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  • China's Premier Says No to Stimulus Measures

    If you are waiting on China's government to make some policy moves to jump-start growth, you may want to find something to do with your time. As Aileen Wang and Adam Rose report for Reuters , Chinese Premier Li Keqiang has quashed any rumors of pending fiscal and/or monetary policy shifts. The almost unabated run of disappointing data this year has fuelled investor speculation the government would loosen fiscal or monetary policy more dramatically to shore up activity. But authorities so far have resisted broad stimulus measures. On Wednesday, the top economic planning agency said the government had less room to underpin growth because it did not want to inflate local debt risks. Still, authorities have take some steps to bolster growth. Earlier this month, they announced tax breaks for small firms and plans to speed up some infrastructure spending, including the building of rail lines. The national railway operator now plans to raise its annual investment by 20 billion yuan (1.9 billion pounds) to 720 billion yuan in 2014. There have also been moves to cut down on bureaucracy and to open up state-dominated sectors to private investors. In his speech, Li said China was positioned to sustain a reasonable level of growth over the long term. "We have set our annual economic growth target at around 7.5 percent," he said. "It means there is room for fluctuation. It does not matter if economic growth is a little bit higher than 7.5 percent, or a little bit lower than that." Read the full article here .
  • Nouriel Roubini's Top Six Risks for Global Markets

    At Project Syndicate , Nouriel Roubini writes that the major risks to global markets have shifted. The leading risks from the last two years, while not quite resolved, are not as predominant. But there is plenty to be concerned about. Namely: For starters, there is the risk of a hard landing in China. The rebalancing of growth away from fixed investment and toward private consumption is occurring too slowly, because every time annual GDP growth slows toward 7%, the authorities panic and double down on another round of credit-fueled capital investment. This then leads to more bad assets and non-performing loans, more excessive investment in real estate, infrastructure, and industrial capacity, and more public and private debt. By next year, there may be no road left down which to kick the can. There is also the risk of policy mistakes by the US Federal Reserve as it exits monetary easing. Last year, the Fed’s mere announcement that it would gradually wind down its monthly purchases of long-term financial assets triggered a “taper” tantrum in global financial markets and emerging markets. This year, tapering is priced in, but uncertainty about the timing and speed of the Fed’s efforts to normalize policy interest rates is creating volatility. Some investors and governments now worry that the Fed may raise rates too soon and too fast, causing economic and financial shockwaves. Third, the Fed may actually exit zero rates too late and too slowly (its current plan would normalize rates to 4% only by 2018), thus causing another asset-price boom – and an eventual bust. Indeed, unconventional monetary policies in the US and other advanced economies have already led to massive asset-price reflation, which in due course could cause bubbles in real estate, credit, and equity markets. Fourth, the crises in some fragile emerging markets may worsen. Emerging markets are facing headwinds (owing to a fall in commodity prices and the risks associated with China’s structural transformation and the Fed’s monetary-policy shift) at a time when their own macroeconomic policies are still too loose and the lack of structural reforms has undermined potential growth. Moreover many of these emerging markets face political and electoral risks. Fifth, there is a serious risk that the current conflict in Ukraine will lead to Cold War II – and possibly even a hot war if Russia invades the east of the country. The economic consequences of such an outcome – owing to its impact on energy supplies and investment flows, in addition to the destruction of lives and physical capital – would be immense. Finally, there is a similar risk that Asia’s terrestrial and maritime territorial disagreements (starting with the disputes between China and Japan) could escalate into outright military conflict. Such geopolitical risks – were they to materialize – would have a systemic economic and financial impact. Read The Changing Face of Global Risk here .
  • CEA Final Report on the Effect of Recovery Act

