The Economic Weekly (week starting 20 May 2019)

All eyes will be on the Federal Election on Saturday 18 May. (The current schedule for the Weekly means that my draft content is finalised on the Thursday so by the time readers see these words, the outcome will be known.) We’ll run a webinar on the post-election outlook for the economy on 22 May. You can register here.

The latest set of RBA forecasts from May’s Statement on Monetary Policy foresee slower growth and lower inflation ahead, even after incorporating market forecasts of two cuts to the cash rate.

Reversing a surprise monthly bounce in February, lending to households for dwellings (excluding financing) fell by more than three per cent in March and was down more than 18 per cent over the year.

According to NAB’s monthly business survey, business conditions declined in April, delivering a negative signal on employment prospects.

The Westpac-Melbourne Institute Index of Consumer Sentiment rose by 0.6 per cent over the month in May.

For a third consecutive quarter, Australia’s wage price index rose at an annual rate of 2.3 per cent in the first quarter of this year, signalling continued moderation in wage growth.

The unemployment rate rose to 5.2 per cent in April, up a revised 5.1 per cent in March.

After the United States imposed new tariffs on Chinese imports, Beijing responded with trade measures of its own. Financial markets were unhappy.

On another front in the geo-economic confrontation, President Trump seems to be paving the way to ban US companies from using telecoms equipment manufactured by Chinese company Huawei.

In somewhat better news for world trade, Washington was reported to have deferred for up to six months a decision to impose tariffs on cars and car parts from the EU and Japan.

Monthly data for April cast some doubts on the current strength of the Chinese economy.

What I’ve been following in Australia . . .

What happened:

The RBA released its May 2019 Statement on Monetary Policy1. The central bank’s latest update offered a relatively subdued assessment of current economic conditions, opening by noting ‘Growth in the Australian economy has slowed and inflation remains low. Subdued growth in household income and the adjustment in the housing market are affecting consumer spending and residential construction.’ Continuing in this vein, the RBA also noted that ‘the March quarter inflation data suggest that domestic price pressures are more subdued than previously thought.’ But consistent with its previous commentary, it also emphasised that ‘the labour market is performing reasonably well.’

Most attention focused on the RBA’s revised forecasts, which delivered a raft of downgrades relative to February’s Statement:

RBA forecasts

The RBA thinks the near-term outlook now looks considerably softer than it did back at the time of February’s Statement. In particular, it has lowered its forecasts for growth in wages and real household disposable income, and as a result expects household consumption growth to be appreciably weaker across both this year and 2020. Dwelling investment too is expected to be a greater headwind this year than was anticipated back in February. As a result, the RBA sees real GDP growth slowing to just 1.75 per cent over the year by June instead of the previous projection of 2.5 per cent growth, and overall growth in 2019 is only expected to average two per cent, down from the previous forecast for 2.75 per cent growth.

Back at the time of the November 2018 Statement, the RBA had been expecting the economy to be expanding at an annual rate of 3.2 per cent by June this year, so over the past six months or so the RBA has downgraded its growth forecast by almost one and half percentage points. That’s a sizeable drop.

The low inflation outcome for the March quarter – where the RBA highlights the contribution of the weak housing market (rents and new dwelling purchases by owner-occupiers are the two largest housing components of the CPI and together account for one-sixth of the total basket) – is also reflected in the new projections. In particular, the RBA now thinks that underlying inflation as measured by the trimmed mean will end the year at below two per cent and will only be a little above two per cent by early 2021. The rise in oil prices over recent months has produced an upward revision to the short-term outlook for headline inflation, but once again the rate is not expected to move much above two per cent.

There are also a couple of areas where outcomes have surprised to the upside. For example, commodity prices have been higher than expected, and as a result the RBA has pushed up its forecast for the terms of trade, where it notes that the increase has been ‘larger and more persistent than had been anticipated and is expected to provide a significant boost to national income over the forecast period.’ Non-mining business investment growth also performed better than the RBA had anticipated last year, while growth in public demand over 2018 was much stronger than forecast (up 6.3 per cent over the year in the final quarter against a February forecast for 4.2 per cent growth). According to May’s Statement, the central bank now expects continued growth in investment over the next couple of years, with a ‘solid pipeline’ of private infrastructure and building work, along with a large pipeline of public infrastructure projects.

Why it matters:

After the RBA left rates unchanged at its meeting on 7 May despite a very low first quarter inflation number, central bank watchers had looked to May’s Statement for an update on how the RBA’s thinking might be changing. In the event, the significant downgrades to the growth and inflation forecasts outlined above confirm that the RBA is in broad agreement with the consensus view that the economy is now appreciably weaker than it was a year ago (even though it’s still more optimistic than the market consensus). And remember, the RBA makes these forecasts conditional on the technical assumption that the cash rate will move in line with market pricing. In other words, this soft outlook for growth and inflation is one that already incorporates a forecast of two 25 basis point cuts over the coming year.

The main narrative of the Statement continues to be largely in line with the RBA’s long-running view assigning a central role to the uncertainties around the outlook for household consumption. Key factors here include households’ views about the likely persistence of low income growth (it continues to hope that tighter labour market conditions – plus some support from tax policy – will allow a modest pick up in growth in real disposable incomes), the impact of housing market developments (the RBA thinks that the deterioration in the housing market will continue to weigh on consumption over coming quarters, while flagging any further sizeable falls in prices will inject additional weakness to the consumption profile), and the high level of household debt. No surprise, then, that the message that ‘the Board will be paying closer attention to developments in the labour market’ gets another run out.

One important adjustment to that now-familiar story, however, is a nod to the possibility that the equilibrium level of unemployment may be lower than the RBA’s previous estimates: ‘the ongoing subdued rate of inflation suggests that a lower rate of unemployment is achievable while also having inflation consistent with the target.’ Reworded slightly, that implies that for the bank to hit its inflation target, unemployment will have to fall below its current rate of five per cent (or if that’s not quite the case, then at least the underemployment – and therefore underutilisation – rate will have to fall).

Finally, it’s worth noting that the RBA’s new forecasts also paint a somewhat weaker picture of the economy than the Treasury forecasts that underpinned April’s budget (and that were reaffirmed in the recent Pre-election Economic and Fiscal Outlook). For example, while Treasury sees household consumption growing at 2.75 per cent over 2019-20, the RBA puts likely growth a bit lower at 2.5 per cent. Among other factors, that reflects a softer outlook for wage growth (Treasury has the wage price index growing at 3.25 per cent by 2020-21 while the RBA forecasts don’t see wage growth getting much above 2.6 per cent across the whole forecast period) and household consumption (which Treasury has growing at three per cent by 2020-21 while the RBA thinks the growth number will continue to have a two in front of it by June 2021).

Real GDP forecast compared

What happened:

The value of lending commitments to households in March fell 3.7 per cent over the month (seasonally adjusted) and dropped 16.2 per cent over the year. Lending to households for dwellings excluding refinancing fell 3.2 per cent over the month and 18.4 per cent over the year.

Lending to households for dwellings

Why it matters:

February had seen a surprise monthly bounce in lending to households for dwellings excluding refinancing, which along with some other recent readings (auction clearance rates, a decline in the pace of monthly price falls) had been seen – albeit rather tentatively – as a potential indicator of some early stabilisation in the housing market. The March numbers, however, show continued large falls in the value of lending for both owner occupiers and investors, suggesting we’re not out of the woods yet.

Lending to households for dwellings

What happened:

According to the NAB monthly business survey, business conditions fell by 4.1 points in April, more than unwinding the increase seen in March. That leaves trend business conditions a little below average but still in positive territory. Notably, all business conditions components saw a decline in April, including a particularly sharp drop in the employment sub-index.

NAB business conditions and confidence

The business confidence index increased by one point in April but remains around neutral (balanced between improving and deteriorating confidence) and below its long-run average.

