Global economics 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.
Free market capitalism has faced intense criticism in recent years. Even that most basic tenet of the post-‘70s era, the free movement of capital and floating exchange rates, has its critics. Some on the left believe that a government set on fundamentally reforming capitalism might need to bring in controls to prevent capital leaving the country and a sharp currency devaluation.
The third quarter Deloitte survey of UK Chief Financial Officers released today shows concerns about Brexit weighing heavily on business sentiment.
In May we wrote that geopolitical factors posed an upside risk to oil prices. Those risks have materialised. Last week the oil price reached $82 a barrel, up 40% over the last 12 months and the highest level in almost four years. Some analysts are warning of a spike above $100.
Last week the team came across some remarkable data. The Oxford economist Max Roser estimates that in 1820 more than 90% of the world’s population lived in extreme, absolute poverty, defined as living on less than $2 per day in today’s money. By 1981 this had fallen to 44% of the world’s population. Today it stands at less than 10% of the world’s population.
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.
The imposition of tariffs on imports of steel and aluminium by the Trump administration in March has sparked a cycle of retaliatory tariffs. This is a serious outbreak of protectionism, one that is already acting as a drag on growth. Yet the global trading system is in rather better shape than it looks. This week’s Briefing explains why.
First, the bad news.