Quarterly economic forecasts for the main developing and emerging countries.
A long and winding road to sustainable recovery
The Covid-19 has triggered a deep global recession as countries have imposed, with varying degrees of stringency, policies of social distancing -including economy-wide lockdowns and travel restrictions- to flatten the epidemiological curb. Gauging the economic costs of Covid-19 remains an uncertain exercise given the many unknowns as to how long social distancing policies might remain in place and how consumers and business will adapt to the post-pandemic environment.
A deeper-dive into some of the more structural aspects of topical issues in the economic debate.
Central Bank Digital Currencies: 10 Frequently asked questions
Central Bank Digital Currencies are new forms of electronic money directly issued by the central bank. They are currently being tested in a growing number of countries, from Sweden to China and France. Whether to address the issue of the disappearance of cash, the threat to sovereignty from private e-money (Libra…), the market power of private payment providers etc., CBDCs are likely to become reality in the coming years.
China’s influence is tilting to demand
In just two decades, China has moved from the world’s 6th largest economy to the 2nd, more than quadrupling its share of global GDP and taking the title, the World’s factory. While China remains a major source of supply to the global economy, both for intermediate and final goods, the more striking feature today is just how important China has become as a source of global demand; even surpassing the US for several major Asian economies. In the wake of the 2008/09 crisis, China, moreover, became the World’s investor of last resort. As such, it is no surprise that news from China impacts global financial markets. China’s large financial system nonetheless still has a low degree of international integration, albeit that funding from China has become more important, not least for a number of emerging economies.
ECB Tiering: A success, but no panacea
The combination of the ECB’s negative deposit rate and its sizeable liquidity injections (via its asset purchase programmes in particular) has been a significant source of support for the euro area’s economy and lending. However, these policies have had a direct cost to banks, of about 6.5% of their profits in 2018, which could end up jeopardising their ability to finance the economy. In order to preserve monetary policy transmission in a negative rate environment, the ECB decided to exempt some bank reserves from the negative deposit rate, beginning from October. Defying some fears, the introduction of tiered remuneration for reserves has not caused any lasting tensions on money markets. It has actually allowed for a reallocation of excess liquidity from the Monetary Union’s core to its periphery.
The challenges of a low interest rate environment
Although a boon for borrowers who find themselves more solvent, the current low interest rate environment is posing real challenges for investors as they see plummeting returns on their savings. In addition, persistent low/negative rates could aggravate a certain number of risks to financial stability, especially by encouraging debt gearing, contributing to a potentially unsustainable rise in the price of assets and prompting certain investors to overexpose themselves in their search for yield. Although nowadays banks, on the whole, are more resilient than prior to the 2008 financial crash, new vulnerabilities are appearing as investors turn to assets offering higher returns but greater risks or less liquidity, issued by non-bank financial players.
The new financial system’s ability to withstand macrofinancial shocks has yet to be proven.
Five polarising trends in European household consumption
Household consumption in Europe has weakened considerably since the 2008 crisis. This stylised macroeconomic fact hides diverging sectoral trends, observable both on prices and volumes. We pinpoint five profound changes in consumption trends and habits in Europe, which have caused a significant shock to the consumer goods and retail sectors: 1) the increasing share of consumption accounted for by basic necessities and 2) spending on leisure services; 3) the concomitant decline in the share of consumer goods due to severe price deflation and 4) a lack of increase in volumes despite this price drop; and lastly, 5) demographic changes combined with a major disparity in income trends depending on age and place of residence within each country.
Leveraging the French paradoxes
Two years into his Presidency, Emmanuel Macron has delivered a flurry of reforms that aim to leverage the strength in the paradoxes of the French economy: high productivity yet improvable education, enviable demographics yet low labour utilisation, relatively low poverty rates yet surprisingly low social mobility…
Africa: a new growth model is needed
For Africa to reach its full growth potential, a higher investment rate and more diversified FDI across sectors are key in shaping a more balanced and resilient growth model, less focused on just a few pockets of growth (such as extractive industries and trade hubs). This new pattern should prioritize agriculture, further diversification of export revenues and more inclusive finance to gradually attract a larger share of the rural activity into the formal sector.
Africa is more integrated in global financial flows
The past two decades have been marked by renewed optimism for Africa with several
countries in the region enjoying high growth rates. Ranking high amongst the many positive
factors (rapid urbanization, a growing middle class, etc.), is Africa’s increasing trade and financial integration with the rest of the world. All types of funding (foreign investment, bank financing, etc.) have risen rapidly since the mid-2000’s. However, the economic performance in terms of productivity catch-up with more developed markets has yet to materialise, and the continent still falls well short of its full growth potential.
