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IMF's Blanchard: Focus of Global Recovery Should Now Be On Supply Side

04-11-2014 8:27 AM with no comments

The global economy has a supply side problem.  That is, the global marketplace needs more buyers.  IMF director of research Olivier Blanchard notes that while he and his team are projecting 3.6 percent growth this year, and 3.9 percent growth next year, it all depends on a "broader" recovery.

First, potential growth in many advanced economies is very low. This is bad on its own, but it also makes fiscal adjustment more difficult. In this context, measures to increase potential growth are becoming more important—from rethinking the shape of some labor market institutions, to increasing competition and productivity in a number of non-tradable sectors, to rethinking the size of the government, to reexamining the role of public investment.

Second, although the evidence is not yet clear, potential growth in many emerging market economies also appears to have decreased. In some countries, such as China, lower growth may be in part a desirable byproduct of more balanced growth. In others, there is clearly scope for some structural reforms to improve the outcome.

Finally, as the effects of the financial crisis slowly diminish, another trend may come to dominate the scene, namely rising inequality. Though inequality has always been perceived to be a central issue, until recently it was not seen as having major implications for macroeconomic developments. This belief is increasingly called into question. How inequality affects both the macroeconomy, and the design of macroeconomic policy, will likely be increasingly important items on our agenda for a long time to come.

Read the full post here.  And watch Blanchard discuss the global recovery below:

Posted by Graham Griffith

China's Premier Says No to Stimulus Measures

04-10-2014 10:50 AM with no comments

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.

Posted by Graham Griffith

Federal Open Market Committee Minutes Show Measured Positive Outlook

04-10-2014 7:51 AM with no comments

The Federal Reserve has released the minutes from the Federal Open Market Committee's March meetings, and they read as measured, but also somewhat optimistic that slow, steady improvement will continue.  Here is a key excerpt:

In their discussion of monetary policy in the period ahead, members agreed that there was sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, members decided that it would be appropriate to make a further measured reduction in the pace of its asset purchases at this meeting. Members again judged that, if the economy continued to develop as anticipated, the Committee would likely reduce the pace of asset purchases in further measured steps at future meetings. Members also underscored that the pace of asset purchases was not on a preset course and would remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of purchases. Accordingly, the Committee agreed that, beginning in April, it would add to its holdings of agency mortgage-backed securities at a pace of $25 billion per month rather than $30 billion per month, and would add to its holdings of longer-term Treasury securities at a pace of $30 billion per month rather than $35 billion per month. While making a further measured reduction in its pace of purchases, the Committee emphasized that its holdings of longer-term securities were sizable and would still be increasing, which would promote a stronger economic recovery by maintaining downward pressure on longer-term interest rates, supporting mortgage markets, and helping to make broader financial conditions more accommodative. The Committee also reiterated that it would continue its asset purchases, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. One member, while concurring with this policy action, suggested that in future statements the Committee might provide further information about the trajectory of the Federal Reserve's balance sheet, including information about when the Committee might discontinue its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities.

With respect to forward guidance about the federal funds rate, all members judged that, as the unemployment rate was likely to fall below 6-1/2 percent before long, it was appropriate to replace the existing quantitative thresholds at this meeting. Almost all members judged that the new language should be qualitative in nature and should indicate that, in determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee would assess progress, both realized and expected, toward its objectives of maximum employment and 2 percent inflation. However, a couple of members preferred to include language in the statement indicating that the Committee would keep rates low if projected inflation remained persistently below the Committee's 2 percent longer-run objective. One of these members argued that the Committee should continue to provide quantitative thresholds for both the unemployment rate and inflation.

Members also considered statement language that would provide information about the anticipated behavior of the federal funds rate once it is raised above its effective lower bound. The Committee decided that it was appropriate to add language indicating that the Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run. In discussing this addition, a couple of members suggested that language along these lines might better be introduced at a later meeting. However, another member indicated that adding the new language at this stage could be beneficial for the effectiveness of policy because financial conditions depend on both the length of time that the federal funds rate is at the effective lower bound and on the expected path that the federal funds rate will follow once policy firming begins. It was also noted that the postmeeting statements, rather than the SEP, provide the public with information on the Committee's monetary policy decisions and that it was therefore appropriate for the postmeeting statement to convey the Committee's position on the likely future behavior of the federal funds rate.

You can read the minutes here.

Wall Street Journal reporter Victoria McGrane was looking forward to seeing the minutes after Fed officials seemed to reveal concern over how Janet Yellen's comments immediately following the meeting were received.  In this interview on the News Hub, McGrane shares her takeaways from the minutes:

 

Posted by Graham Griffith

Benefits of EU Membership for Poorer Nations

04-09-2014 9:32 AM with no comments

Yesterday, European economists Nauro Campos, Fabrizio Coricelli, and Luigi Moretti posted some of their findings on the benefits of EU membership to rich nations.  Today, they share some of their findings--again at Vox--on the benefits to poorer nations.  They focus on two periods of enlargement: the 1980s and 2004.  And they find that there are clear benefits to every nation except one.

