Have we hit peak trade?
Global trade has surged over the past 25 years. People are trading with one another more than ever before.
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Global trade has surged over the past 25 years. People are trading with one another more than ever before.
Bubble risks are back. There is no clear economic definition of what makes an asset price bubble. The term is controversial. In broad terms a bubble has four characteristics.
The changes to today’s world economy are truly revolutionary. While many people get excited about the latest model of smartphone or other technological leap forward, economists do not. For an economist, it is the way technology changes society and the structure of the economy that is the exciting story.
Recessions tend to be caused by policy error or by bubbles that burst. The damage when a central bank makes a mistake is fairly obvious. If bubbles are allowed to build, an economy is likely to experience strong growth then a sharp downturn. These things will still happen in the future. It is hard to see a global recession happening in the coming year, but, at some point, there will be a downturn.
GLOBALLY, income inequality has collapsed over the past 25 years. A lower proportion of the world population live in poverty today than at any time in human history. People doing the same job in different countries are more likely to earn similar wages. However, within economies income inequality has risen. Almost every major economy has seen a growing gap between the richest and poorest in its society. This creates political, social and economic problems.
Inflation is back. Low oil prices dragged down headline inflation rates in recent years, creating a low inflation illusion. Crude oil is not directly part of consumer spending—pouring a barrel of crude oil into the engine of your car will have negative consequences.
However, consumers indirectly buy crude oil as gasoline, airline tickets (aviation fuel) and food (diesel-powered delivery trucks). The prices of gasoline, airline tickets and food are in consumer-price inflation. Crude oil is embedded in these prices.
WITH the US Federal Reserve raising interest rates, and President Mario Draghi of the European Central Bank seemingly unable to escape his addiction to quantitative policy easing, many investors are questioning who wants to buy the euro. The answer is simple. The whole world is eager to buy the euro. The problem in 2017 is more likely to be finding anyone who wants to buy the US dollar.
INVESTORS have consistently underestimated populism. Now, with the election of Donald J. Trump in the United States, there is a sudden reappraisal of what wider populism might mean. It seems likely that populism will play a significant and potentially destabilizing role in global markets in the coming years.
AT 3 in the morning the day after the UK referendum on EU membership, I was on the UBS trading floor (where else would an economist be at 3 in the morning?). The near universal reaction of colleagues matched friends’ reactions on social media: “I don’t know anyone who voted to leave”. That sense of bewilderment reflects a trend in global politics and economics. It is a trend in the US and in Europe. Most important, it is a trend that is a challenge for financial markets.
AS we stand on the brink of the fourth industrial revolution, the technological change can seem daunting; self-driving cars, intelligent machines and robots everywhere. There is an idea that global inflation rates will collapse as new technology increases efficiency and lowers costs. The Apple iPhone 7, in short, could cause global deflation.
POLITICS is back, and markets do not know what to do about it. Political risk faded from financial markets in the 1990s. Central bank independence seemed to remove economic policy from political influence. Markets did not care which Bush or Clinton was in the White House, so long as Alan Greenspan was at the Federal Reserve. The result was a reverence for central bank policy, an emphasis on mathematical economics and a disregard for political concerns.
MONETARY policy has become increasingly complicated. We have rising interest rates in some parts of the world. We have falling interest rates in other parts of the world. Some central banks have taken rates negative. For investors, it is important to understand how such changes in monetary policy affect the economy at large.
MONETARY policy has become increasingly complicated. We have rising interest rates in some parts of the world. We have falling interest rates in other parts of the world. Some central banks have taken rates negative. For investors, it is important to understand how such changes in monetary policy affect the economy at large.
THE British referendum decision to end the country’s European Union (EU) membership may seem an isolated event. Something for the United Kingdom to worry about, certainly. Something for the EU to muse over. But not, necessarily, something that Asia should be concerned about.
We have all been seduced by the fall in the oil price. Headline-inflation figures have been held at low levels in most of the world’s major economies, and investors have been inclined to forget that prices can go up. This process has been helped by a number of central banks that have chosen to take interest rates negative, giving the impression that inflation is a thing of the past and it is falling prices that should concern us.