Why it matters:

With the RBA still signalling the importance of the labour market, the drop in the employment component of the business conditions index was a key takeaway from the April result. According to NAB economists, based on historical relationships the current value of the employment index is consistent with employment growth of around 14,000 per month. If realised, that would be significantly weaker than the average monthly performance over the past quarter, or indeed the past year.

What happened:

The Westpac-Melbourne Institute Index of consumer sentiment (pdf) rose 0.6 per cent to 101.3 in May from 100.7 in April. The index fell by 0.5 per cent relative to May 2017 but has now been above 100 for ten of the last 12 months, indicating that optimists continue to outnumber pessimists, and is close to its long run average (101.5).

Westpac Melbourne institute consumer index

The Unemployment Expectations Index recorded a 5.1 per cent decline in May and is back near recent lows, indicating that fewer consumers now expect unemployment to increase over the year ahead, while the Index of House Price Expectations fell 6.5 per cent, partially reversing a surprisingly strong 11.9 per cent increase in April.

Why it matters:

Given that an uncertain outlook for household consumption has been cited by the RBA as one of the key risks to its growth projections, it’s useful to keep an eye on consumer sentiment. While the headline number remained in positive territory again this month, the component indices painted a bit more of a mixed picture. So, while there were gains in the sub-indices tracking family ‘finances vs a year ago’ and ‘economic outlook, next 12 months’ there were also falls in ‘family finances next 12 months’ and ‘economic outlook, next five years’. The sub-index ‘time to buy a major household item’ was up 0.3 per cent over the month but down 4.5 per cent over the year, consistent with the relatively weak reading on first quarter retail trade volumes reported in the previous Weekly.

What happened:

The seasonally adjusted Wage Price Index (WPI) rose 0.5 per cent in the March quarter and was up 2.3 per cent over the year, according to the ABS. Quarterly growth was just below expectations (which had been for a 0.6 per cent print) while annual growth was in line with the consensus forecast.

Wage Price Index

Private sector growth was up 0.5 per cent over the quarter in seasonally adjusted terms and rose by 2.4 per cent over the year, catching up with the annual rate of growth of public sector wage increases (which was up 0.4 per cent over the month and 2.4 per cent over the year)2.

Why it matters:

With headline wage growth unchanged in annual terms, the story of a slow wage growth economy remains intact, despite what had been strong employment growth and a relatively low level of unemployment over the first quarter of this year.

Private sector wage growth continues to grind its way up from the lows of mid-2017. And as headline inflation dropped to just 1.3 per cent in the first quarter, the March WPI reading implies real wage growth is currently running at around one per cent (or a bit lower if core inflation is used), which is its fastest rate since the June quarter of 2016.

As noted above, the RBA’s (downwardly) revised forecasts now expect annual wage growth to hit 2.4 per cent by June 2019. This quarter’s numbers do suggest that this modest outcome could be within reach, but it’s worth remembering that we’ve now had 2.3 per cent growth for the WPI for three consecutive quarters. We need to go back to the final quarter of 2014 to find the last time the economy recorded a faster rate of wage increase.

What happened:

Australia’s unemployment rate rose to 5.2 per cent in April (on a seasonally adjusted basis), while the March unemployment rate was revised up to 5.1 per cent from five per cent. Markets had been expecting the unemployment rate to stay at five per cent. The underemployment rate also increased in April, rising to 8.5 per cent from 8.2 per cent in March, taking the underutilisation rate up to 13.7 per cent from 13.3 per cent.

Unemployment and underemployment

Across Australia, the unemployment rate was up over the month in New South Wales, Victoria, South Australia, Western Australia and Tasmania, while Queensland saw a decline.

Unemployment rate by senate

Seasonally adjusted employment increased by 28,400 persons in April 2019, comfortably beating market expectations of a 15,000 gain. The number of persons in full-time employment fell by 6,300 but this was more than offset by an increase of 34,700 persons in part-time employment. Over the past year full-time employment has increased by more than 248,000 persons while part-time employment is up by almost 75,000.

Change in employment

Across the States, employment was up in New South Wales by more than 25,000 persons, in Western Australia by more than 6,000 and Queensland by more than 5,000. The only decrease was in Victoria (down 7,600 persons).

Nationwide, the participation rate increased, rising to 65.8 per cent, the (joint) highest level recorded this century.

Why it matters:

Given the centrality of the labour market to the RBA’s thinking, the rise in the unemployment rate in April to its highest level since August last year (along with the upward revision to March) was the big news this month. Granted, in trend terms (which the ABS reckons smooths the more volatile seasonally adjusted elements and therefore provides the ‘best measure of the underlying behaviour of the labour market’) the April reading was unchanged from March at 5.1 per cent. But either way, a look at the recent monthly unemployment results is hard to reconcile with the RBA’s search for an improvement in the labour market, especially once the increase in underemployment is also considered. That certainly seems to have been the market reaction, with the Australian dollar dipping below US$0.69 shortly after the labour market data were released.

Recent trends in unemployment rate

For those looking for better news, the data on jobs growth and the high level of the participation rate both offer a rather more positive perspective on the labour market. But it’s that rise in the unemployment rate that will grab most of the attention.

. . . and what I’ve been following in the global economy

What happened:

After Washington had followed through on its threat to increase tariffs on US$200 billion of Chinese imports on 10 May, Beijing responded on 14 May by announcing that it would raise tariffs on US$60 billion of US imports. Later the same day, the US Trade Representative listed a further US$300 billion of Chinese imports that could be subject to 25 per cent tariffs.

Meanwhile, on another front in the geo-economic contest between the two superpowers, President Trump issued an executive order barring US companies from using telecom kit made by firms deemed to pose a national security risk – which has been widely interpreted as paving the way for an effective ban on dealings with China’s Huawei and possibly other Chinese telecommunications companies such as ZTE.

Why it matters:

The escalation in the tariff war between the United States and China triggered a negative reaction across financial markets as share markets fell in both countries on the news of the tariff increases. There now seems to be a rather fascinating game underway. President Trump appears to judge that China is feeling the economic pain of the trade war more than the United States, and therefore that he can ratchet up the pressure on Beijing by making aggressive moves on tariffs, perhaps even by weaponizing the use of twitter to trigger swings in sentiment about China’s vulnerability to trade wars. It turns out that the difficulty with this approach, however, is that this is very much a two-edged sword since the President also appears to treat a strong US stock market as a kind of vote of confidence in his administration’s handling of the economy. So, when tariff increases send the US market tumbling, his instinct is to respond by curbing the aggressive trade rhetoric and playing up the scope for an agreement. At least until the next time.

Beijing faces its own complications in managing the trade war, including the likelihood that it will run out of US trade to target before Washington faces the same constraint – a consequence of the current bilateral trade imbalance. This has left some analysts wondering whether China will look to other avenues to prosecute any future geo-economic tit-for-tat. Back when observers first started worrying about a possible US-China economic confrontation, a favourite candidate for Chinese action was Beijing’s large holdings of US government debt (anyone remember Larry Summers talking about a ‘balance of financial terror’ in the years before the global financial crisis?) That old theory has been taken out for a spin again over the past few weeks, although most analysts seem sceptical of its potential efficacy as a weapon for China.

As of March, China held about US$1.12 trillion of US government debt, making it the largest foreign holder of US government paper, ahead of Japan (with US$1.08 trillion), although its relative importance has been falling for several years now, with its share of total foreign holdings peaking back in 2011.

China's holdings of US Treasury securities

As noted last week, while the elements of a potential short-term compromise between Washington and Beijing are relatively straightforward to identify (if apparently much harder to negotiate, given 11 rounds of trade talks and counting), the longer-term prognosis remains troubling.