Italy’s Fiscal Multiplier Trap
The impact of discretionary fiscal policy on economic growth is an ongoing topic of debate, and not least these days between Brussels and Rome. Weighing up the different mechanisms at work, we find that the multiplier on fiscal expansion in Italy today is below the levels needed to bring down the debt-to-GDP ratio. Conversely, should the Italian government switch the fiscal lever to austerity, we are concerned that this too could prove self-defeating. In a nutshell, Italy seems caught in a “fiscal multiplier trap”. Breaking out of this requires a much stronger focus on growth boosting structural reforms.
China’s Mission Impossible
Chinese economic policy pursues four, at times conflicting, goals: growth, financial stability,exchange stability and deleveraging. Albeit that this is not new, the context is now much more restrictive and although measures have been announced favouring growth and reforms, there is mounting concern that policymakers will have to make some hard choices.
We believe that the direction of economic policy will lean towards growth and financial stability while pausing the other two, although not fully abandoning these goals. This implies,
at least over the next two years, a gradual weakening of the RMB and a pause in the deleveraging process. We expect Chinese growth to gradually slow to around 5% in 2022.
Stock market, real economy: The great paradox
As the COVID-19 pandemic has plunged the global economy into an unprecedented recession in peacetime, stock market valuation multiples have, in general, returned to their historic heights. Never before has the relationship between economic reality and the reality of the stock market been so loose. How to explain this strange disconnection? Three points stand out: a handful of mega-cap stocks that drive indices upwards; a bet on the unconditional support of central banks; ultra-low interest rates.
How will the recovery from Covid-19 shape up?
The COVID-19 pandemic and the measures taken to contain it have plunged the global economy into a recession without precedent in modern economic history, in terms of its intensity and suddenness, as well as its global dimension. Which leads to the question now on everyone’s lips: what shape will the economic recover take once the health crisis has passed?
Why a central bank cannot go bankrupt
The dramatic increase in risks taken by major central banks since the 2008 financial crisis and exacerbated by the Covid-19 crisis may have led some to express the fear that central banks could suffer losses, that their capital may, therefore, become negative and that this may undermine their effectiveness and even drive them to bankruptcy. These fears, however, are largely unfounded because a central bank has the unique ability to effectively serve its purpose regardless of its financial status.
Saved by helicopter money?
At a time when COVID-19 is causing a shock of almost unprecedented violence and raising the spectre of another Great Depression, the idea of “helicopter money” is back in force in the public debate. The term “helicopter money” was coined by economist Milton Friedman, who sought to illustrate his theory of the neutrality of money with a metaphor. What would happen, asked Friedman, if a helicopter flew over a country and dropped banknotes from the sky?
The global liquidity trap
Developed in the 1930s by John Maynard Keynes, the concept of a liquidity trap refers to a situation in which conventional monetary policy becomes ineffective at stimulating the economy because short-term interest rates are at or approaching zero. In a liquidity trap, economic agents no longer see a difference between holding bonds that yield zero or near-zero rates and holding money, and their demand for liquidity becomes virtually infinite.
2020: Stock market/Economy, the great divide?
2019 was an auspicious year for financial markets, but clouds gathered over global economic growth which was at its lowest since the 2009 financial crisis. Today, Western equity markets continue to reach new heights while the global economy is seeing sluggish growth. In an environment of ultra-low and even negative rates, the hunt for yield is driving stock markets up. Can the divide between the stock market and the economy continue to widen indefinitely?
Global debt reaches record highs
On the rise since the 2008 crisis, global debt has now reached levels not seen since the Second World War. The debt of Chinese state-owned enterprises and the government debt of developed economies were the biggest contributors to this increase. Another concerning trend includes a marked decline in the credit quality of corporate borrowers, notably in the US, along with a fall in covenant quality.
The search for missing inflation
For fifty years, the obsession for combating inflation has dominated OECD economies. Today, inflation has virtually disappeared; central banks are struggling to increase it towards their 2% target. There are multiple causes and they are often linked: globalisation, technological innovations, weakening influence of trade unions, lacklustre global demand, weak inflation expectations… The spectre of “Japanisation” now hovers over the developed economies.
Yield curve inversion is causing concern
The yield curve recently inverted in the United States, causing concern in high places because in the past an inverted yield curve has been the most reliable leading indicator of a recession to come. But some observers believe things will be different this time. Some point to the sharp decline in the “term premium” to assert that the inversion of the yield curve now provides a less reliable signal of an economic downturn than in the past.
A financial bubble: to be or not to be?
