2/4/19: World Economic Conditions and Yield Signals

Global divergence...

... until global convergence?

More likely, the latter: https://www.reuters.com/article/us-ecb-policy-rates-idUSKCN1R81B3. 

8/5/18: Germany's ifo: World Economic Climate Deteriorates

Here is the summary of the Germany's ifo Institute World Economic Climate outlook update (emphasis is mine):

"The ifo World Economic Climate has deteriorated. The indicator dropped from 26.0 points to 16.5 points in the second quarter, returning to more or less the same level as in the fourth quarter of 2017. Experts’ assessments of the current economic situation remained as favourable as last quarter, but their expectations are far less optimistic. The world economy is still experiencing an upturn, but it is losing impetus.

The economic climate deteriorated in nearly all regions. Both assessments of the current economic situation and expectations fell significantly in the USA. In the European Union, Latin America, the CIS countries, the Middle East and North Africa economic expectations also cooled down. Assessments of the current economic situation, by contrast, improved. Economic expectations also clouded over in the Asian emerging economies and developing countries. Assessments of the current economic situation, by contrast, remained more or less unchanged.

In line with rising inflation expectations, short and long-term interest rates will rise over the next six months. Experts also expect far weaker growth in world trade, partly because they are reckoning with higher trade barriers. Overall, experts expect world gross domestic product to increase by 3.9 percent this year."

This is in line with my recent warnings on the pressures building up in the global economy, as raised in a series of recent articles for the Sunday Business Post see http://trueeconomics.blogspot.com/2018/04/27418-global-growth-and-irelands.html and http://trueeconomics.blogspot.com/2018/02/27218-volatility-uncertainty-are-back.html, and for the Cayman Financial Review see: http://trueeconomics.blogspot.com/2018/04/27418-goldilocks-economy-of-state.html.

15/4/18: EuromoneyCountryRisk 1Q 2018 report

Euromoney Country Risk 1Q 2018 report (gated link) is out, quoting, amongst others, myself on geopolitical and macroeconomic headwinds to global economic growth:

Two interesting tables/charts:

My quote:

12/4/16: IMF (RIP) Growth Update: Risks Realism, Policy Idiocy

IMF WORLD ECONOMIC OUTLOOK update out today (we don’t yet have full data set update).

Top line forecasts published confirm what we already knew: global economic growth is going nowhere, fast.  Actually, faster than 3 months ago.

Run through top figures:

• Global growth: In October 2015 (last full data update we had), the forecast for 2016-2017 was 3.6 percent and 3.8 percent. Now, it is 3.2 percent and 3.5 percent. Cumulated loss (over 2016-2017) of 0.725 percentage points in world GDP within a span 6 months.
• Advanced Economies growth: October 2015 forecast was for 2.2% in 2016 and 2.2% in 2017. Now: 1.9% and 2.0%. Cumulated loss of 0.51 percentage points in 6 months
• U.S.: October 2015 outlook estimated 2016-2017 annual rate of growth at 2.8 percent. April 2016 forecast is 2.4% and 2.5% respectively, for a cumulative two-years loss in growth terms of 0.72 percentage points
• Euro area: the comatose of growth were supposed to eek out GDP expansion of 1.6 and 1.7 percent in 2016-2017 under October 2015 forecast. April 2016 forecast suggests growth is expected to be 1.5% and 1.6%. The region remains the weakest advanced economy after Japan
• Japan is now completely, officially dead-zone for growth. In October 2015, IMF was forecasting growth of 1% in 2016 and 0.4% in 2017. That was bad? Now the forecast is for 0.5% and -0.1% respectively. Cumulated loss in Japan’s real GDP over 2016-2017 is 1.005 percentage points.
• Brazil: Following 3.8 contraction in 2015 is now expected to produce another 3.8 contraction in real GDP in 2016 before returning to 0.00 percent growth in 2017. Contrast this with October WEO forecast for 2016 growth at -1% and 2017 forecast for growth of +2.3% and you have two-years cumulated loss in real GDP of a whooping 5.08 percentage points.
• Russia: projections for 2016-2017 growth published in October 2015 were at -0.6% and 1% respectively. New projections are -1.8% and +0.8%, implying a cumulative loss in real GDP outlook for 2016-2017 of 1.41 percentage points.
• India: The only country covered by today’s update with no revisions to October 2015 forecasts. IMF still expects the country economy to expand 7.5% per annum in both 2016 and 2017
• China: China is the only country with an upgrade for forecasts for both 2016 and 2017 compared to both January 2016 and October 2016 IMF releases. Chinese economy is now forecast to grow 6.5% and 6.2% in 2016 and 2017, compared to October 2015 forecast of 6.3% and 6.0%.