What happened:

Press reports indicated that the US administration was planning to defer a decision on whether to impose tariffs on imports of cars and car parts from the EU and Japan. Previously, President Trump had threatened to impose tariffs of up to 25 per cent on the grounds of national security, but Washington is now said to be considering giving Brussels and Tokyo 180 days to agree to a deal limiting or restricting imports into the United States.

Why it matters:

While the delay had still to be formally announced at the time of writing, it seems that Washington is deciding to focus on one trade war for now, rather than ramping up the conflict on other fronts. Unfortunately, the news is about a delay to the policy rather than a reversal. So, while President Trump may have avoided adding another straw to the camel’s back this week, this is only qualified good news for world trade and globalisation more generally.

What happened:

According to China’s National Bureau of Statistics, nominal retail sales grew at 7.2 per cent over the year to April. That was their slowest rate of increase in nearly 16 years and came in below consensus forecasts for growth closer to nine per cent. Growth in industrial production fell to 5.4 per cent in the same month, down from more than eight per cent in March and below market expectations for a 6.5 per cent print. And cumulative fixed asset investment also experienced a decline in the pace of growth, growing at an annual rate of 6.1 per cent over the first four months of the year compared to a 6.3 per cent result for the first quarter and a consensus forecast of 6.4 per cent.

Monthly activity indicators

Why it matters:

With three key data releases all coming in below expectations, April’s ‘data dump’ suggests that the impact of Beijing’s earlier efforts at stimulating the Chinese economy may have started to wane. And that’s before the impact of the latest round of US tariffs has been felt. That said, some China watchers have cautioned against reading too much into April’s numbers, pointing to several one-off factors that could have distorted the data, including the introduction of VAT cuts in April (which may have encouraged businesses to font-load purchases to March in order to benefit from higher input tax deductions) and longer public holidays from 1 – 4 May (which saw Beijing increase the number of working days in April and which may have seen consumer spending delayed until this month).

What I’ve been reading: articles and essays

ANZ’s bluenotes series on the appearance of green shoots in the Australian housing market. ANZ expects nationwide house prices to fall a further five per cent this year before stabilising in 2020.

According to CommSec’s latest ‘State of the States’ report, Victoria and NSW currently share the title of best performing state economy, with the ACT in joint third spot with Tasmania.

In previous editions of the Weekly I’ve noted the big drop in government bond yields and the rise in the value of debt carrying negative rates. There’s a nice Box in the RBA’s May Statement that reviews some of the reasons as to why long-term bond yields are so low: very low expectations about future central bank policy rates reflecting falls in estimates of the neutral rate; entrenched low inflationary expectations; and unusually low term premia are identified as the leading culprits.

I’ve also referred to the global economic policy uncertainty index a few times here in the Weekly and in some of my presentations. This Voxeu column argues that the sharp increase in policy uncertainty seen over the first quarter could be enough to trim up to half a percentage point from global growth this year. Blanchard and Summers ask whether the future of macroeconomic policy will be characterised by evolution or revolution. They reckon that the current economic conjuncture of low (neutral) interest rates, the re-emergence of fiscal policy as a tool for economic stabilisation, the difficulties central banks now face in hitting their inflation targets, and the financial ramifications of a low interest rate environment will prompt big changes in policy.

Related, Barry Eichengreen on the return of fiscal policy. Eichengreen starts from the apparently irreconcilable worldviews of Thomas Piketty’s r > g and Olivier Blanchard’s r < g before explaining that the two economists are talking about two different interest rates, separated by the risk premium. But his main point is the increasingly common refrain that in the future we will have to rely more on fiscal policy and less on monetary policy to deliver stable growth.

The FT’s Gideon Rachman with an interesting take on what he sees as the mirror-image positions of Beijing and Washington: Beijing seeks to transform the world’s strategic order and wants to retain the current international economic order to help it do so, while Washington wants to preserve the prevailing strategic order and to that end wants to revise the current economic order.

Conventional economic wisdom is that US consumers have borne the brunt of the current trade war, with higher tariffs on Chinese products largely passed through as increases in US prices. One estimate is that tariffs have reduced real incomes by about US$1.4 billion per month, while another study puts the projected decline in US real income at around US$7.8 billion per year. Tyler Cowen has a slightly different view. While he doesn’t dispute the view that tariffs have produced higher prices for US consumers, he thinks that in the longer run China might end up suffering larger costs than the United States via damage to its export and investment competitiveness relative to neighbouring economies.

The Economist on the brains behind Corbynomics. This piece canvasses ‘the assumption that Britain has once again become a political laboratory, as it was in 1979 when Thatcher began to transform the state.’ Since it turns out that a chunk of the funding for some of the left wing think tanks carrying out this work is coming from the Buffett family, the Economist helpfully points out that ‘the seed capital of modern British socialism is being indirectly provided by the godfather of American capitalism.’ Which would seem to make for an interesting start up proposition.

Finally, a list of the top 100 economics blogs of 2019 (found via Marginal Revolution, which is ranked in the number one spot for general economics blogs).

1 Yes, the Statement came out the week before last, but I did promise to cover it this week.

2 Readers may wonder how 2.4 per cent annual growth in both public and private sector wages can produce a 2.3 per cent headline rate. The answer, according to the ABS, is that the published index numbers are all rounded to one decimal place, and the percentage changes (themselves rounded to one decimal place) are calculated from those same rounded numbers. In some cases ‘this can result in the percentage change for the total level of a group of indexes being outside the range of the percentage changes for the component level indexes.’

The Economic Weekly (week starting 13 May 2019)

Despite much speculation to the contrary, the RBA decided to leave the cash rate unchanged after its 7 May meeting.

Australia’s retail trade in March was up 0.3 per cent over the month and 3.5 per cent over the year, but in volume terms growth in the March quarter overall was disappointing.

Australia recorded another big monthly trade surplus in March, contributing to a record result for the first quarter of this year.

The Australian dollar has been testing the US$0.70 ‘floor’ that has applied for the past couple of years.

Washington has threatened to impose additional tariffs on imports from China after complaining that Beijing was retreating from earlier commitments made in US-China trade negotiations.

What I’ve been following in Australia . . .

What happened:

The RBA left the cash rate unchanged at 1.5 per cent for a 30th consecutive meeting.

The central bank also flagged its forecasts for growth and inflation. The RBA now expects the Australian economy to grow by around 2.75 per cent in 2019 and 2020 under its central scenario. Unemployment is projected to remain around five per cent for the next year or so, before ‘declining a little’ to 4.75 per cent in 2021. And underlying inflation is expected to be 1.75 per cent this year, two per cent in 2020 and ‘a little higher’ after that, with headline inflation put at around two per cent this year.

Why it matters:

It’s been a long time since the run-up to an RBA Board meeting generated quite the amount of excitement that the 7 May meeting did. After all, the last time the central bank moved on interest rates was all the way back in August 2016, before the current governor was even appointed (in September that year). But as noted in the previous Weekly, the very low inflation outcome for the first quarter of this year had convinced RBA watchers that May’s meeting was a ‘live’ one.

In the event, the RBA stood still. Doing so was consistent with its view – expressed most recently in the minutes to the April meeting discussed (also discussed in the previous Weekly) – that it would need to see a deterioration in labour market conditions to trigger a rate cut.

What the RBA did do, however, was to move on the preconditions for a rate cut. The latest statement concedes that the ‘inflation data for the March quarter were noticeably lower than expected and suggest subdued inflationary pressures across much of the economy.’ And it then goes on to note that while the Board judged it was appropriate to leave policy unchanged in May, ‘it recognised that there was still spare capacity in the economy and that a further improvement in the labour market was likely to be needed for inflation to be consistent with the target’. That suggests that while labour market developments will continue to be critical in determining the RBA’s next move, the bar for a future rate cut has now been lowered: whereas before the RBA reckoned that a deterioration in the labour market was a precondition for a change in policy, it now appears to be signalling that the absence of a continued improvement in conditions will be a sufficient trigger.