    On the occasion of the fifth anniversary of the American Recovery and Reinvestment Act, the Council of Economic Advisers has released a report to Congress on the economic impact of the act. The CEA stands firmly behind the act, and the report points to several measures as signs of the effectiveness of the government's plan. Among the evidence presented: GDP per capita returned to pre-crisis levels in four years, an the economy has added over 2 million jobs a year since ARRA. The estimates for the long term impact of ARRA are bullish, with the CEA touting a significant multiplier effect from overall fiscal policy: CEA Estimates of the Recovery Act and Subsequent Fiscal Measures Combined. The combined effect of the Recovery Act and the subsequent countercyclical fiscal legislation is substantially larger and longer lasting than the effect of the Recovery Act alone. The Recovery Act represents only about half of total fiscal support for the economy from the beginning of 2009 through the fourth quarter of 2012. Moreover, as shown in Figures 7 and 8, the bulk of the effects of the other fiscal measures occurred as the Recovery Act was phasing down. These other measures thus served to sustain the recovery as effects of the Recovery Act waned. The CEA multiplier model indicates that by themselves these additional measures increased the level of GDP by between 1.0 and 1.5 percent per quarter from mid-2011 through the end of calendar year 2012. Altogether, summing up the effects for all quarters through the end of calendar year 2012, the Recovery Act and subsequent fiscal measures raised GDP by an average of more than 2.4 percent of GDP annually—totaling a cumulative amount equal to about 9.5 percent of fourth quarter 2008 GDP. The contribution of all fiscal measures to employment is equally substantial. Other fiscal measures beyond the Recovery Act are estimated to have raised employment by 2.8 million job- years, cumulatively, through the end of calendar year 2012. Adding these jobs to those created or saved by the Recovery Act, the combined countercyclical fiscal measures created or saved more than 2.3 million jobs a year through the end of 2012—or 8.8 million job-years in total over the entire period. Estimates from Private Forecasters. Private forecasters and domestic and international institutions have used large-scale macroeconomic models, mostly to estimate the effects of either the Recovery Act by itself or other policies in isolation. The models used by these individuals and organizations generally employ a similar multiplier-type analysis as is found in CEA and CBO work, although they vary considerably in their structure and underlying assumptions. Although no outside estimates of the total impact of all the fiscal measures are available, Table 6 displays the estimates of the impact of the Recovery Act offered by several leading private-sector forecasters before the Act was fully implemented. Despite the differences in the models, these private-sector forecasters all estimated that the Recovery Act would raise GDP substantially from 2009 to 2011, including a boost to GDP of between 2.0 and 3.4 percent in 2010. Read the full report here . For a helpful summary, read a summary from CEA chair Jason Furman here .
  • Treasury Secretary Lew on the "End" of Too Big to Fail

    Treasury Secretary Jacob Lew is feeling good about the economy. In an interview with Charlie Rose last night, Lew expressed optimism that growth will pick up in 2014, and though he tended to remain cautious about his predictions, he suggested that our elected officials in Washington are making progress in economic policy around debt and immigration. Rose and Lew covered a lot of ground--from domestic issues to emerging markets and China. In this excerpt, Lew argued that banking rules are significantly stronger now than they were six years ago: We will post the full video when it becomes available. See also: Damian Paletta 's "12 Takeaways" from the interview at the Wall Street Journal Washington Wire blog, here .
  • Larry Summers on the Cost of Not Taking Advantage of Low Interest Rates

    Lawrence Summers isn't officially an adviser to the White House at the moment, but that doesn't mean he is without advice for politicians in Washington. In an interview with Here and Now 's Jeremy Hobson , following the latest deal in Congress to raise the debt ceiling, Summers said "we don't have a realistic option, ever, of defaulting on the debt." Summers went on to discuss the importance of smart spending while interest rates are low. Costs for fixing infrastructure and improving education will get higher in the future, and the costs for not fixing infrastructure and improving education will be great, he argues. Here is the full interview:
  • Draghi on Eurozone's 'Path from Crisis to Stability'

    Well, isn't this a change. At this year's annual World Economic Forum in Davos, European Central Bank President Mario Draghi spoke about reduced risks and "dramatic recovery" in Europe's economies. In this interview with Philipp Hildebrand , Draghi talked about how Europe has moved to more stable footing, and addresses the risks ahead (including deflation):
  • Bernanke Helps Open New Brookings Center for Fiscal and Monetary Policy Studies

