Reuters blog archive
from Edward Hadas:
By Edward Hadas
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
The International Monetary Fund recently engaged in what has become an annual ritual. For the fourth year in a row, it reduced its forecast for world GDP growth. The 0.7 percentage point average decline from the earlier estimate to the new 3.4 percent growth projection is not huge, but the persistent disappointments make many economists uneasy.
Larry Summers has an explanation for the problem in rich countries, which he calls secular stagnation. The former U.S. treasury secretary’s argument has several strands, but his main thesis is that investment has been too low for almost two decades because prevailing interest rates have been too high and because politicians have not permitted sufficiently large government deficits. Controversially, he suggests that growth has been painfully slow whenever financial bubbles are lacking, as in the years since the 2008 crisis.
Summers’ complaints about monetary and fiscal policy seem excessive. Before the crisis, central banks were widely praised for generating steady, non-inflationary growth around the world. That does not make them sound too tough. And the fiscal deficits since the crisis in many developed countries have been the largest ever in peacetime as a share of GDP. That hardly sounds inadequate.
It's a familiar narrative: companies will finally start investing the trillions of dollars of cash they're sitting on, unleashing a capital expenditure boom that will drive the global economy and lift stock markets this year.
The problem is, it looks like an increasingly flawed narrative.
For a start, capital expenditure, or "capex", has already been rising for years. True, the Great Recession ensured it took three years to regain its 2007 peak. But the notion companies are just sitting idly on their mounting cash piles is misplaced. As Citi's equity strategists point out:.
The last seven days has been a glaring example of fallout from the cross-border carry trade. That's the sort of trade, well known in currency markets, where investors borrow funds in low-rate countries and invest them in higher-rate ones. Some $4 trillion is estimated to have flooded into emerging markets since the 2008 financial crisis to profit off the ultra accommodate policies of the U.S. Federal Reserve, Bank of Japan, European Central Bank and the Bank of England. Now that central banks in developed economies are looking to reverse course and eventually raise rates, that carry trade is unraveling fast, resulting in the brutal sell-off in emerging markets such as Turkey and Argentina over the last week.
The Fed's decision on Wednesday to keep cutting its stimulus effectively ignores the turmoil in such developing countries. And while the Fed may well be right not to overreact, it makes one wonder just how much attention major central banks pay to the carry trade and its global effects -- and it brings to mind a prescient exchange between some of the brightest lights of western economics, just a week before emerging markets were to run off the rails.
U.S. businesses have never had it so good.
Corporate cash piles have never been bigger, either in dollar terms or as a share of the economy.
The labor market, meanwhile, is still millions of jobs short of where it was before the global financial crisis first erupted over six years ago.
British inflation dipped to 2 percent in December – its lowest since November 2009 and within the Bank of England’s target. Part of the move was driven by a fall in prices in Britain’s services sector – which constitutes more than three quarters of the country’s output.
Services inflation, which makes up around 47 percent of the consumer price index, eased to 2.4 percent in December – also its lowest since November 2009. Goods inflation – which is more sensitive to global markets than domestically generated services inflation – edged up to 1.7 percent last month. But it has also come down in recent months as a strengthening sterling pushed down import prices.
After today's surprise ECB move it is safe to forget the code words former ECB President Jean-Claude Trichet never grew tired of using - monitoring closely, monitoring very closely, strong vigilance, rate hike. (No real code language ever emerged for rate cuts, probably because there were only a few and that was towards the end of Trichet's term.)
His successor, Mario Draghi, has a different style, one he showcased already at his very first policy meeting, but no one believed to be the norm: He is pro-active and cuts without warning. Or at least that's what it seems.
Brazil inflation jumped above expectations in February, despite a steep cut in electricity rates. It was not the first time, though; inflation has been running higher than consensus forecasts since July, considering the market view one month before the data release:
The total gap between market consensus and the actual inflation figures amounts to 1.19 percentage point - about one quarter of the inflation rate reported. Reuters polls conducted a few days before the official numbers come out have also proved wrong since July, with a total error of 0.37 point.
Latin America has defied one of the most elementary rules of macroeconomics in the past decade, Citigroup economists Joaquin Cottani and Camilo Gonzalez found in a report.
Lower interest rates reduce the cost of money and therefore should encourage businesses and consumers to borrow, as we've repeatedly heard from analysts and government officials for decades. Puzzlingly enough, credit growth accelerated after central banks in countries like Brazil and Peru raised rates, and slowed when borrowing costs fell. Why is that?
Forecasts about the future for the euro zone economy are starting to resemble a multiple-choice novel. Are you an economist working for an Anglo-Saxon institution? Then turn to p.65 -- "Recession for the euro zone". A German bank? Go to p.80 -- "Happy days are here again!"
That simplifies the case slightly, but there's more than a grain of truth in it. We've noted repeatedly that predictions about the euro zone are coloured heavily by whether someone works for an employer based inside the currency union or not.
Angela Merkel's visit to Greece today was anything but low key. Greek police fired teargas and stun grenades at protesters in central Athens when they tried to break through a barrier and reach the German chancellor. There are lots of differences between the two countries. Here's a look at some of the main ones: