Global economics in The Monday Briefing
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The behaviour of the equity market provides useful signals about where investors think the global economy is heading. As we move into the second half of 2018 here’s our mid-year assessment of what equity markets are telling us.
The biggest change is in investors’ attitude to risk. In 2016 and 2017 investors made money investing in riskier assets. Emerging market equities soared and as confidence spread about the Europe’s recovery, so, too, did euro area markets. Caution has returned this year and outside the US the returns on equities have been meagre to negative. Globally equities are down 8% from their January peak.
US stocks have done better, returning 6% this year. The star performers have been tech and retail, up 14% and 20% respectively, supported by robust consumer demand. (Checking the numbers I am kicking myself for not buying Netflix stock at the time I subscribed to their service. Shares have doubled in value this year and have risen ten-fold in the last five years.)
With the holiday season upon us we are launching our summer reading list. All are available free and on-line. You can save these articles on your iPhone or iPad's reading list by opening the links on Safari and tapping on the share icon (the box with an arrow). To print these articles please use the print icons, where available, on the webpages to ensure proper formatting.
Political developments over the last few years, among them the Brexit vote and the election of Donald Trump, have led to increasing criticism of the democratic process. Some venture that ‘epistocracy’ – rule by experts – might be a better alternative. This article explores the practicalities and potential pitfalls of a system where only ‘those who know best’ make political decisions. (9 pages)
The passports-for-cash market is booming. Up to 40 countries now run active economic-citizenship or residence programmes which allow people to purchase citizenship or residence rights in return for investing in the national economy. In an era of globalisation and mobility citizenship has become a commodity – at least for the well-heeled. This article from 1843 magazine examines the motives of those buying passports and the incentives for the nations selling them. (7 pages)
The Chinese government is developing a ‘Social Credit System’ to rate the trustworthiness of its 1.3 billion citizens. The system, now being tested by volunteers and expected to become mandatory by 2020, tracks a wide range of activities – from shopping habits, to health, to social media activity – to produce a ‘Citizen Score’ which gauges trustworthiness. People with low scores will be penalised, with plans including restrictions on internet speeds, access to restaurants and the removal of the right to travel. This Wired article analyses an unsettling experiment in monitoring and controlling human behaviour. (9 pages)
There’s never a shortage of things that could go wrong with the global economy. One that’s joined the list in recent months is worries about the health of some emerging market (EM) economies. In a sign of unease nervous investors have been pulling money out of EM equity and bond funds. What’s happening and why does this matter for the rest of the world?
EMs are feeling the effects of the unwinding of a decade of cheap money policies in the US. Low US interest rates encouraged investors to move capital into higher yielding emerging markets equities and bonds. Vast amounts of capital flowed into EMs, pushing up asset prices and bolstering growth. The impact of the unwinding of that great experiment in monetary policy is feeding through to EMs.
The previous Chair of the Fed, Janet Yellen, said she hoped that the reversal of Quantitative Easing (QE) would be as “dull as watching paint dry”. Yet when QE was being rolled out the effects, especially on asset prices, were anything but dull. And just as buying assets makes money cheap and plentiful so selling those assets should have the reverse effect. Ms Yellen’s hopes for a boring unwinding of QE seem predicated on the process happening very slowly. Like the fabled frog failing to notice the cold water becoming warmer and eventually boiling, the aim seems to be to reverse QE so slowly that markets will hardly notice.
I don’t recall a time when there has been so much interest and anxiety about the effects of new technology on jobs. Last week I took part in a panel discussion at the House of Commons on the future of work. These are the ideas I tried to convey.
In the last decade Britain and the US have experienced an unusual combination of soaring asset prices and sluggish wage growth.
Between 2006 and 2016, the total value of assets held by UK households rose by 59% while average incomes increased by just 24%.
The oil price has had a turbocharged run in the last year, rising almost 60%. Last Friday it closed at a three year high of $77 a barrel. From the, early 2016, lows of under $30 the oil price has risen by over 160%.
Three factors explain the rebound in oil prices.
First, the global economic upswing has come faster than expected fuelling demand for oil and bolstering prices. Despite a first quarter wobble, the global economy is likely to grow at the fastest rate in seven years in 2018.
A post-World War II wave of liberalisation reduced barriers to trade and helped fuel a global boom in exports. The Uruguay Round of negotiations between 1986 and 1994 marked the high point of this process. It was the largest ever trade negotiation and significantly reduced barriers to trade in goods. Since the 1990s the momentum of trade liberalisation has slowed, and since the financial crisis, almost ground to a halt. The election of Mr Trump, an ardent critic of the international trading order, is indicative of how much things have changed.
Last month Deloitte’s economists from across the world met in London to assess the outlook for the global economy. It was a fascinating and wide-ranging discussion. Rather than trying to summarise individual views, here are some of the areas where the discussions affected my own thinking.
The global recovery has moved up a gear in the last year. The year 2018 is likely to be the best year for world growth in seven years. But this is a mature recovery and, at the risk of sounding like a kill joy, this is about the time you’d expect the economic cycle to start rolling over. For the rich western economies the second half of 2018 is likely to mark the peak in growth.