    On Thursday the Brookings Institution opened the new Hutchins Center on Fiscal and Monetary Policy , and Ben Bernanke was one of the featured guests for the event. Bernanke spoke about the past, present, and future of monetary policy in the U.S. and the Federal Reserve in particular. With the Fed now in the early days of its centenary year, Bernanke is about to step down after being in charge for 8 challenging years. In this excerpt from his talk, Bernanke takes a moment from discussing the long view to address monetary policy during the global economic crisis, saying "we did the right thing": Here is the full talk: You can watch other sessions from the Hutchins Center launch here .
  • Draghi Stands By European Central Bank Reform Policies

    European Central Bank head Mario Draghi deserves some credit for starting the year off with courage. He sat down for a candid interview with German newspaper Der Spiegel, and answered some tough questions. Darghi defended the ECB's approach to crises in Greece and other struggling EU nations. And he took on criticism coming from German politicians and pundits. Here is an excerpt: SPIEGEL: We have a feeling that the number of governments which can no longer hear your tune is growing. The new coalition government in Germany, for example, wants to undo the pension reforms made by the former coalition government comprised of the center-left Social Democrats and the Green Party years ago and introduce a universal minimum wage of €8.50 ($11.67). Are these policies that help the euro? Draghi: It is too early to assess the policies of the new German government. I can only say that the crisis has shown that the monetary union is incomplete and that the weaknesses need to be remedied. Germany helps the euro best by further strengthening its competitiveness and promoting growth. Whatever helps that process is right, everything else is wrong. SPIEGEL: Many economists represent a completely different theory. They regard Germany's competitiveness as the real problem of the euro area and are calling for state curbs on exports. What do you think of that? Draghi: Not much. It's a mechanistic perspective of economic activity, and there's little I can do with it. We won't make the weak stronger by making the strong weaker, as a very wise man once said. That applies to the economy as well. If Germany were less competitive, the euro area as a whole would lose, because less could be produced then. SPIEGEL: In Germany, ECB policy is unpopular because you have now pushed the interest rates for investments down so far that they are often no longer enough to compensate for inflation. In other words, only fools save. Draghi: That's not the fault of the ECB The link between the short-term interest rates set by the ECB and the long-term interest rates paid on investments which are relevant for savers in Germany is not very strong. SPIEGEL: Really? It's a stated goal of your policy to indirectly suppress long-term interest rates. Draghi: No, especially in recent years, we were unable to control long-term interest rates -- because investors were very unsettled by the euro crisis. That's why everyone has been taking money into Germany to buy safe German government bonds. That's why the interest rates in Germany have fallen. We take the concerns of savers very seriously. But how can we respond? We run monetary policy for the entire euro area, not for a single country. If we are able to dispel the uncertainty, many investors will again take their money out of Germany and back to their home countries and interest rates will rise again. Read the full interview here . Hat tip Antonio Fatas .
  • OECD's Gurría on Key Fixes For Struggling Global Economy

