Monetary policy, inflation 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.)
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.
UK activity has softened since the vote to leave the EU. The UK slowdown has been pronounced, though less severe than widely predicted on the eve of the referendum, and has left the UK slowing into a global recovery.
The changing size of the state tells the story of modern nations and the ideas that shape them.
Until the late nineteenth century the civilian state scarcely existed. In 1692, when comprehensive records for what was to become the UK started, civil spending by government came to a modern equivalent of around £90 million. A country that was about to acquire a vast empire was governed with a budget equivalent to that of today’s Food Standards Agency.
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%.
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.
There are numerous explanations for why technology is no longer boosting productivity in the way it did in the twentieth century. The US economist, Robert Gordon, argues that today’s technologies are less productivity-enhancing than the great inventions of the past. The opposing view is that technology is still working its magic, but in ways, such as improving the quality of goods and services, which are poorly captured by the statistics.