The RBA also outlined its forecasts ahead of the release of the Statement on Monetary Policy on 10 May. Back in February’s Statement, the RBA reckoned that underlying inflation (as measured by the trimmed mean) would end 2019 at two per cent and rise to 2.25 per cent by December 2020. The new numbers seem to imply a weaker trajectory. Moreover, despite highlighting the need for an improvement in the labour market to keep inflation in line with the RBA’s target, the forecasts suggest that unemployment will remain unchanged this year and ease only slightly by 2021. Several commentators have highlighted this apparent inconsistency, and it will be interesting to see whether the upcoming May Statement brings a bit more clarity.1

The RBA’s decision may also prompt another round of discussions as to the appropriateness of the current monetary policy framework. Over the past quarter century or so, it’s fair to say that inflation targeting has served Australia well relative to previous monetary regimes. But the current bout of lowflation – which has left inflation below target for a prolonged period – arguably poses a growing challenge to the regime’s credibility (a problem that is not just restricted to Australia and the RBA, but which also applies to other inflation targeting central banks). One option that has been canvassed is a change to the inflation target itself (it’s possible to find advocates for both higher and lower inflation targets in this debate), while another is a shift to a different regime, such as nominal income targeting. No such change is likely to be imminent, but the longer inflation remains below target, the more pointed such debates are likely to become.

What happened:

Retail trade rose 0.3 per cent in March (seasonally adjusted) and was up 3.5 per cent over the year. That was slightly better than consensus expectations for a 0.2 per cent monthly rise.

Retail trade

Retail trade volumes for the March quarter were down 0.1 per cent, following a flat result in the December quarter, and up only 1.1 per cent over the year.

Retail trade volumes

Why it matters:

While the monthly outcome for March may have been slightly better than consensus expectations, the weak quarterly volume number received the lion’s share of attention, implying as it does another muted contribution from household consumption to the upcoming March quarter GDP. That would follow on from a soft Q4:2018 reading and would therefore be consistent with a continuation of the story of weak growth in disposable income constraining household spending.

What happened:

Australia recorded a $4.9 billion trade surplus in March, following on from a (revised) record $5.1 billion surplus in February. That implies an impressive cumulative total trade surplus of $14.7 billion for the first quarter of this year (or closer to $14.2 billion once quarterly seasonal adjustments have been applied).

Trade balance

Exports fell two per cent over the month (largely driven by a big drop in non-monetary gold but also reflecting a decline in iron ore exports due to weather-related disruption) while imports dropped by one per cent. In annual terms, exports rose by almost 12 per cent relative to March 2018 while import growth was closer to one per cent.

Why it matters:

Australia continues to enjoy a strong international trade performance, with the preliminary estimate of a Q1:2019 trade surplus of more than $14 billion representing a marked increase on what was already a sizeable surplus in the final quarter of last year. That also suggests we should expect a decent contribution from net exports to first quarter GDP growth. While the overall story may be positive, however, the detail around the monthly drop in imports is rather less welcome, with the fall in imports of consumption goods (down more than three per cent over the month and one per cent over the year) providing another indicator of continued weakness in domestic demand.

What happened:

Over the past week or so, the Australian dollar has been pushing below US$0.70, which has served as something of a floor to the exchange rate since January 2016.

AUD - US dollar exchange rate

Why it matters:

There’s a strong case to be made that Australia’s flexible exchange rate has been one of the key contributors to our current run of recession-free growth (now at 110 quarters and counting). By acting as a shock absorber, movements in the dollar have helped offset a series of major economic shocks. During the resources boom, for example, a sustained real exchange rate appreciation helped the economy avoid overheating and a potentially destabilising inflationary outbreak. Then, once commodity prices had started falling, a real depreciation boosted the relative competitiveness of the Australian non-resource export sector and provided a new source of growth.2

Exchange rate and the terms of trade

In many ways, we might expect the current period to be another one of real depreciation (and as the chart above shows, to some extent that has indeed been the case). But it’s also true that the Australian dollar has been subject to several offsetting forces over the past year.

So, on the one hand, a widening interest rate differential with the United States, market expectations of additional RBA cuts to the cash rate (which would make the current rate gap even larger), soft economic growth readings, falling house prices and on again, off again fears about US-China trade wars would all be expected to place the currency under downward pressure.

RBA cash rate vs Funds rate

On the other hand, there are several forces that have been pushing in the opposite direction. High commodity prices and hence relatively robust terms of trade, for example.

The dollar and commodity prices

Likewise, a series of sizeable trade surpluses have contributed to a marked narrowing of the current account deficit and a consequent decline in the need for external financing that should, all else equal, imply a stronger exchange rate.

Current account balance Australia

These two sets of offsetting factors have meant that the slide in the Australian dollar that began around February 2018 lost momentum towards the end of last year. If that earlier downward move were to now resume, that would be helpful for the economy (and the RBA) on two fronts.

First, a lower dollar would offer additional support both to exports and to overall growth. In the past, the RBA has estimated that a ten per cent depreciation in the real exchange rate works to increase export volumes by around three per cent and to decrease import volumes by about four per cent, together implying a cumulative boost to GDP of around 1.5 percentage points over a two year period. Exports of manufactures and services would benefit the most, while resource exports would receive a smaller lift and rural exports would be largely unaffected.

Second, a weaker dollar would also inject some life into tradables inflation by boosting the price of imports and hence help move headline inflation closer to the RBA’s inflation target.

. . . and what I’ve been following in the global economy

What happened:

After a period of optimism about the outcome of US-China trade talks, the mood soured again this week. On 5 May, President Trump tweeted that the United States would not only implement its postponed increase in tariffs from 10 per cent to 25 per cent on US$200 billion of Chinese imports on Friday 10 May, but that he would also consider imposing 25 per cent tariffs on the remaining US$325 billion of Chinese imports. Trump’s intervention was followed the next day by more formal comments from US trade representative Robert Lighthizer and US Treasury secretary Steve Mnuchin confirming that Washington was indeed planning to implement the proposed tariff hike from ten to 25 per cent, with Mr Lighthizer describing China as ‘reneging on prior commitments.’ (See this Reuters piece for details on China’s supposed change in approach, which reportedly included revisions to its position on intellectual property, technology transfers, competition policy, access to financial services, and currency manipulation). For its part, Beijing has threatened to retaliate with ‘necessary countermeasures’ if US tariff increases go ahead.

Why it matters:

Over the past few weeks, markets had become increasingly confident that Beijing and Washington were close to reaching an agreement over their long-running trade dispute. The abrupt shift in tone has undermined that complacency and sent global economy watchers back to worrying about trade wars.

In fact, it’s always been quite hard to see a good outcome to this. First, as noted here before, it’s difficult to see a lasting resolution to what appear to be the fundamental issues between China and the United States. Sure, it should in theory be possible to stitch together a deal whereby China agrees to buy more US goods and services, tightens domestic rules on intellectual property and allows increased investment that would collectively be enough for President Trump to declare a victory. And that’s pretty much what markets have been assuming will happen. But to the extent that what Washington is really targeting is the Chinese growth model itself, along with China’s geo-economic rise more broadly, it’s much harder to envision a permanent solution. In that context, and absent a very big shift in position in one or both capitals, the best that we can hope for is a short-term agreement that delivers what would basically be a temporary ceasefire.

Granted, that would still deliver some short-term upside by reducing the trade policy uncertainty currently roiling financial markets. Yet even that kind of deal would arguably be problematic for the overall health of the global trading system, since it would indicate that two of the world’s major trading powers were now choosing to settle trade issues outside of the multilateral system, even to the extent of creating new (extra-WTO) monitoring and enforcement mechanisms.