    OECD Angel Gurría presented his organization's latest Global Economic Outlook this week, and he gave a measured evaluation of the global economy. Unemployment is going to remain high, income inequality is posing serious risks to global growth and a healthy world economy, and the public has lost a lot of faith in policy makers. The key part of the speech, for us, is when Gurría outlines some prescriptions. Here are four: ●First, fixing the banks in Europe. This involves addressing the twin problems of non-performing loans and forbearance: recapitalising the banks (ideally without making deleveraging worse) and fully implementing the banking union. Policymakers also need to consider going beyond existing international regulatory initiatives and reforming the business model of banks. The separation of commercial banking and investment banking activities and adopting a leverage ratio of 5% would buttress the resilience of the banking sector. ●Second, we need to maintain open markets for trade and investment and reduce trade costs, including through trade facilitation reforms being discussed now at the WTO.There are increasing signs of trade protectionism that could jeopardise the still fragile economic recovery. ●Third, governments need to maximise the impact of the recovery on jobs. Greater and more targeted efforts are needed to upgrade the skills of the unemployed and those looking for jobs. Also, more effective labour activation policies are required to ensure that job-seekers are better incentivised in their search for employment. Lastly, progress needs to continue in some countries to add greater flexibility and dynamism in labour markets and to reduce excessively high labour costs. ●Finally, there is a need to overhaul regulations that restrict competition and to ensure a more effective policy support of innovation. In particular, policy makers need to adopt a broader concept of innovation, beyond the conventional view in which R&D is pre-eminent. Other assets such as organisational capital and design, and the ability to create value from data, are increasingly central to productivity growth in a knowledge-based economy. You can read or watch the full speech here . Here is a synopsis of the report:
  • Hawks and Doves on the Marketplace Whiteboard

    Paddy HIrsch was puzzled as to why we have taken to using the hawks vs doves theme for fiscal matters. After all, unlike in foreign policy matters, the hawks in fiscal matters are the ones reluctant to take action. He sorts it all out at the Marketplace Whiteboard :
  • SF Fed President on the Challenge of Rebalancing Economies in China and US

    Speaking to community leaders in Los Angeles, San Francisco Fed President John C. Williams compared the challenges for U.S. policymakers to those of their counterparts in China. While the details in each economy are rather different, the overall challenges are similar. Both countries need to rebalance their economies for future growth. But that is no small undertaking, and it is made more difficult by short-term challenges. From the speech: Unsurprisingly, economists can’t agree about the primary reason China’s domestic consumption is so low and what should be done about it. One possibility is the population’s focus on saving—in large part to cover the cost of health care, education, and preparation for old age. This is exacerbated by China’s massive and rapid urbanization; as it currently stands, most social services, such as education and health care, are administered in one’s home city. This means that much of the migrant workforce can’t access these services in their new cities, and is forced to save to cover those expenses. While local authorities may balk at paying more for social services, there is a trade-off: addressing such structural barriers would free up workers’ income that could be spent locally, stimulating host cities’ economies. Another issue is increasing income inequality—something we in the United States can relate to. What money is flowing to households is concentrated largely in the expanding class of wealthy citizens, rather than in rural and middle-class families. The final and perhaps most important factor is that, while corporate profits have risen, a comparable rise in individual income has not followed. Again, something that has happened in the United States as well. Low borrowing costs for state-supported firms, combined with low wages for many workers, have helped business profits at the expense of households. If China is to rebalance the economy away from exports and towards domestic consumption, there must be an increase in household incomes. That means higher wages and dividend payments from firms. Further liberalization of the financial system will also help, as higher deposit rates and more investment options would boost spending power. Furthermore, China’s citizens must feel a sense of stability and certainty regarding their future. When we’re worried about the future, the natural response is to want to save more. So, even if these steps were to be taken, the question remains whether China’s middle- and rural-class citizens are willing to become bigger spenders anytime soon. Turning to the United States, over the longer run we need to increase investment in education, physical capital, technology, and infrastructure. We will also need to put federal fiscal policy on a sustainable path, which involves making some tough decisions about taxes and spending. Importantly, spending less on current consumption will free up resources for investment areas that foster greater production and will increase the size of the economy over the long term. However, to succeed at these longer-run goals, we first need to get our economy working at its full potential. That’s where the Federal Reserve and monetary policy come in. Since the early days of the crisis and recession, the Federal Reserve’s monetary policy body, the Federal Open Market Committee (FOMC), has been taking strong actions to foster economic recovery and get people back to work. We lowered short-term interest rates to near zero almost five years ago. The goal was simple: With very low interest rates, households and businesses are more willing to spend. This increase in demand for goods and services leads businesses to hire more workers. Read Rebalancing the Economy: A Tale of Two Countries here .
  • Washington Post: Why We Have a Debt Ceiling