Beyond growth forecasts, IMF also revised its forecasts for World Trade Volumes. In October 2015, the Fund projected World Growth to expand at 4.1% and 4.6% y/y in 2016 and 2017. April 2016 update sees this growth falling to 3.1% and 3.8%, respectively. And this is without accounting for poor prices performance.

In short, World economy’s trip through the Deadville (that started around 2011) is running swimmingly:

Meanwhile, as IMF notes, “financial risks prominent, together with geopolitical shocks, political discord”. In other words,we are one shock away from a disaster.

IMF response to this is: "The current diminished outlook calls for an immediate, proactive response… To support global growth, …there is a need for a more potent policy mix—a three-pronged policy approach based on structural, fiscal, and monetary policies.” In other words, what IMF thinks the world needs is:

1. More private & financial debt shoved into the system via Central Banks
2. More deficit spending to boost Government debt levels for the sake of ‘jobs creation’, and
3. More tax ‘rebalancing’ to make sure you don’t feel too wealthy from (1) and (2) above, whilst those who do get wealthy from (1) and (2) - aka banks, institutional investors, crony state-connected contractors - can continue to enjoy tax holidays.

In addition, of course, the fabled IMF ‘structural reforms’ are supposed to benefit the World Economy by making sure that labour income does not get any growth any time soon. Because, you know, someone (labour earners) has to suffer if someone (banks & investment markets) were to party a bit harder… for sustainability sake.

IMF grafts this idiocy of an advice onto partially realistic analysis of underlying risks to global growth:

• “The recovery is hampered by weak demand, partly held down by unresolved crisis legacies, as well as unfavorable demographics and low productivity growth. In the United States, ..domestic demand will be supported by strengthening balance sheets, no further fiscal drag, and an improving housing market. These forces are expected to offset the drag to net exports coming from a strong dollar and weaker manufacturing.” One wonders if the IMF noticed rising debt levels in households (car loans, student loans) or U.S. corporates, or indeed the U.S. Government debt dynamics
• “In the euro area, low investment, high unemployment, and weak balance sheets weigh on growth…” You can’t but wonder if the IMF actually is capable of seeing households of Europe as still being somewhat economically alive.

But the Fund does see incoming risks rising: “In the current environment of weak growth, risks to the outlook are now more pronounced. These include:

• A return of financial turmoil, impairing confidence. For instance, an additional bout of exchange rate depreciations in emerging economies could further worsen corporate balance sheets, and a sharp decline in capital inflows could force a rapid compression of domestic demand. [Note: nothing about Western Banks being effectively zombified by capital requirements uncertainty, corporate over-leveraging, still weighted down by poor quality assets, etc]
• A sharper slowdown in China than currently projected could have strong international spillovers through trade, commodity prices, and confidence, and lead to a more generalized slowdown in the global economy. 
• Shocks of a noneconomic origin—related to geopolitical conflicts, political discord, terrorism, refugee flows, or global epidemics—loom over some countries and regions and, if left unchecked, could have significant spillovers on global economic activity.”

The key point, however, is that with currently excessively leveraged Central Banks’ balance sheets and with interest rates being effectively at zero, any of the above (and other, unmentioned by the IMF) shocks can derail the entire wedding of the ugly groom with an unsightly bride that politicians around the world call ‘the ongoing recovery’. And that point is only a sub-text to the IMF latest update. It should have been the front page of it.