This column presents new estimates of the economic (monetary) benefits from EU membership. The main finding is that of substantial and positive pay-offs, with approximately 12% gain in per capita GDP. Despite substantial differences across countries, there are clear indications that the benefits of EU membership have significantly outweighed the costs (except for Greece). An important question is to identify factors that allow countries to better exploit EU entry. Campos et al. (2014) began investigating this issue and their preliminary findings highlight the role of financial development (i.e., more financially developed countries growing significantly faster after EU membership) and, somewhat less surprisingly, trade openness.

Read How much do countries benefit from membership in the European Union? here.

Posted by Graham Griffith

Pew Research Center: Pay Gap Has 'Narrowed But Persisted'

04-09-2014 9:15 AM with no comments

That pesky pay gap. 

For Equal Pay Day, the Pew Research Center's Eileen Patten put together some key statistics about the gender pay gap.  Clearly, there has been some progress.  The gap has narrowed, but is still significant.

Posted by Graham Griffith

Women and the Negotiating for Better Pay

04-08-2014 2:16 PM with no comments

It is no coincidence that the Obama administration chose today to announce new executive actions designed aimed at narrowing the pay gap between women and men.  Today is Equal Pay Day, marking the day when the average American woman's income matches that of the average man's for the previous year.  The average woman had to work into the fourth month of 2014 to match what the average man's salary for 2013.  Of course, there are many many factors involved in pay disparity.  In a piece for NPR, Ashley Milne-Tyte focuses on salary negotiation:

Posted by Graham Griffith

Benefits of EU Membership for Rich Nations

04-08-2014 1:35 PM with no comments

With the relatively healthy EU member states on the hook for helping lift the economies of less healthy member states, many Finns and Germans, for example, are asking, "what's in EU membership for us?"  European economists Nauro Campos, Fabrizio Coricelli, and Luigi Moretti have been looking at the benefits of EU membership, and they find that joining the club came with many economic benefits.  But interestingly, those benefits varied based on when a nation joined. From Vox:

Figures 1 and 2 show SCM results for the 1973 and 1995 EU enlargements.2 The dark line is for actual per capita GDP (or labour productivity), and the red line for the estimated synthetic counterfactual.

A measure of the magnitude of the economic benefits from EU membership is given by the difference between the actual per capita GDP for each country (or labour productivity) and that of its SCM artificial control group. We find substantial benefits for the 1973, and modest benefits for the 1995 enlargement. For the first ten years post-accession, per capita incomes for the former would be approximately 12% lower, while that for the latter would be about 4% lower (without EU membership). Alternatively, if we consider all years since accession, the respective figures would be about 34% for the former, and 5% for the latter. We find that per capita incomes in the UK and Denmark would have been 25% lower (if they had not joined the EU in 1973), but that the benefits for Ireland are even larger. Our estimates suggest that per capita income in Ireland would have been about 50% lower if it had not joined the EU in 1973.

This column presents new estimates of the economic benefits from EU membership focusing on the 1973 and 1995 enlargements. The main conclusion is that of substantial and positive pay-offs with benefits from EU membership clearly above direct costs, and with larger gains for the 1973 than for the 1995 enlargement.6 Moreover, the difference between the estimated benefits for 1973 and 1995 enlargements is considerable and, thus, should not be attributed solely to differences in per capita incomes at the time of joining. We conjecture that institutions may provide a more promising explanation of these differences if one believes that Austrian, Finnish, and Swedish institutions were better developed or aligned with the EU when these countries joined the European Union.

Read The eye, the needle and the camel: Rich countries can benefit from EU membership here.

Posted by Graham Griffith

Dan Ariely on the Cost of Dishonesty

04-08-2014 8:46 AM with no comments

Most organizations have problems with dishonesty.  Not necessarily big acts of cheating (those exist, of course), but rather a lot of little acts of cheating.  Those little acts don't seem so bad when looked at one at a time.  But added up they are problematic.  Dan Ariely's latest book is The Honest Truth About Dishonesty: How We Lie to Everyone -- Especially Ourselves, and he has spent a lot of time examining the costs of dishonesty.  He speaks openly about the experience in this conversation with Knowledge@Wharton's Adam Grant

Posted by Graham Griffith

The Rise and Fall of Real Interest Rates

04-07-2014 7:39 AM with no comments

Ahead of biennial meetings with the World Bank in Washington this week, the IMF's research department has put out an interesting analysis of interest rates around the world. In the last thirty years, real interest rates have plummeted, from an average of 5.5% in the early 1980s to 0.33% post global economic crisis.  From the report:

The decline in real interest rates in the mid-2000s has often been attributed to two factors:

• a glut of saving stemming from emerging markets economies, especially China; and

• a shift in investors’ preferences toward fixed income assets—such as bonds—rather than equity, such as stocks.

