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R&R Weekly Column

Short-Term Macro Wobbles, Long-Term Demographic Issues


by Brunello Rosa

21 January 2019  


The global economy continues to decelerate. As a result of its longest ever government shutdown, US growth is likely to suffer in the coming months. (US PMI’s are expected to show this starting this week). The glimmers of hope coming from US-China trade talks, with China offering to increase its imports from the US to USD 1tn in the next six years (from 190bn in 2018), might not be enough to stop this deceleration, in the absence of fiscal and monetary stimulus. In China, Q4 GDP figures this week are expected to confirm a deceleration from 6.5% to 6.4% y-o-y, led by a contraction in exports. In the Eurozone, Germany’s preliminary GDP growth figures showed a deceleration to 1.5% in 2018 (down from 2.2% in 2017), after its GDP contracted in Q3. According to Banca d’Italia, Italy seems destined for a technical recession, its GDP having contracted in Q4 2018 after also doing so in Q3. The central bank has updated its forecast for Italy’s GDP growth in 2019 to 0.6%, a pace of growth that is only about half of the most recent 1% growth forecasted by the country’s government (a forecast that does not even rule out the possibility of a supplementary budget during the year, in order to realign Italy’s fiscal deficit to the level agreed upon with the EU). 

Given these decelerating conditions, and considering that inflation remains easily in check, short-term policy responses are underway. Last week, the PBoC injected a net CNY 560bn (USD 83bn) into its banking system, the highest amount ever recorded in a single day. Next week, the Fed is likely to provide further hints about a pause in its tightening cycle. This week, the ECB should acknowledge the ongoing economic deceleration and suggest continued or increased gradualism regarding its exit from the extraordinary accommodation it has provided in the last five years. 

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Also this week, we expect the BoJ not to take any meaningful action while downwardly revising its growth and inflation outlook. We also expect Norges Bank not to move this week while confirming its forward guidance for a hike to take place in March. In the UK, on Monday the government will present its Plan B for Brexit, but no vote is expected until next week. The BoE remains ready for any eventuality. Considering these moves, markets are having a bit of respite: risky asset prices are slowly recovering the losses they experienced at the end of last year.   

Underlying these short-term wobbles are much deeper economic challenges. In our recent in-depth report on demographics, we discuss how current demographic trends tend to impact economic and political developments, policy choices and market outcomes more profoundly than short-term policy (monetary, fiscal, regulatory) fixes. In our global overview, we look at demographic developments in the US, Latin America, Europe and Asia, finding that most of the policy choices we see being made today are already partly the result of underlying trends that have been in place for decades. The coming generation of policymakers will be bounded and constrained by these persistent trends. The moral of the story here is quite simple. While managing short-term macroeconomic developments, policy makers should also address long-term issues. Otherwise, the challenges these long-term issues pose will eventually become insurmountable by conventional instruments.  

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The Geopolitical Corner by John Hulsman

Brexit: Ways to get unstuck


22 January 2019


“I predict future happiness (for Americans), if they can prevent the government from wasting the labours of the people under the pretence of taking care of them .” - Thomas Jefferson


I was planning to write about the US-China trade war today when I came across this telling Jefferson quote. I felt as if the Sage of Monticello was mocking me, for my resolute insistence on avoiding--despite the specific pleas of a number of my loyal readers—the Brexit clown car crash that has poisoned the front pages these many weeks. Like many, I have turned away in disgust, appalled by the equal arrogance and incompetence of the British ruling elite, making a mockery out of a country I am inordinately fond of, all the while seemingly blithely unaware of the stifled rage of the people they govern, and the damage they are all doing. 

But Jefferson is, as so often, right. Disgust, anger, frustration, and even horror must not lead to indifference. Worst of all, the paternalism of both the executive and parliament--that somehow the historical Brexit vote can be ignored, talked to death, obscured, and best forgotten—is the disease that must be combatted by any free-thinking people. Given the Western elite’s collective record over Iraq, Afghanistan, the rise in inequality, the stagnation of middle-class wages, and most of all the 2008 global financial crisis, you would think a certain amount of humility would be in order. 

You would be wrong. Instead, our betters somehow, in some way, still think they know better, despite all policy evidence to the contrary. Jefferson is right to urge us to war against this enraging, misplaced paternalism. For the Brexit vote, whatever you think it means, surely signified that business as usual for the British elite was not what the country’s people had in mind. So shamed by the poet of my revolution, I feel honor-bound to look at possible ways out of the mess the entirely gormless Theresa May has gotten us all into. 

A necessary rant 

But before doing so, allow me just one moment for what my staff calls my J’accuse rants, my Emile Zola effort to send down plagues on the collective houses of the British elites. The original sin here is that Theresa May should have followed her immediate gut instinct following her botched election and resigned, for the simple reason that her minority government has left her in such a dire electoral position, that the math means it is impossible for her to get any plan through parliament. 

