Monetary policy, inflation 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.
The polarisation of politics in the Western world has created new challenges to existing political norms. Declining support for established political parties has been paralleled by a growth of alternative, more extreme, parties and politicians. This week we take a look at what voters in the US, UK and Europe are telling pollsters on the big issues.
Mr Trump won a remarkable victory, but he entered office with an approval rating of 45%, a record low for an incoming US President. His rating now stands at 40% compared with an average of 61% for previous Presidents at this stage in their administration.
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.
Last week two of the UK’s leading economic forecasters concluded that Brexit is unlikely to cause a sharp slowdown in UK growth over the next three years. This is big news.
Last summer, in the weeks after the referendum, talk of the UK falling into recession was rife. Economists slashed their UK growth forecasts. By August economists expected GDP growth would fall away in the second half of 2016 as Brexit hit home. They saw the UK eking out meagre growth of 0.6% in 2017, the slowest since the recession in 2009.
Inequality in incomes is a hot topic across the industrial world. Although the global recovery is in its eighth year in most rich countries the gap between higher and low incomes has widened.
A conspicuous exception is the UK. I was surprised to learn that take-home incomes for those in the bottom 20% of incomes have risen faster than for those in the top 20% in the last ten years.
The Brexit vote has set the UK on a new path. The form Brexit takes will take time, possibly years, to emerge. But there is another, and for me, more fundamental question facing Europe.
2017 marks the sixtieth anniversary of the foundation of the European Union. Its founding principle was progress to “ever closer union”. Today, amid challenges created by low growth, migration, the growth of insurgent political parties and Brexit, this principle is in question as never before.
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.
The latest Deloitte survey of UK Chief Financial Officers highlights the opportunities and risks facing British business in 2017. To read the report in full visit:
CFOs have become markedly more positive on the outlook for their businesses. Optimism among the UK’s largest businesses rebounded to the highest level in 18 months in the fourth quarter.
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.