Finally, it's worth noting that if the United States did choose to implement both sets of threatened new tariffs, economists at Deutsche Bank have calculated that this would take the average US tariff rate up to 7.5 per cent. That would make the United States an outlier across developed economies in terms of the level of applied trade protection, leaving it with tariff barriers higher than those that now apply in many emerging and developing economies.

What I’ve been reading: articles and essays

From August last year, the RBA’S Guy Debelle describes some of the factors behind low inflation (in fact, the headline rate was – unusually for recent years – just above the bottom of the RBA’s target band at the time of his speech). Rather than looking at macro drivers, Debelle looks at changing price dynamics at a more disaggregated level. He highlights competition in the retail sector, the impact of technological change on the prices of audio, visual and computing equipment (adjusted for quality change), historically low increases in rents, low wage growth and slower growth in some administered prices as key drivers of recent low inflation outcomes.

Also from last year, Warwick McKibbin and Augustus Panton from the ANU’s Centre of Applied Macroeconomic Analysis (CAMA) provide an evaluation of the RBA’s inflation targeting regime, which has served as the framework for Australian monetary policy since around 1993. They conclude that the ‘flexible inflation targeting regime followed by the RBA has clearly outperformed the alternative monetary frameworks . . . that had been implemented in earlier decades’ but argue that a change to a nominal income growth targeting framework may be warranted. In their view, supply shocks in the form of climate policy, climate shocks, technological disruption and structural change in the global economy are likely to become more important in the future, and this shift will increase the case for a change in monetary policy regime.

The FT’s Martin Wolf looks at how our low inflation world was made. He divides the last two decades into two periods: ‘pre-crisis secular stagnation’ characterised by low and falling real interest rates and destabilising property and credit bubbles; and ‘post-crisis secular stagnation’ characterised by near-zero real interest rates, partial deleveraging, weak growth and pervasive populist policies.

A new IMF working paper examines the vulnerability of Asian corporates to any tightening in global financial conditions. The authors find that higher global interest rates and home currency depreciation increase the probability of default, with a 30 per cent currency depreciation associated with a two-notch downgrade in the corporate credit rating.

The Conference Board has released its latest estimates of global productivity growth. It calculates that global growth in output per worker was 1.9 per cent in 2018, compared to two per cent in 2017. That means that the trend decline in global productivity growth – which had slowed from an average annual rate of 2.9 per cent between 2000 and 2007 to 2.3 per cent between 2010 and 2017 – has continued. The Conference Board notes that the ‘long-awaited productivity effects from digital transformation are still too small to see reflected in a lasting improvement at the macroeconomic level.’ The Board also released productivity estimates for 123 countries, including Australia, where growth in GDP per person employed is estimated to have fallen from 1.4 per cent over 2000-07 to 1.1 per cent over 2010-2017 and to 0.8 per cent last year (up from no change in 2017). GDP per hour worked in Australia is estimated to have been about 82 per cent of US levels in 2018, putting us 15th out of the 40 so-called ‘mature economies’ ranked.3 

Harold James on why historians may be more dangerous than economists. After the global financial crisis, ‘the sheer depth of political and economic uncertainty turned historians into pundits whose critiques of conventional social science are overly biased toward random pet narratives.’

Peter Egger and Katharina Erhardt propose that traditional trade models may severely underestimate the impact of recent tariff increases.

Tyler Cowen argues that ‘the basic view that big business is pulling the strings in Washington is one of the major myths of our time.’ Cowen reckons that ‘there is plenty of crony capitalism in the United States today’, but emphasises that across a range of areas what the US government is actually delivering is quite different from what US corporate leaders would prefer to see.

Finally, I haven’t had a chance to dig into any of the contents yet, but the latest edition of the Journal of Economic Perspectives includes a symposia on automation and employment and a series of essays on fiscal policy that are now on my ‘should read’ list.

1 The plan is to look at the May Statement in the next Weekly.

2 Bilateral exchange rates (such as the exchange rate between the Australian and US dollars) are the most commonly quoted exchange rates. The RBA also constructs a trade-weighted index (TWI) which captures the price of the Australian dollar in terms of a weighted average of the currencies of our major trading partners. Real exchange rates account for differences in price movements across countries. The real TWI, for example, is the (nominal) TWI multiplied by the ratio of Australian prices to prices in our trading partners. Real exchange rates are typically seen as a better measure of competitiveness than nominal exchange rates and are driven by the combined impact of changes in nominal exchange rates and changes in relative rates of inflation. In the case of Australia, changes in the nominal rate tend to be a major driver of changes in the real rate. There’s a good RBA explainer available.

3 The Conference Board data on cross-country productivity are based on purchasing power parity (PPP) conversions. That has implications for the estimated level of productivity (for example, it means that the Conference Board’s number for the level of Australian productivity is lower than that implied by ABS statistics. Other methodological differences (e.g. in measuring capital and labour inputs) mean that there are also differences between these growth estimates and those produced by the ABS.

The Economic Weekly (week starting 6 May 2019)

As this is the first Weekly following a short break, it looks back at a few key data releases from the holiday period.

The latest set of RBA minutes reported that members did not see a strong case for a near-term adjustment in monetary policy, viewed inflation as ‘likely to remain low for some time’ and agreed that a trend rise in unemployment would warrant a cut in the cash rate.

Australia’s unemployment rate ticked back up to five per cent in March from 4.9 per cent in February, but employment increased by almost 26,000 persons over the month.

Australia’s consumer price index (CPI) in March was unchanged over the previous quarter and up just 1.3 per cent over the year. The surprisingly weak reading prompted a jump in market (and economist) expectations for a cut to the cash rate on 7 May.

Australian house prices fell again in April, although the pace of decline continues to ease.

First quarter GDP readings from China, the United States and the euro area were all somewhat stronger than had been expected.

The US Federal Reserve left rates unchanged at its May meeting and – despite some public encouragement from President Trump to loosen policy – signalled that no change to its current stance was imminent.

What I’ve been following in Australia . . .

What happened:

The RBA published the minutes for the 2 April monetary policy meeting.

Members saw the ‘central scenario was for further gradual progress to be made on both unemployment and inflation . . . [and] agreed that there was not a strong case for a near-term adjustment in monetary policy.’ In addition, they ‘agreed that inflation was likely to remain low for some time . . . In these circumstances, members agreed that the likelihood of a scenario where the cash rate would need to be increased in the near term was low.’

They also ‘discussed the scenario where inflation did not move any higher and unemployment trended up, noting that a decrease in the cash rate would likely be appropriate in these circumstances.’

Finally, the minutes reported an interesting discussion on funding availability for Australian businesses. For larger enterprises, the conclusion was that conditions were ‘accommodative’, with three-year corporate bond yields at record lows and ‘robust’ bank lending to (large) businesses. At the same time, however, ‘credit conditions for some small businesses were reported to have tightened further.’

Why it matters:

The RBA’s messaging continues to be broadly consistent with its previous commentary, with a bias towards no near-term shift in the policy stance combined with a recognition that any significant deterioration in labour market conditions would nevertheless be likely to warrant a cut in the cash rate. The RBA also signalled that it seems to be reconciled to a sustained period of low inflation, and that this alone is unlikely to be enough to trigger a policy response. That said, the discussion was centred around a situation in which ‘inflation did not move any higher’, which arguably left scope for any shift to an even lower inflation profile to change the picture (on which more below).

The minutes also touched on the debate as to the likely efficacy of any additional cuts to the cash rate given that the latter is already at a record low. Here, the view was cautiously optimistic, as although members accepted ‘that the effect on the economy of lower interest rates could be expected to be smaller than in the past, given the high level of household debt and the adjustment that was occurring in housing markets’, they also judged that ‘a lower level of interest rates could still be expected to support the economy through a depreciation of the exchange rate and by reducing required interest payments on borrowing, freeing up cash for other expenditure.’ Related, members noted that ‘the major banks’ funding costs had declined over the preceding couple of months’, which, all else equal, should increase the scope for banks to pass on a greater share of any cut to the policy rate. That said, it’s also worth remembering that the impact from any rate cut now would also have to push against the current tightening in lending standards.