Finally, the US Federal Reserve (the Fed) has seen fit to raise interest rates. They should have done it three months ago. The Fed is informally signaling that there will be another four rate increases in 2016—“a quarter point a quarter” is the rallying cry. Economists have been expecting this move, and as a rule generally agree that the Fed is doing the right thing. Financial markets seem less convinced. There is an air of sullen resentment in the financial markets’ grudging acknowledgement of the Fed’s tightening. Investors in many different asset classes have been less convinced than economists about the necessity of monetary policy tightening.
Over the course of the past few months, financial markets seem to have become caught up in a disinflation mentality. Disinflation is when the rate of inflation declines—and, at current inflation levels, disinflation would very quickly become outright deflation, which is when the rate of inflation is negative. Fortunately for the world economy, this is very unlikely to happen. We are not in a disinflation world. We are in a relatively low inflation world, but that is a very different situation.
THE US Federal Reserve (the Fed) conspicuously failed to raise interest rates in September. It did everything else it was supposed to do. The Fed signaled that quantitative policy would not change. The Fed guided that future rate changes would be slower than normal. It is just that somewhere in the process the Fed forgot to raise interest rates.
China’s decision to allow market forces to play a greater role in determining the value of its currency prompted an overreaction in financial markets and the media. Concerns about currency wars, competitive devaluations and deflation were voiced. It is time to take a deep breath and start to consider the facts.
The recent moves of the Chinese equity market provoked a flurry of questions directed at economists. Underlying these questions was an assumption that equity markets are in some way intimately linked with the workings of economies. This is not so. In fact, for economists, equity markets are something of a side show.
CENTRAL banks and sovereign wealth funds are one of the most significant investor groups in global financial markets today—rivaling institutional investors, like pension funds and insurers, as to their size. Central banks alone (excluding sovereign wealth funds) manage around $12 trillion of assets—a decent amount of money by anyone’s standards.
THE absence of a strong capital spending improvement has been one of the lamentable stories of the post global financial crisis recovery. Investment growth is often still below precrisis investment growth, seven years after the crisis. Even with interest rates at record lows in developed economies, companies seem reluctant to invest in the future.
‘THE euro area is in crisis” is not the most thrilling way to open an article. The euro area is seemingly always in crisis. The euro area crisis resembles an opera by Wagner–very, very long, with lots of wailing and melodrama, generally conducted in German. The perpetual round of emergency summits and last-minute deals is something investors have had to get used to.
THE start of 2015 has brought with it a flurry of central bank activity. The Swiss National Bank abandoned its policy of limiting the value of the Swiss franc against the Euro. The European Central Bank (ECB) undertook to purchase sovereign government bonds (albeit using a slightly peculiar structure). The Canadians cut their interest rate. The Danes took their official deposit rate back into negative territory. Singapore unexpectedly eased its policy (via the currency markets). It is all dramatic stuff.
The rise of the dollar in recent weeks has been significant. The dollar’s move has coincided and in some way caused the decline of global commodity prices, and as such it takes place against the backdrop of a generally low inflation environment. At the December meeting of the US Federal Reserve, the American central bank was very clear about ignoring the impact of oil prices on the US inflation rate. Does the dollar’s move higher change US inflation and the Fed’s response? And could the dollar’s weakness provide a boost to the lackluster economy of Europe, and the recession hit economy of Japan?
CENTRAL-BANK policy is already being tightened. The problem is, in the world after quantitative policy, central-bank policy can no longer be represented by a simple interest-rate line on a chart. Policy has become more complex, and that complexity is something that markets seem to overlook. Central-bank policy now rests on three pillars, and tightening in any of these will restrict economic activity.
THE United Kingdom caused a brief moment of concern in the global financial markets in September, when Scotland held a referendum on independence. For a few days, investors contemplated the possibility of the disintegration of one of the world’s more enduring multinational states. The decision went against independence, and the risks associated with separation faded from the markets.
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