Both these factors put downward pressure on real interest rates globally while the expected return to invest in equities increased.

The substantial increase in saving in emerging market economies, especially China, in the middle of the first decade of the 21st century was responsible for more than half of the decline in real rates (Chart 2). This was only partly offset by the reduction in saving in advanced economies. High-income growth in emerging market economies during this period seems to have been the most important factor driving the increase in savings.

The IMF is now projecting a rise in real interest rates, but not to anywhere near the levels of the 1980s:

Read the report here.

Posted by Graham Griffith

Marketplace Whiteboard: Indexes as Baskets

04-04-2014 12:44 PM with no comments

If you have students who can’t quite get their heads around how indexes work, Paddy Hirsch is ready to help. In his latest  Marketplace Whiteboard, your mate Paddy tells us to just think of indexes as baskets:

Posted by Graham Griffith

Unemployment Rate Stays at 6.7% as Employment, Labor Force Increase

04-04-2014 9:53 AM with no comments

The U.S. economy added 192,000 jobs in March, according to the Department of Labor.  There was a slight increase in the labor force participation, as it rose 0.2% to 63.2%.  The headline number--the unemployment rate--stayed at 6.7%.  Here's a look at the unemployment trends from the Bureau of Labor Statistics:

Here are some of the key data from other areas we like to track in the monthly jobs report:

The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was little changed at 7.4 million in March. These individuals were working part time because their hours had been cut back or because they were unable to find full-time work.

In March, 2.2 million persons were marginally attached to the labor force, little changed from a year earlier. (The data are not seasonally adjusted.) These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.

Among the marginally attached, there were 698,000 discouraged workers in March, down slightly from a year earlier. (These data are not seasonally adjusted.) Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The remaining 1.5 million persons marginally attached to the labor force in March had not searched for work for reasons such as school attendance or family responsibilities.

Read the full report from the BLS here.

Posted by Graham Griffith

Nouriel Roubini's Top Six Risks for Global Markets

04-03-2014 5:51 AM with no comments

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.

Posted by Graham Griffith

Michael Lewis on 'Flash Boys'

04-02-2014 9:19 AM with no comments

Michael Lewis takes on Wall Street in his latest book, Flash Boys.  The markets, Lewis argues, are rigged, as "a handful of insiders" have an inordinate amount of control.  Lewis sat down with Charlie Rose to talk about the book, about high frequency traders, and the problems with the system.  In this excerpt, he shares how he came across the story behind the book:

In this clip, Lewis discusses his intended impact for the book on behavior on Wall Street:

Watch the full episode here.

Posted by Graham Griffith

IMF Notes Progress on Elimination of Implicit Too-Big-To-Fail Government Subsidies

04-02-2014 8:08 AM with no comments

The IMF likens protections for too-big-to-fail, or too-important-to-fail, banks as de facto government subsidies that are costly to the global marketplace.  The good news is that reforms following the Great Recession have reduced the implicit subsidies across developed economies.  The bad news is that they have yet to be completely eliminated--which is the IMF's goal.  From the IMF:

In its latest analysis for the Global Financial Stability Report, the IMF shows that big banks still benefit from implicit public subsidies created by the expectation that the government will support them if they are in financial trouble. In 2012, the implicit subsidy given to global systemically important banks represented up to $70 billion in the United States, and up to $300 billion in the euro area, depending on the estimates.

Government support to banks during the crisis has taken different forms, from loan guarantees to direct injection of public funds into banks. The expectation of that support allows banks to borrow at cheaper rates than they would if the possibility of that support didn’t exist. Those lower funding costs represent an implicit public subsidy to large banks. Subsidy encourages risk-taking

This implicit subsidy distorts competition among banks, can favor excessive risk-taking, and may ultimately entail large costs for taxpayers. While policymakers may need to rescue big banks in distress to safeguard financial stability, such rescues are costly to governments and taxpayers. Moreover, the expectation of government support reduces the incentives of creditors to monitor the behavior of big banks, thereby encouraging excessive leverage and risk-taking.

Recent financial reforms and progress in banks’ balance sheet repair have contained the too-important-to-fail issue, albeit with unequal results across countries. The analysis found that particularly large subsidies persist in the euro area, and to a smaller extent in Japan and the United Kingdom.

Read Big Banks Benefit From Government Subsidies here.

Posted by Graham Griffith

Zachary Karabell on Making Statistics More Meaningful

04-01-2014 9:31 AM with no comments

Zachary Karabell is on a quest.  He wants us to have a healthier relationship with economic statistics.  And that means not placing too much pressure on those statistics to tell us more than they are designed to.  In his latest book, The Leading Indicators: A Short History of the Numbers That Rule Our World, Karabell knocks some of the magic shine off of GDP and other key data that we follow closely.  He recently spoke about GDP, income per capita, and other headline stats at the Carnegie Council.  Here is an excerpt:

For more information on the event, and to listen to the full talk, click here.

Posted by Graham Griffith

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