What happened:

Monthly employment increased by 25,700 persons (seasonally adjusted basis) in March, according to the ABS. Full-time employment increased by 48,300 while part-time employment fell 22,600.

Change in employment

The total gain was significantly greater than consensus expectations for a 15,000 increase in employment. There was also a sizeable upward revision to the February employment numbers, with the estimated increase up to 10,700 from the previous estimate of 4,600.

The unemployment rate rose to five per cent in March, up from 4.9 per cent in February. With the underemployment rate also increasing (to 8.2 per cent from 8.1 per cent), the underutilisation rate climbed to 13.2 per cent.

Unemployment and underemployment

The participation rate increased by 0.1 percentage points to 65.7 per cent and remains close to recent highs, while the employment to population ratio remained unchanged at 62.3 per cent.

Participation rate

Why it matters:

As flagged in the most recent set of RBA minutes, labour market developments are a critical input into the central bank’s thinking on interest rates. In that regard, there was nothing in the March data to advance the case for an imminent rate cut: the unemployment rate continues to hover around the five per cent mark, the economy is still adding jobs at a decent rate, and the participation rate remains high. The main negative signal relates to the high rate of underemployment, which means that the overall underutilisation rate also remains disappointingly high. In turn, that elevated level of labour market slack continues to act as a dampener on wage growth and hence overall inflation.

What happened:

The consumer price index (CPI) recorded no quarterly increase in March (seasonally unadjusted) and was up just 1.3 per cent over the year. Price falls for automotive fuel (down 8.7 per cent due to falls in world oil prices back at the start of this year), domestic holiday, travel and accommodation (down 3.8 per cent) and international holiday, travel and accommodation (down 2.1 per cent) were particularly large over the quarter, offsetting increases in vegetables (up 7.7 per cent), secondary education (up 4.2 per cent), motor vehicles (up 2.4 per cent) and hospital services (up 1.3 per cent).

Consumer prices

Measures of underlying or core inflation were similarly subdued, with the trimmed mean recording a 1.6 per cent increase over the year and the weighted median up 1.2 per cent over the same period1. The average of the two measures was just 1.4 per cent.

Underlying inflation

Why it matters:

March’s inflation print was much weaker than expectations. Consensus forecasts had expected a headline rate of 0.2 per cent over the quarter and 1.5 per cent over the year. Likewise, expectations for core inflation (consensus expected the trimmed mean to be up 1.7 per cent over the year and the weighted median up 1.6 per cent) were also disappointed. With a couple of brief exceptions (in March 2017 and June 2018), the headline inflation has now been stuck below the bottom of the RBA’s target band since December 2014, leaving Australia mired in a period of ‘lowflation.’

The market reaction to all of this has been to bring forward its expectations for a cut in the cash rate. The proposition here is that, although the March labour market results described above may on their own be inconsistent with the RBA’s view that a marked deterioration in unemployment is a necessary precondition for a change in its policy stance, a fall in Australia’s already-subdued inflation profile might be enough to tip the balance. As a result, at the time of writing, market pricing was indicating a decent (roughly 40 per cent) chance of a rate cut at the RBA’s meeting on 7 May.

Policy rates

What happened:

April saw Australian national dwelling values fall by 0.5 per cent over the month and drop by 7.2 per cent over the year. According to CoreLogic, that’s the largest annual fall since February 2009, during the global financial crisis. Nationwide, values are now 7.9 per cent down from their September 2017 peak.

Home value index

Sydney dwelling values were down 10.9 per cent over the year to April, Melbourne values were down ten per cent, Perth down 8.3 per cent, Darwin down 7.1 per cent and Brisbane down 1.9 per cent. Only in Adelaide (+0.3 per cent), Canberra (+2.5 per cent) and Hobart (+3.8 per cent) were values still above their April 2018 levels. On a monthly basis, prices fell across every capital city with the sole exception of Canberra.

Why it matters:

Dwelling values continue to fall, dragging down housing wealth and undermining the health of household balance sheets. Moreover, the geographic scope of that fall appears to be widening. Offsetting that, the pace of decline continues to slow. Since peaking at 1.3 per cent in December last year, the monthly rate of decline in prices across Australia’s capital cities has now eased for four consecutive months.

. . . and what I’ve been following in the global economy

What happened:

First quarter 2019 GDP readings for the ‘big three’ of China, the United States and the euro area all beat expectations.

In the case of China, GDP growth rose at an annual rate of 6.4 per cent in Q1:2019, unchanged from the final quarter of last year and a bit ahead of market expectations for a 6.3 per cent result.

Real GDP growth

Growth in the United States rose by 3.2 per cent (at a seasonally adjusted annualised rate) in the first quarter of this year. That both comfortably beat market expectations for a 2.3 per cent print and represented a substantial increase from the Q4:2018 result of 2.2 per cent.

US Real GDP growth

Finally, real GDP in the euro area in March rose by 0.4 per cent over the previous quarter and was up 1.2 per cent over the year. Again, that beat market expectations of a 0.3 per cent quarterly increase and a 1.1 per cent annual rise.

Euro Real GDP growth

Digging into the aggregate numbers shows that, following two consecutive quarters of negative growth, the Italian economy has moved out of technical recession with GDP up 0.2 per cent over the quarter. France saw real GDP expand 0.3 per cent and Spain by 0.7 per cent over the same period. (German GDP data has not yet been released, but the overall euro area result implies a better outcome than the flat result in Q4 last year which, following on from a contraction in the third quarter, saw Europe’s largest economy narrowly avoid falling into a technical recession.)

Why it matters:

One key theme for the start of this year was that the global economy had entered a soft patch in the second half of 2018 and that this had been sustained into 2019. As noted in previous editions of the Weekly, that in turn has seen a series of international forecasters including the IMF, OECD and the ECB trim their growth forecasts for this year. Given that context, the fact that first quarter GDP outcomes beat expectations across three major economies (albeit with only the US result significantly surprising on the upside) is certainly welcome news. That said, the devil is in the details.

In the case of China, for example, although the first quarter result did surpass market expectations, it still marked the (joint) lowest growth outcome since March 2009, during the depths of the global financial crisis. On the upside, March results for industrial production and retail sales also exceeded expectations alongside GDP growth. But April’s survey results for manufacturing (both the official purchasing managers index and the private Caixin survey) fell back slightly from their previous month’s results, serving to dampen some of the optimism generated by the earlier March readings.

Turning to the United States, there is no doubt that the GDP result was a strong outcome, especially given a backdrop of soft data from the start of the year, a (temporary) inversion of the US treasury yield curve, and the uncertainty caused by ongoing trade disputes with Beijing and Brussels. Even so, some of the details serve to qualify the headline number. A significant part of the strong growth result represented a substantial build-up in inventories, for example, which looks vulnerable to reversal later in the year. At the same time, the US domestic demand story was relatively weak, with soft growth in personal consumption. And markets have also been focussed on another set of weak inflation data (see below).

Meanwhile, other US data continue to paint a similarly mixed picture: for example, according to the Institute for Supply Management (ISM), the US manufacturing sector grew at its slowest pace in more than two years in April. On the other hand, numbers from payroll processor ADP showed US private employers adding 275,000 jobs in the same month, marking the biggest monthly increase since July 2018.

Finally, in the case of the euro area, the decent quarterly GDP result stands in marked contrast to a series of disappointing survey results over past couple of months. Most recently, for example, economic sentiment in April slipped to its lowest level in more than two years while industrial confidence in the same month dropped to a five-year low, suggesting that the euro area economy may not be out of the woods yet.

