Quarterly economic forecasts for the main developing and emerging countries.
Policy Tipping Points
Global economic activity continues to slow, reflecting stagnant global trade and a broad-based slowdown in real investment, especially in the manufacturing sector. Global manufacturing PMI has inched up for three consecutive months but remains at a modest 50.3 (close to 50, which marks the line between expansion and contraction) in November.
A deeper-dive into some of the more structural aspects of topical issues in the economic debate.
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.
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.