    Well, looks like we are going to have to keep reading about the U.S. debt ceiling, at least through the end of the year (if not for longer. Are we stuck with the debt ceiling as a MacGuffin in the political theater forever?). So we may as well learn about why it is there in the first place. The Washington Post 's Karen Tumulty explains:
  • IMF: 'More Fiscal Integration to Boost Euro Area Resilience'

    In a new paper out this week, IMF researchers call for "deeper fiscal integration" among euro area countries. In reading the paper, it appears IMF researchers view the euro experiment as incomplete. Despite struggles during the global economic crisis and global recession, there is confidence in the euro area, but no so much in its current "architecture." From the paper: Large country-specific shocks. While it was recognized that countries joining the euro area had significant structural differences, the launch of the common currency was expected to create the conditions for further real convergence among member countries. The benefits of the single market were to be reinforced by growing trade, and financial, links—making economies more similar and subject to more common shocks over time (Frankel and Rose, 1998). In that context, these common shocks would be best addressed through a common monetary policy. Instead, country-specific shocks have remained frequent and substantial (Pisani-Ferry, 2012; and Figure 1). Some countries experienced a specific shock through a dramatic decline in their borrowing costs at the launch of the euro, which created the conditions for localized credit booms and busts. The impact of globalization was also felt differently across the euro area, reflecting diverse trade specialization patterns and competitiveness levels (Carvalho, forthcoming). These country-specific shocks have had lasting effects on activity. And divergences in growth rates across countries have remained as sizeable after the creation of the euro as before (Figure 2). Deeper into the paper we start to see some proposed solutions: Long-term options for the euro area. Cooperative approaches to foster fiscal discipline have shown their limits in the first decade of EMU. On that basis, and in light of international experience, two options emerge to foster fiscal discipline in the euro area in the longer term. One could be to aim to restore the credibility of the no bailout clause, including through clear rules for the involvement of private creditors when support facilities are activated. But the transition to such a regime would have to be carefully managed and implemented in a gradual and coordinated fashion, so as to not trigger sharp readjustments in investors’ portfolios and abrupt moves in bond prices. Another option would be to rely extensively on a center-based approach and less on market price signals. This would, however, have to come at the expense of a permanent loss of fiscal sovereignty for euro area members. In practice, the steady state regime might have to embed elements of both options, with market discipline complementing stronger governance. Read a summary of the paper, and download the full paper, here .
  • Markit Economics: Euro Zone Business Activity Picks Up

    Business is picking up across the Euro Zone, according to the latest Purchasing Managers Index release from Markit Economics . An upturn in new business activity, combined with increased activity in both the service and manufacturing sector, drove PMI to its highest level in 27 months. In fact, the survey shows increases pretty much across the board, with one notable exception. Employment continues to lag. Here's a look a the trend: Comments from Chris Williamson , Chief Economist at Markit, in the release: “An upturn in the Eurozone PMI in September rounds off the best quarter for over two years, and adds to growing signs that the region is recovering from the longest recession in its history. “It is particularly encouraging to see the business situation improved across the region. Although the upturn continued to be led by Germany, France saw the first increase in business since early-2012 and elsewhere growth was the strongest since early-2011. “Employment continued to fall, though it is reassuring that the rate of job losses eased to only a very modest pace, suggesting that employment could start rising again soon. “The overall rate of growth signalled by the Eurozone PMI remains modest, however, consistent with gross domestic product rising by a meagre 0.2% in the third quarter. While rising inflows of new business bode well for a further upturn in the fourth quarter, policymakers at the ECB will no doubt view it as too early to change their stance on keeping policy on hold for an extended period.” Read the full release here .
  • Andrew Ross Sorkin Looks Back at the Response to the Global Financial Crisis

    In this short video at the New York Times , DealBook columnist Andrew Ross Sorkin gives his take on what we've learned five years on from the near-meltdown of the global financial system. His conclusion: that if (when?) the next giant financial crisis hits, the same response options will not be on the table.
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