What happened:

The US Federal Reserve left the target range for the fed funds rate unchanged at 2.25-2.5 per cent after its 1 May meeting. According to the accompanying statement, the Federal Open Market Committee (FOMC) ‘continues to view sustained expansion of economic activity, strong labour market conditions, and inflation near the Committee’s symmetric two per cent objective as the most likely outcomes.’ And once again, the FOMC stressed that it will be ‘patient’ in assessing any future adjustment to policy, with Chairman Jay Powell saying that he saw no immediate need to move rates in either direction.

The FOMC also announced ‘a small technical adjustment’ to the rate of interest paid on required and excess reserve balances.

Why it matters:

While the Fed had been expected to leave rates unchanged this month, financial markets have been betting that the central bank will still be forced to ease policy at some stage this year. Despite the strong Q1 GDP number discussed above, that view was reinforced by another weak inflation reading last month which saw the Fred’s preferred measure of inflation – the core personal consumption expenditures (PCE) price index – rise at just 1.6 per cent over the year in March, down from 1.7 per cent in February. That was the slowest rate of increase since January 2018 and once again left inflation below the Fed’s two per cent target.

US inflation

With President Trump also putting the Fed under an unusual amount of public pressure in recent weeks to cut rates and restart quantitative easing, Fed watchers had been looking for any sign this month that the central bank was starting to move away from its ‘patient’ approach. No such sign was forthcoming, however, with the FOMC statement pointing out that ‘economic activity rose at a solid rate’ since the last meeting. The closest the text came to flagging any change in position was an acknowledgment that ‘overall inflation and inflation for items other than food and energy have declined and are running below two per cent.’ The RBA is not alone in struggling with lowflation.

What I’ve been reading: articles and essays

The Grattan Institute’s Commonwealth Orange Book, which sets out their suggested policy priorities for the winner of the upcoming Federal Election, including a scorecard (pdf) showing how Australia rates against a set of its peers across metrics including energy, health, education, economic development and budget policy. There are too many proposals to summarise here, but as a flavour, the recommendations on tax include: reducing the capital gains tax discount to 25 per cent, limiting negative gearing, increasing the tax on super earnings in the pension phase to 15 per cent, broadening the GST base and/or increasing the rate, introducing investment allowances or accelerated depreciation on new investment to lower effective company tax rates, and encouraging the states to replace stamp duties with general property taxes.

The ABS’s updated historical statistics on Australia’s population. Compared with the situation at Federation in 1901, Australians today are older2 (the median age has increased from 22 to 37 and the share of the population aged 65 or over has risen from four per cent to 15 per cent), more urban (in 1901 just one in three Australians lived in capital cities, now it is two in three), have fewer children (the fertility rate has fallen from an average of 3.1 babies per woman in 1921 to 1.8 babies today), more likely to be female (the ratio of men to women has fallen from 110:100 to 100:98), and can expect to live longer (life expectancy at birth has increased by around 25 years for males and 26 years for females).

An FT Big Read on Why America is learning to love budget deficits. The Congressional Budget Office’s latest outlook sees US deficits averaging around 4.4 per cent of GDP over 2020-29. That’s well above the past 50-year average of 2.9 per cent of GDP and, if realised, would put US public debt on a trajectory that would eventually see it exceed the record levels set in the immediate aftermath of World War Two. The piece argues that ‘the trend towards looser fiscal policy led by the US marks potentially the greatest change in economic policymaking for a generation.’

Related, and also from the FT, Gavyn Davies on What you need to know about modern monetary theory (MMT). There’s been a spate of pieces on MMT recently, many of them involving prominent US economists dismissing the approach. (I also linked to a similar style piece by Adair Turner a couple of issues ago.) Davies is broadly sympathetic to these mainstream critiques, saying that he tends to agree with the description of MMT as ‘a questionable extension, made by fringe economists, of a doctrine that may be partially true, but only in extreme circumstances.’ But he also concedes that some of MMT’s insights can be relevant to modern economies under certain circumstances.

Uri Dadush and Guntram Wolf think about what life after the multilateral trading system might look like. In their view, it will be a world of power, bilateral agreements and (unenforceable) norms dating back to the era when the WTO still mattered. The power in this world will rest with the big three of the US, EU and China, with smaller nations finding themselves pushed into asymmetric bilateral deals with what are likely to become three major trading blocs.

Daron Acemoglu (among other things, co-author of Why Nations Fail, a paean to the importance of economic and political institutions that is worth a look if you haven’t already come across it) argues that the top priority for policymakers should be creating high-wage jobs, and that this should ‘guide policymakers’ approach to everything from technology, regulation and taxes to education and social programs.’

Indermit Gill at the Brookings Institution suggests that ‘the world’s economic geography is changing in disconcerting ways’. He offers three interesting examples: the southward shift of economic power in India; regional dislocation in the US and UK prompting the rise of ‘Anglo-American populism’; and the expansion of China’s external reach.

Finally, I couldn’t find a transcript for this one, but here’s a video of Ken Rogoff’s recent speech to the G30 asking, Is this the beginning of the end of central bank independence? This makes for interesting viewing in the context of the discussion above on Australian and US inflation. Rogoff argues that central banks around the world are now facing a rising challenge to their independence, due to a combination of sometimes sticking to their inflation targets too rigidly, sometimes taking undeserved credit for good outcomes, the current lack of inflation (in this environment it’s quite a bit harder than it used to be to argue that any erosion in independence will jeopardise price stability), and an apparent lack of effective tools for delivering stimulus when interest rates are approaching the zero bound.

What I’ve been reading: books (NB. This was holiday reading so ymmv even more than usual)

Europe at Dawn, the fourth (and I think final?) volume in Dave Hutchinson’s quite excellent Fractured Europe series.

Holy Sister, the concluding volume in Mark Lawrence’s Book of the Ancestor series. Fun beach reading and a satisfying end to an entertaining trilogy.

The Uninhabitable Earth by David Wallace-Wells. Intentionally apocalyptic.

1 The idea here is that the headline CPI is subject to a degree of short-term volatility (fruit and vegetable prices or fuel prices can move substantially in the short-term due to changes in supply conditions [for example, the 400 per cent rise in banana prices that occurred in mid-2006 due to Cyclone Larry]; a change in tax rates can have a large one-off impact; and changes in administered prices and government policies – such as the introduction of the childcare rebate in 2007 – can also influence the headline rate) that can make it hard to interpret the economic content of quarterly movements in measured inflation. Hence the RBA also looks at several measures of underlying inflation which are designed to be less influenced by short-term volatility. These measures include ‘exclusion-based measures’ (such as the CPI excluding volatile items) and ‘statistical measures’ (such as the trimmed mean and weighted median). The former approach excludes the volatile items of fruit, vegetables and fuel; the latter use statistical adjustments. The trimmed mean is the weighted mean of the central 70 per cent of the quarterly price change distribution of all CPI components; that is, the top and bottom 15 per cent of the distribution are trimmed. Hence it excludes extreme movements in any expenditure class. The weighted median is the inflation rate for that expenditure class which is in the middle of the total distribution of price changes; that is, it trims away all but the midpoint of the distribution so that half the component weights are on one side of the median, and half on the other. It can therefore also be thought of as a 50 per cent trimmed mean. See this explanation from the RBA and for a more recent update on the statistical measures, this helpful overview from the ABS.

2 As of 2016.

The Economic Weekly (week ending 12 April 2019)

Since I spent last week on the road in Queensland, this will be a shorter Weekly than usual. And as I’m just about to head off once more – this time for leave – the Weekly will now be on hiatus for a little while before returning in May.