So before anyone noticed, almost a 1,000 rate cuts around the world later, and roughly USD20 trillion in various asset purchasing programmes around the globe, trillions in bad assets work-outs and tens of trillions in Government and corporate debt uplifts, we are still where we were: at a point of system fragility being so acute, even the half-blind moles of IMF spotting the shine of the incoming train.

7/7/2014: About those Global Growth Uplift Forecasts...

Last week, IMF updated its World Economic Outlook with a fresh upgrade to global growth forecast for 2015. Lot's of media miles have been travelled over this upgrade (here's one example). And, in fairness, the IMF might be right: there has been some firming up in global growth in recent months.

More significantly, the firming up is coming on foot of stronger performance of the advanced economies, where the cycle is now clearly indicating early stages recovery.

The same positive momentum has been confirmed in a number of expert surveys, e.g. BlackRock Investment Institute and McKinsey Global Institute and so on.

Still, just to be on the safer side, it is worth taking IMF forecasts in perspective. The Fund has been systematically wrong in its outlooks for Global and Advanced economies growth in recent years. Here is some evidence.

First: take the same period estimates (April-published estimates for the same year growth). These should be pretty easy to predict, as by the date of their release, the Fund has contemporaneous data flows on the economies (e.g. PMIs) and previous year dynamics pretty much sorted. Table below shows that, despite some data already being available, the Fund has rather varied experience with its estimates. And when it comes to the World Economy estimates, things have goo ten worse over the last three years, compared to the 5 years range.

Second, let's look at one year-ahead forecasts. Here, things are better in most recent three years, but they are not brilliant, especially when it comes to the Fund forecasts for the Euro Area. 3-5 year average over-estimate of growth is to the tune of 0.76-1.05% per annum. When it comes to World growth forecasts, these too turn out to be too optimistic, in the range of 0.56-0.60% annually.

Third: over two years forecasts, Fund's performance is worse: for the World economy forecasts tend to be on average more optimistic than the outrun by between 0.68% and 1.04% per annum. The same range for Euro Area is 1.19% to 1.53%.

Two charts illustrate the above. First: One-year ahead forecasts compared to outrun:

Next: 2008-2012 forecasts and 2013 (April) estimate for growth in 2013 compared to actual outrun:

Someone criticised my choice of the period covered, but the entire point of my argument here is not that the IMF is bad at forecasting (it is no worse than many other sources), but that forecasts at the times we live in are by their nature highly restrictive. That is, of course, not the notion one gets from reading business media reports of every IMF (or other major source) forecasts update.

So the net conclusion must be that there are indicators of global growth firming up… but I would't be rushing to buy on foot of IMF statements about 2015… At least not until there is a clear and established trend along which the forecasters can glide smoothly. When we need forecasts most, they are least useful… such is reality.

06/03/2011: Kauffman survey of economics bloggers

Kauffman Foundation - non-partisan US-based research think tank studying the issues of entrepreneurship. It describes itself as: "dedicated to the idea that entrepreneurship and innovation drive economic growth". The foundation released their quarterly survey results for Q1 2011 on the opinions and policy positions held by the US-based top economics bloggers.

You can access the survey paper from here and believe me - IT IS WORTH READING!

Here are the highlights:

• The survey was conducted in mid-January 2011 by soliciting input from top economics bloggers as ranked by Palgrave’s Econolog.net.
• Economics bloggers are less pessimistic in their outlook on the U.S. economy than they were at the end of 2010, though 77% believe overall conditions are mixed, facing recession, or in recession.

• "For an economy in which growth is the norm, 31% of respondents think that the U.S. economy is worse than official statistics indicate, and only 10% believe it is better".
  
• When asked to describe the economy using five adjectives, "uncertain” remains the most frequently used term.

• "Although the panel is largely non-partisan, a 3:1 majority of top economics bloggers believe the government is too involved in the economy."

• The top policy recommendation is for the government to “reduce regulatory burdens and fees on new firm formation” and “approve trade agreements with South Korea, Colombia, and Panama,” with 92% support. So free trade and lesser burden on business formation. "Promoting entrepreneurship is a consensus agenda among policymakers".
  
