Asset prices in The Monday Briefing
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It is perhaps odd that despite gloomy news stories about the risks to growth the world economy is recovering. And this is a rare thing, a synchronised global recovery with activity strengthening in developed and emerging markets for the first time since 2010.
Leading indicators for growth are flashing green. Singaporean export growth, a barometer of global demand, has hit a two-year high. Chinese electricity consumption has rebounded. Arguably Europe’s most important economic indicator, Germany's Ifo business confidence index, is near a three-year high. In the UK, optimism among manufacturing companies has reached its highest level since 1995. Surging North American rail freight volumes point to growing demand. Across the world the regular economic data are coming in on the strong side of expectations.
This all sounds good, and it is. But the pace of this recovery doesn’t look likely to take us back to the sorts of growth rates that were seen before the financial crisis. Global growth is running around 80% of its pre-crisis levels. This so-so performance has been dubbed the New Normal.
Escaping the New Normal requires a recovery in productivity growth. Most rich countries have seen rates of productivity growth slow since 2009. In the UK, for instance, productivity growth has fallen from an annual average of around 2.0% a year before the crisis to about zero.
The Governor of the Bank of England, Mark Carney, recently lamented Britain’s “first lost decade” since “Karl Marx was scribbling in the British Library” in the 1860s. He was referring to the fact that wage growth for the average British worker has stagnated in the decade since the financial crisis.
Last year earnings for the median worker in the UK, the person in the middle of the wage distribution, were almost 7% below their pre-recession level in real terms. The latest official forecast shows that real earnings are unlikely to return to pre-recession levels until 2021.
Free trade helped power a dramatic rise in living standards in the West in the nineteenth and twentieth centuries. In the last three decades it has had a similar impact on the welfare of billions of people in emerging economies.
Yet in the face of a backlash against globalisation, free trade is arguably more at risk than at any time since the 1930s. Those who want to limit trade see it as a way of “bringing home” high-quality jobs and reinvigorating industry.
Switch on the TV news, follow Twitter or read a paper and it can feel like we are living in an era of high, perhaps unprecedented, uncertainty.
We certainly seem, over time, to have become more aware of uncertainty. Since the 1940s references in English language books to uncertainty, volatility, complexity and ambiguity have soared. The term Chief Risk Officer did not exist before the mid-1990s. Now CROs are an established part of many large companies. In the 1990s the US army War College coined the term VUCA in to describe an apparently new world of volatility, uncertainty, complexity and ambiguity.
The performance of financial markets provides signals about the state of the global economy. Market movements in part reflect shifting expectations about growth, inflation and risk. The messages from markets are fallible. But unlike economists’ forecasts, the positions investors take are backed by real money.
So who made money in financial markets in 2016 and what does it imply for the global economy?
The global recovery is entering its eighth year – sufficiently long for some commentators to suggest that we are due for another recession. That seems premature. 2017 looks likely to be another year of growth for the global economy, and at a rather faster rate than in 2016.
But this is not likely to be the year in which growth finally breaks through, returning to the heady rates seen in the decade before the financial crisis. In other words, activity is likely to remain close to the lower, so-called New Normal levels seen since 2009.
For the last Monday Briefing of 2016 we have pulled together our favourite funny news stories from the Briefing through the year. As ever credit goes to my colleague, Alex Cole, who tracks down each week’s news stories and is the indefatigable inventor of the play on words that concludes each week’s Briefing. The Monday Briefing will return in the New Year. In the meantime the Economics Team – Ian, Alex, Debo, Jemma and Anthea – send our very best wishes to you for Christmas and the New Year.
With Christmas approaching here is our seasonal offering of six thought-provoking articles to occupy the quiet time during the holidays. All are available free and on-line.
The continuing problems faced by Italian banks, some of the oldest in the world, is a reminder of Italy’s long banking history. This History Today article describes how the Italian Medici family built their banking empire in the fifteenth century; “not merely the most profitable organisation in Europe, but the richest commercial house there has been anywhere.”
Our Christmas Quiz offers an eclectic test of knowledge of economics and business. The answers, and a brief explanation of the factors at work, are at the end of this note.
- Which of the following countries is likely to show the fastest growth of the seven major industrialised nations this year?
Increasing specialisation in production has been a major driver of human welfare in modern times.
The late eighteenth century pioneer of modern economics, Adam Smith, called it the division of labour. Smith argued that splitting production into a series of tasks, each performed by a specialist, whether a worker or a company, would raise productivity and growth.