While Wall Street is setting record upon record, many observers are asking whether a financial bubble might be on the cards. But do bubbles exist? In 2013, the Nobel Prize in Economic Sciences was awarded to two researchers with opposing points of view: for E. Fama, bubbles do not exist because the markets are efficient; for R. Shiller, bubbles exist because human behaviours often deviate from rationality.
The long-term equilibrium rate of interest
Economic theory suggests the existence of an equilibrium rate of interest which balances savings and investment at full employment. Research shows that this rate fell in the aftermath of the Great recession of 2008 to now stand at a very low level. To bring the economy back to its potential, the central banks have endeavoured to ensure that actual rates do align with this theoretical rate.
Negative rates: how did we get here?
Today, several governments can take out loans on financial markets at negative interest rates – which means that investors are paying to lend them money. If this situation, unprecedented in history, may at first seem absurd, it is in fact absolutely rational at a time when investors are becoming increasingly pessimistic about the economy in a world where underlying economic fundamentals remain essentially weak.
The winners and losers of the robot revolution
The age of automation promises growth in production but also heralds a widening of inequalities, with low and medium-skilled workers on one side and highly-skilled, increasingly well-paid workers on the other. Furthermore, the rise in capital stock that is inherent to automation is set to widen the inequality gap further, given that capital ownership is more unevenly distributed than labour income.
What is shadow banking?
Shadow banking refers to all credit intermediation activities that take place outside the regulated banking system. Although shadow finance plays a valuable role, it is not without risk. Certain activities – estimated by the Financial Stability Board at $51,600 billion in 2017 – are liable to present systemic risks to financial stability.
Monetary policies: what is the endgame?
Upon the conclusion of its monetary committee meeting on 29 and 30 January, the US Federal Reserve (Fed) marked a pause in the cycle of raising its key rates that it had initiated in December 2015. The question of the irreversibility of ultra-expansionary monetary policies is particularly acute in these times of a global economic slowdown.
The quantitative easing retreat
The world has entered a new era, with the central bank liquidity tap – on full since the 2008 crisis – now being gradually turned off. While the Fed continues with quantitative tightening (QT), that is, the shrinking of its balance sheet, the ECB ended its quantitative easing (QE) programme on 31 December 2018. Monetary tightening could have disruptive effects.
Can the euro challenge “King Dollar”?
In his State of the Union speech in Strasbourg on 12 September, European Commission President Jean-Claude Juncker announced that proposals would be presented before the end of year aimed at “strengthening the international role” of the euro against the dollar. “It is absurd, he lamented, that European companies buy European planes in dollars and not in euros“. But does the euro have the means to challenge the hegemony of the dollar?
Past the peak on growth and rates
The global expansion has lost steam after reaching a peak in 2017. International trade and manufacturing output have slowed amidst weaker demand from China. Political uncertainty (Brexit, US-China trade talks, pace of economic reform in the euro area) mark an additional headwind. The forward guidance from the Fed and the ECB has shifted to a more dovish tone and stock market have rebounded so far in 2019. Yet, fixed-income markets price now weak growth and low inflation for long. Rising unit labour costs in Europe and tighter labour markets in the US could still lead to inflationary surprises and a near-term correction on bond yields could prove a source of financial volatility.
The dynamics of inequality: Is there a general pattern?
The world today is both more and less unequal than it was back in the 1970s. Inequality between countries has narrowed over the course of the last few decades, mainly due to the extraordinary growth of China, but inequality within countries, especially rich countries, which had declined between the 1930s and the 1970s, has risen substantially. A high level of inequality is problematic, as it can undercut social cohesion, lead to more instability, and, as research at the IMF and elsewhere has recently shown, undermine the sustainability of growth itself. Looking closely at inequality can provide us with an important key to understanding major political and economic events of the recent past.
Asia: growth jeopardised by the trade war
Trade tensions between China and the United States represent a major risk for the export-oriented Asian region. Economies can be affected via the global value chain, Chinese growth and competitive devaluation (although the latter is unlikely). Only India is less vulnerable to this risk.
Monetary Policy: back to normal?
The 2008 financial crisis witnessed unprecedented policy responses from the world’s major central banks. Main central banks cut their policy rate to near 0%, exhausting the conventional monetary options. Then, to further ease financial conditions, they started to design a variety of unorthodox monetary policy tools commonly labelled as “unconventional monetary policies”. These have included “lower-for-longer” forward guidance on the short-term rate, large-scale asset purchases, large-scale liquidity provis.
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The Economic Research Department analyses, monitors and drafts forecasts/scenarios regarding global economic and financial developments on behalf of the Societe Generale group as a whole. Its experts share their vision through economic, financial and socio-political studies and articles.