• Only 32% agree with a policy of “subsidizing new firm formation with targeted spending and tax benefits,” with 68% disagreeing (24% strongly).
  
• The alternative option to “reduce regulatory burdens and fees on new firm formation” is favored by 92% of respondents.
  
• "Rather than recommending that the government get more involved in helping entrepreneurs, top economics bloggers recommend it simply do less to hinder them."
  

Now some most excitingly interesting charts:

First: how balanced / non-partisan the panel is:
Oh, sorry, yes, Americans do have some serious talent amongst the bloggers and they tend to come from all 3 sides of economics thinking: Left, Right and purely objective 'quantifiers'.

Another one for us, Europeans. Remember the hoopla surrounding the high-sounding principles, but bad economics (yes, the Congressional Budget Office analysis has proven it to be 'bad economics') of the Obama Healthcare bill? Here's the verdict of the economists:
Ouch: 55% say "Repeal" the beast, 71% say "Don't tax the benefits".

Now more goodies for us, Europeans - how do the US economists rank performance of the ECB?
No "A" marks for ECB, Average mark is solid "D". Only US Congress and the Wall Street score less than the Euro-guardian.

Fascinating results!

Economics 17/08/2009: Global Recession is Over - IMF

Per IMF's Chief Economist, Oliver Blanchard, the global recession is now over and a recovery has begun. "The turnaround will not be simple," Blanchard wrote, as "The crisis has left deep scars, which will affect both supply and demand for many years to come." Blanchard expects growth start occurring in 'most countries', but at low rates - not enough to shift unemployment off its highs.More importantly, Blanchard argues that potential global output may have been permanently reduced and that any growth to take place in the short run will still remain highly dependent on government stimulus and accommodating monetary policies. Sustaining growth "will require delicate rebalancing acts, both within and across countries," he said

Now, of course for Ireland, this is not much of a welcome news. Our fiscal stimulus is perverse NAMA sucking cash out households' pockets, plus the widely anticipated and media-supported tax hikes in the next Budget. Our monetary easing is there solely to help the banks, who in turn are now raising mortgage rates.

Per Blanchard, US consumption (ca 70% of the US GDP) and most of global demand will be very slow to return to pre-crisis levels. These long-term declines are driven primarily by wealth effects due to the fall-offs in personal wealth on the back of housing and stock markets collapses. Blanchard, who devoted much of his academic career to the models of nominal and real rigidities remarked that he perceives the crisis legacy as having made Americans more aware of the unlikely events that can yield catastrophic consequences. This is known in the literature as "tail risks". The likely result of this will be a permanently higher rate of savings in the US and elsewhere around the world, leading to lower consumption, but cheaper financial capital.

Interestingly, Blanchard apparently ignored the issue of increased risk aversion that might also accompany the fear of 'tail risks'. If this does materialise, higher risk aversion can shift the burden of financing the latest crisis off the fiscal authorities (through lower yields on bonds) onto the shoulders of already strained corporates (with higher required returns to equity financing). The resultant knock-on effect will be to double the adverse risk of lower consumption by the households, reducing potential rate of growth globally.

Global rebalancing to address this new reality will require, in Blanchard's view :

• "Both higher Chinese import demand and a higher (yuan) will increase U.S. net exports";
• Higher domestic consumption growth in China (effectively replacing the US as the main consumption growth player in global economy);
• Lower current account surpluses in China; and so on

Thus Blanchard's view has not really change that much since the beginning of the crisis and even further back. Even in the late 1990s the IMF kept sounding alarms about the Sino-US imbalances.

Another long-term challenge is decoupling the real economy off its dependence on state spending. This will be painful, as current stimuli around the world spell higher taxation in the future and thus lower future growth. "In nearly all countries, the costs of the crisis have added to the fiscal burden, and higher taxation is inevitable," Blanchard said. "All this means that we may not go back to the old growth path, that potential output may be lower than it was before the crisis," he added.

What's there to say about our country, then - a cost in tens of billions and no stimulus in return... aka NAMA.