Deficits, debt in The Monday Briefing
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Slowing growth in Europe and emerging markets and October’s equity sell off have got economists pondering when the next recession might strike.
Recessions are not rare. Donald Trump, born in 1946, has lived through 12 US recessions. Britain has had eight since the War.
Some countries do better, but they are outliers. The Netherlands had 26 years of interrupted growth 1982 and 2008, a record matched by Australia since 1991. The International Monetary Fund reckons that economies are in a state of recession roughly 10-12% of the time. For most rich world economies recessions are like London buses - there will always be another one along.
It ended on a high note last week, but overall October was a rotten month for equities. The world equity market has just had its worst month since 2012, with the benchmark MSCI world index down 7% in October. This fall has more than reversed earlier gains, leaving the global index down 3% so far this year.
The financial crisis, recession and a slow recovery played havoc with the UK’s public finances, leaving the government with the largest ever peacetime budget deficit.
The summer months tend to be pretty thin for media coverage of economics and finance. Like the rest of us, journalists take their holidays in July and August. Yet economics is no respecter of holidays and events and data have continued to pile up.
Emerging market economies have been the main losers from US protectionism and higher US interest rates.
Capital has flooded out of emerging economies to the US to benefit from rising interest rates. This has meant less liquidity and has sent some emerging economy currencies through the floor. Emerging market governments or businesses which borrowed in dollars, and many have, are having to cope with rising financing costs and a heavier local currency debt burden.
A week ago, we seemed to be on the verge of a second euro crisis with a populist mood threatening to sweep Italy out of the single currency. By the end of the week a coalition government was in place, the markets had cheered up and the newspapers were worrying about other things.
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.