This is not something I have discovered after the first colossal defeat of her terrible plan (the second is to come today); I have been saying this for well over a year, as the politics should have been clear to all. Enacting a change as radical as Brexit in policy terms calls for a large parliamentary majority, that expected defectors in any direction can be seen off, with the people’s will clear. For example, this is the structural electoral reality lying behind the success of the Thatcher Revolution. That has never been the case here, which is why this whole sorry mess has been doomed from the start.

But there is so much more blame to go around. May, being the Vicar’s daughter that she is, has dutifully (if dully) tried to implement a Brexit she never believed in, telling literally no one (hardly a democratic position to take) what she is doing, and ignoring all inconvenient facts to the contrary (the parliamentary math, the EU’s obvious negotiating intransigence). She is perhaps the worst of all policy worlds, overconfident, stubborn, secretive, and frankly, more than a little incompetent. She obviously feels she was elected to get something called Brexit through parliament (whatever the actual terms), and that is what she is going to do. It would be laughable, if the effects weren’t so horrendous.

But like most calamities, May is hardly alone in being at fault; there is not a statesman amongst this motley crew. We have a Remainer in May leading a Brexiteer Tory Party; in Labour’s Jeremy Corbyn, we have a Brexiteer leading a Remainer Labour Party. In his obsession for calling a general election (which somehow he is still likely to lose) rather than sorting out this mess, Corbyn has not done his country a service. We have enraging, (somehow) elitist, Tory and Labour Remainers trying to talk themselves and the country into the fact that ignoring the will of the people is somehow bravely re-asserting parliament’s rights, as though anyone believes them. 

Read Previous Geopolitical Comments by John Hulsman


In turn, we have enraging and (somehow) elitist Tory and Labour (just a few) Brexiteers, who all parliamentary facts to the contrary, want the whole thing to go off a cliff. Personally, I am for a no deal Brexit, but only because I have a metric and a policy plan for what to do with Britain’s newfound freedom. It centers on free trade deals being done with Australia, New Zealand, Canada, the US, and India (China comes later) in the next five years, as well as a deal in place over that period of time with Brussels. 

If that happens, all is well. If not, Brexit was a bad idea. Rather than the stifling nonsense being theologically peddled by all sides now, the key as to whether Brexit is worth it revolves around policy, around what comes next. That is not what I hear from the overconfident (and under-prepared) Boris Johnson, or the perpetual confidence man, Michael Gove. They want a result, while being vague a best about what they would do with that result. That is not leadership, that is the fantasies of children. And don’t get me started on John Bercow. 

Follow Jefferson’s lead 

In this crisis, there is a lot that we do know. Europe, after years of empirical data, will not budge on the deal negotiated with May, and parliament will not approve such a deal. May, stubborn and incompetent to the end, is the impediment to anything that comes next. The Tories cannot dislodge her for another year; Corbyn has also failed to get her to see reason and go. So what to do?

As Jefferson would have it, trust in the collective genius of the people. Any glance at the most recent ICM poll, published after the overwhelming defeat of May’s plan, suggests several ways forward. Like a fish caught in a net, Britain must try all of them and all at once, if it is to wriggle free of the mess its leaders have made of it. In it, 28% of respondents called for a no deal Brexit, for the UK to crash out of the EU on WTO trading terms and begin to negotiating trading deals with the rest of the world, and now. However, 24% favored a Second Referendum as a way ahead, with 11% calling for another General Election to clarify things, and only a paltry 8% arguing May should continue the Chinese Water Torture of pressing for her discredited plan in parliament. 

Normally, I’d say the General Election is just the thing to clarify what to do, with the huge plus of having the popular will behind it. But given that the two clowns—May and Corbyn—will both still be driving their clown cars, this strikes me as an unlikely solution, though in Jeffersonian terms it would be best. 

The problem with having a Second Referendum would be the question asked: if May’s Soft Brexit and Labour’s fondest hope of the UK rejoining the EU are the only options on the ballot, then the largest single group of people in Britain (the 28% calling for no deal) would be utterly excluded. To put it mildly, devastating political consequences in the UK would follow for a generation. 

The best way ahead appears a deal between the two most extreme groups (and according to the ICM poll, the two most popular) the No-Dealers and the Second Referendum supporters. In exchange for another (this time utterly definitive) vote, the terms of the question would have No-deal on the ballot, along with Canada, Norway, and not leaving options. Second preferences would have to be included until a majority was reached, but such a ballot would reflect the popularity of the no-deal option, as well as the movement for a second referendum. Better still, a specific way forward—devoid of Bercow’s buffoonish theatrics—would be finally put into place in policy terms. 

