Monetary policy, inflation in The Monday Briefing
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The global economy has been slowing for some time. The question is whether we are heading for a soft landing or something worse.
Financial markets last week raised the odds on ‘something worse’. Investors sold riskier assets, including equities, for safe havens such as gold and government bonds. Markets were reacting to alarm signals from two of the world’s most important economic indicators.
First, the yield curve, a gauge of future growth prospects, inverted last week in the US and in the UK. The yield curve measures the gap between the interest rate, or yield, on ten-year government bonds and shorter-maturity debt. Central banks largely set short-term interest rates while long-term yields are driven by market expectations for growth and inflation. When ten-year rates fall below three-month rates, as they have done in the US and the UK, the curve inverts signalling that short rates are too high and growth prospects are weakening. The fact that each of the last seven US recessions were preceded by an inverted curve explains why the equity market took fright last week to the inversion of the yield curve.
Economists went into 2019 forecasting a slowdown in global growth. That slowdown has come faster than expected. Alarmed by the speed of the downturn, the US Federal Reserve and European Central Bank have switched from tightening monetary policy to easing.
The combination of slower growth and easier policy has elicited very different responses from business and financial markets.
Today we are launching our quarterly “UK corporate environment” chart book, which is available here: https://blogs.deloitte.co.uk/mondaybriefing/
2019/07/uk-corporate-environment.html. The report aims to provide a graphical summary of the key trends and themes shaping the UK corporate sector, setting the context to the CFO survey. We will be developing and refining the chart book and welcome your feedback. Do feel free to use any of the charts in your own presentations and drop my colleague Tom Simmons a line at firstname.lastname@example.org with ideas and comments.
At the beginning of this year equity markets were reeling from a sell-off driven by fears over global growth and rising US interest rates.
It is commonplace to say that the pace of technological change is speeding up. From Twitter to online shopping our everyday lives are, apparently, being transformed.
China’s growth rate has slowed in recent years. Its sustainable growth rate has almost halved, to around 6.0% in a decade or so.
By Western standards this is an unattainably rapid growth rate. It would enable China’s economy to double in size every 12 years. China is still a fast-growing country, and one that exercises growing authority on the world stage. From technology to overseas investment and geopolitical influence China increasingly matters.
For centuries governments have taxed, borrowed or created money to pay for public spending. All carry risks. Heavy taxes dampen growth and upset voters. Excessive public borrowing triggers financial crises. Printing money to pay for public spending can look tempting. But, as rulers from Henry VIII to Venezuela’s Nicolás Maduro have discovered, creating money out of thin air and spending it tends to destroy confidence and send inflation rocketing.
Last week saw UK unemployment fall to the lowest level since 1974. Against a backdrop of sluggish GDP growth this is quite an achievement. But the success of labour market policies should be judged on wider criteria. The quality of work, the flexibility of the jobs market and how inclusive and productive it is also matter. This week’s Briefing assesses the UK on each count.
There’s no doubt that growth in the West is slowing. The question is whether the slowdown could turn into a recession. Last month the US yield curve, a key gauge of future US growth, temporarily dipped into recessionary territory for the first time in ten years.
China’s economic transformation in the last four decades is one of the great economic success stories of modern history. Through liberalisation and opening up to trade China was able to grow by 10% a year between 1980 and 2018. Its economy expanded by a factor of 30 and it easily dodged recession during the global financial crisis. There is no precedent in history for an economy of this size growing at such a rate for so long.