even saw people who paid off their credit cards each month have them withdrawn. Small companies found that the criteria used to value the assets backing loans were made more onerous.

When the financial system virtually collapsed, governments provided money and central banks lowered rates. Many thought that this would increase the ability to get loans from banks. Indeed some governments made efforts to link the provision of public money to increased loans to particular groups, such as small businesses and homeowners.

But that is not what is happening. Banks are still reluctant to lend. And, really, nobody should be surprised.

Two factors are at work.

First, the economic cycle is working against lending. Even if a V shaped recovery takes hold in many countries, the fall in activity that has occurred is large enough to ensure an increase in bad debts for banks over the next year or two. Banks are reluctant to lend under these conditions.

But that is merely cyclical. The real problem comes from the second factor - structural changes in the ways that banks operate. No longer can banks rely on lending from each other. Retail deposits are key. And they don’t come cheaply. Furthermore, regulation will tighten soon. Banks foresee this and are reluctant to lend when the amount of capital they will need to support their loans books will increase.

The collapse of the Japanese banks in the late 1990s provides a view of what could happen. Loan growth was negative for seven years from 1998 to 2005. Loan growth is not negative in most countries but its rate of growth has been slowing.

If Japan’s experience provides any insight, don’t expect loan growth to recover soon. In fact, you could argue that worse is yet to come.”

Perhaps largely to a surge in the yen, Tokyo is back as the most expensive city in the world, followed by Osaka which made a leap from last year when it ranked 11th in the cost of living survey by consultants Mercer.

Moscow falls to the third from the top, while New York jumps to the eighth from the 22th last year.

Lagos (32) and Abidjan (34) are more expensive than San Francisco (34) or Luxembourg (38) while Bratislava (30) and Algiers (40) come higher than Frankfurt (48) or Washington (66).

Birmingham (125) and Wellington (139) are cheaper than Guatemala City (119) or Bogota (120).

Residents in Tokyo would pay £3,751.28 a month to rent a luxury two-bedroom unfurnished appartment while those in Johannesburg would pay just £624.16. A cup of coffee, including service, costs £4.08 in Paris, while it is just £1.80 in Sydney.

Warsaw is the cheapest place to buy a litre of pasturtised whole milk, above 2.5 pct fat (£0.55) while Beijing is the most expensive (£1.82) and Tokyo the second most expensive (£1.79).

It’s starting to look like the Summer of Love. Two reasons: The recovery is taking on a L-U-V shape globally, and it’s going to require huge amounts of love and nurturing to keep growth alive.

• L stands for Europe, where slowness to confront deep damage and write down the remaining $500 billion odd in bad bank debt, mean rebuilding will be protracted and painful.
• The United States sports a U, bouncing along bottom right. But its financial giants swallowed harsh medicine early and the U.S. has the flexibility to stage an impressive rebound, if not undone by a fast-rising jobless rate at 9.5 percent and heavily indebted consumers.
• V stands for Asia (ex Japan), the surprise region showing resiliency, thanks to its rapid Q4/Q1 inventory workdown and huge infrastructure spend by China.

Like the Summer of Love 41 years ago, it is a drug-fueled affair. G20 governments are peddling $820 billion in stimulus this year, equivalent to 2 percent of GDP. Central bankers are spending even more. The Fed has doubled its balance sheet to $2.04 trillion the past 12 months.

These actions might have cushioned a severe cyclical downturn but the structural adjustment to a world of costlier credit is only just beginning.

Will politicians and central bankers have the wisdom or the stomach to keep the drug supply going long enough to prevent L-U-V from turning into an ugly W?

Japan, slightly sidelined by the U.S.-UK “special” relationship and the Franco-German alliance at the G20 summit, is keen to stress the country can offer lessons to be learned from the country’s banking crisis in the 1990s.

Here’s a re-cap of what happened. In 1992, then-PM Miyazawa warned of a financial crisis unless banks were recapitalised using public funds now. Yet no action was taken. Between 1995 and 1997, staggering 5 financial institutions failed, forcing the government to inject public funds into 21 banks in 1998. Then two major banks were nationalised, then the government injected additional capital into 32 banks.

U.S. Treasury Secretary Timothy Geithner experienced the crisis himself as a financial attache at the U.S. embassy in Tokyo in the 1990s.

But how relevant are Japanese lessons to the global markets today?

“In some ways, Japan was lucky. Its lost decade was spent at a time when the global economy was recovering from recession. As a result, there was an opportunity for exports to grow,” Ian Bright, ING economist, writes in a paper which won the Society of Business Economists’ Rybczynski Prize.

“Today, the situation is different. The problems in financial markets are global rather than local. As a result, the chances of any one country finding solace in exports are slim.”

(Reuters photo: Toru Hanai)

Goldman Sachs has long been a keen advocate of the BRICs — Brazil, Russia, India and China – as a new power tool for world growth. Indeed, it is credited with coining the phrase.

In a note, the firm says that even though the group is being hit differently by the global slowdown — Russia suffering most,  India least — a uniform drive from the four will return as soon as the cycle starts to turn.

It is predicting big things as early as next year.  It says China’s economy is already the third largest in the world and it sees it eclipsing current No. 2  Japan as early as 2010. Furthermore, as a group, the four countries are set to be dominant.

“Our long-term projections envisage the BRICs as an aggregate surpassing the G7 by 2035,” it says.