This is exactly the sort of discussion—about what actually to do—that we haven’t seen in the UK over these past few painful months, where wishful thinking and grandstanding have taken the place of serving the country. It is high time we look at the polls, reflecting what Jefferson knew was the genius of the people—for a way out.    

This article was originally published on the Author's LinkedIn Page. John Hulsman's new book, To Dare More Boldly: The Audacious Story of Political Risk, was published by Princeton University Press in April 2018. 

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Looking Ahead

The Week Ahead


Week 21 - 27 January 2019


In the US, as 800,000 federal workers remain in furlough, growth is expected to suffer; this week, the PMI is likely to decelerate (US Markit manuf. PMI January, c: 53.4; p: 53.8).

In the UK, during this week PM May is expected to hold cross-party talks to devise a “plan B” on how to proceed. 

In the EU, concerns about an upcoming economic slowdown are mounting, but the PMI is likely to remain stable this week (EZ Markit manuf. PMI January, c: 51.4; p: 51.4). 

This week the ECB is likely to maintain rates unchanged (c: 0%; p: 0%). Analysts expect it to adopt a more cautious tone.

This week in Japan, the BoJ is also likely to maintain its current, accommodative stance (c: -0.1%; p: -0.1%). 

The Quarter Ahead


The PBoC - given the ongoing economic deceleration (GDP Q4, c: 6.4% y-o-y; p: 6.5%) - will continue to support the financial sector: last week, the PBoC injected a net CNY 560bn (USD 83bn) into the banking system, the highest amount ever recorded in a single day.

In India, inflation remained at an 18-month low (a: 2.2%; c: 2.2%; p: 2.3). Given a structurally low inflation and the upcoming elections, the pressure on the CB to cut interest rates is likely to increase.


Last week's Summary (14 - 20 January 2019)

Real Economy And Monetary Policy Expectations: Softer Growth And Stable Prices Likely To Delay Monetary Policy Normalization

In the US, the longest government shutdown on record (almost one month) is hampering growth. 

Trade-related concerns declined, after China offered to increase imports from the US to USD 1tn (from USD 190bn in 2018) - over the next six years. 

In China, an unexpectedly strong decline in trade activity hints to: 1) activity front-loading; and 2) softer external demand (December export growth, a: -4.4%, c: 2.0%, p: 5.4%; December import growth, a: -7.6%, c: 4.5%, p: 3.0%).

The expectations about further Fed’s monetary tightening are declining, after an over-reaction earlier in the year: the market-implied likelihood of no rate hikes in 2019 fell to 68% (pw: 85%). 

In the UK, PM May’s Brexit deal was heavily defeated by the parliament (432 votes against-202 for). However, the government survived a no-confidence vote (325-306).

In the EU, in 2018 Germany’s GDP grew at 1.5%, a deceleration from 2.2% in 2017 and its weakest pace in five years. 

In Italy, budget-related tension subsided; yields on 10y bonds fell by 13bps to 2.73%, the lowest level in six months, as foreign investors drove bid-to-cover ratios to more than 3 and buyers shrug off the risk of political turbulence and slowing EU growth.

Eurozone headline and core inflation remained stable (CPI December, a: 1.6% y-o-y; c: 1.6%; p: 1.6%; CPI Core December, a: 1.0% y-o-y; c: 1.0%; p: 1.0%).

In Japan, headline inflation fell below expectations (CPI December, a: 0.7% y-o-y; c: 0.8%; p: 0.9 %).

In Turkey, the CBT left the policy rate unchanged at 24%, as the CB remains vigilant about inflation.  

Financial Markets: Positive Performance Of Global Stocks And USD

Most global markets experienced a positive performance, extending their streak into the fourth week, driven by progress in the trade discussions between the US and China. Optimism over a potential bilateral deal helped to offset worries about the prolonged US government shutdown.

Global stocks rose w-o-w (MSCI ACWI, +2.2%) driven by the US (S&P 500, +2.9%) and EMs (S&P EMs, +1.7%). Volatility decreased towards its long-term average (VIX, -0.4 points to 17.8; 52w avg.: 17.1; 10y avg.: 18.3).

Fixed-income indices fell during the week (BAML Global bond index, -0.1%), driven by the US (Reuters US bond index, -0.5%). Sovereign bond yields rose in the US (10y yield, +8bps to 2.78%) and fell in Germany (10y yield, +8bps to 0.26%).

Currencies: w-o-w, the USD rose against a basket of currencies (DXY, +0.7%); the GBP rose (GBP/USD, +0.2% to 1.287) on hopes of a Brexit delay. 

Commodities: Brent prices rose by 3.7%, to 62.7USD/b, driven by stronger expectations about demand, as concerns about global trade subsided. 

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