(As a quick aside: many thanks to the AICD members and guests who gave up their time to come and listen to my presentations – and put up with a lot of PPT slides – over the past week, as well as to the AICD team who pulled the trip together. And, of course, thanks to all of you who have been reading my stuff over the past two months as I’ve been settling in to my new role here and to my AICD colleagues who have been turning my scribblings into publishable content.)

What I’ve been following in Australia . . .

What happened:

According to the ABS, lending to households rose 2.6 per cent in February (seasonally adjusted) over the previous month but was down more than 15 per cent over the year. Lending to households for dwellings (excluding refinancing) rose by 2.7 per cent in February in what was the first monthly increase since July last year, although it was still down more than 18 per cent over February 2018. Lending to both owner-occupiers and investors was up over the month.

Lending to households for dwellings

Why it matters:

While lending for housing was still down sharply over the past year, the small upward bounce in the monthly numbers – together with the declining pace in the fall of house prices noted in the previous Weekly – may indicate that the housing market correction is starting to moderate. Still too soon to tell, of course. But just possibly, some straws in the wind?

What happened:

The Westpac-Melbourne Institute Index of Consumer Sentiment (pdf) rose 1.9 per cent to 100.7 in April.

Westpac-Melbourne Consumer Sentiment Index

Why it matters:

April’s survey was conducted over 1 – 5 April and that timing meant that it captured consumer reactions to the Federal Budget. The latter appears to have had a positive impact on confidence: sentiment among those surveyed post-Budget was 7.7 per cent higher than for those surveyed before the budget. According to Westpac, that’s ‘the most positive turnaround since we began tracking pre and post Budget responses in 2011.’

. . . and what I’ve been following in the global economy

What happened:

The IMF released its April 2019 World Economic Outlook (WEO), describing the global economy as at a ‘delicate moment.’

The Fund has trimmed its growth forecast for this year from the 3.5 per cent it had been expecting in January (and the 3.7 per cent forecast last October) to a more modest 3.3 per cent, while leaving the forecast for 2020 unchanged at 3.6 per cent1. Growth in the advanced economies collectively is now expected to run at 1.8 per cent this year (down from a two per cent growth forecast in January) while growth forecasts for emerging and developing economies have been trimmed by 0.1 percentage points in 2019 and 2020. On a more positive note, the Fund thinks that global growth should stabilise over the first half of this year before staging a gradual recovery over the second half of 2019.

Real GDP growth 2000-2024F

For Australia, the IMF now expects our economy to grow by just 2.1 per cent his year before expanding at 2.8 per cent in 2020. That 2019 projection represents a sizable downgrade from the October 2018 WEO, which had expected the Australian economy to grow by 2.8 per cent in 2019.

Elsewhere, notable downgrades for forecast real GDP growth in 2019 across the developed world include Germany (down 0.5 percentage points to 0.8 per cent), Italy (also down 0.5 percentage points to just 0.1 per cent), Canada (down 0.4 percentage points to 1.5 per cent) and the UK (down 0.3 percentage points to 1.2 per cent). The growth forecast for the United States saw a more modest downgrade of 0.2 percentage points to 2.3 per cent growth. In emerging economies, there were sizeable downgrades to growth forecasts for Mexico (down 0.5 percentage points) and Brazil (down 0.4 percentage points).

The Fund also cut its forecast for world trade growth, with trade volumes now expected to grow by 3.3 per cent this year, down 0.6 percentage points from its January forecast.

Why it matters:

IMF forecasts are arguably the closest we come to an ‘official’ view of global economic prospects, and as such are a useful gauge of current conditions. One theme of the Weekly over the past month or so has been the soft start to the year for the global economy, and the downgrades to the Fund’s growth expectations reflect this. While the IMF’s base case is for global growth to improve as 2019 progresses, it is also clear that the Fund reckons that the balance of risks ‘remains skewed to the downside’, highlighting: trade tensions; downside risks in systemic economies; financial vulnerabilities; and medium- and long-term risks including ‘pervasive effects of climate change and a decline in trust with regard to establishment institutions and political parties.’

What happened:

US President Trump warned that he was considering imposing tariffs on US$11 billion of EU products in retaliation for Brussels’ subsidies to Airbus. For its part, Brussels said it was seeking punitive tariffs on US$12 billion of US exports in response to US policy support for Boeing.

Why it matters:

While US-China trade talks tend to get most of the headlines, we’ve noted before in the Weekly that trade tensions between Washington and Brussels are another important feature of the contemporary global trade landscape. The current Airbus-Boeing fracas dates all the way back to disputes in the WTO in 2004, but tensions have been rising more recently after the US administration extended tariffs on steel and aluminium to the EU in June last year, prompting retaliatory measures from Brussels. The US has also threatened to impose tariffs on European automotive imports. One possibility worrying trade analysts is that any resolution of the current dispute between Washington and Beijing could be followed quickly by an intensification of US-EU trade disputes.

What happened:

The US Federal Reserve released the minutes from the March 2019 meeting of the Federal Open Market Committee (FOMC). The report of the discussions noted that ‘With regard to the outlook for monetary policy beyond this meeting, a majority of participants expected that the evolution of the economic outlook and risks to the outlook would likely warrant leaving the target range unchanged for the remainder of the year.’ But there was also something of a warning shot for markets, with the follow up statement that: ‘Several participants noted that their views of the appropriate target range for the federal funds rate could shift in either direction based on incoming data and other developments. Some participants indicated that if the economy evolved as they currently expected, with economic growth above its longer-run trend rate, they would likely judge it appropriate to raise the target range for the federal funds rate modestly later this year.’

Why it matters:

In past issues of the Weekly we’ve discussed the marked swing in the Fed’s stance towards monetary policy since the turn of the year. We’ve also noted that financial markets have been increasingly inclined to anticipate a forthcoming rate cut. While the minutes do little to change the assessment of a Fed that is considerably more cautious in its views of the economy than it was in 2018, they also show that the FOMC is keen to remind markets that they may have been getting slightly ahead of themselves with their expectation of a looming rate cut.

What happened:

The European Central Bank (ECB) promised that it would leave official rates unchanged ‘at least though the end of 2019, and in any case for as long as necessary’. In his press conference, ECB president Mario Draghi gave strong hints that further policy stimulus might be on the way later this year, if the ECB does not see a pick up in euro area activity.

Why it matters:

Europe in general and the euro area in particular has been a prominent contributor to the soft global growth conditions highlighted by the latest IMF forecasts, with sluggish underlying growth exacerbated by what Draghi has previously described as ‘continued weakness and pervasive uncertainty’, with the latter reflecting what might be described as ‘known unknowns’ including Brexit and US trade policy. Mindful of the downside risks, the ECB has previously announced that it would launch new measures (in the form of targeted longer-term refinancing operations, or TLTROs) this September to try and provide additional support to the sagging European economy, and Draghi – who will step down from his current role in October – is keen to emphasise that the central bank remains ready to respond to any further signs of weakness.

What I’ve been reading: articles and essays

RBA Deputy Governor Guy Debelle gave a speech on the state of the economy. Debelle covers some familiar ground, highlighting a couple of key disconnects across the economy. The first of these is the contrast between household consumption growth, which has been much weaker than the RBA had previously anticipated, and the rest of the economy, where things have played out largely as the central bank expected. Debelle reckons that the sharp slowdown in consumption growth in the second half of last year was mainly a product of low growth in household income along with ‘an increasing expectation that it is likely to remain low’. In contrast, the story across the rest of the economy has been more upbeat: non-mining business investment has been ‘growing at a good rate’, the decline in mining investment is ‘about at the end’, and exports have continued to expand. The second disconnect is between ‘surprisingly weak’ growth in real GDP and a ‘surprisingly strong’ labour market, with evidence from business surveys bridging the gap. According to Debelle, the ‘tension highlighted by these different lenses on economic growth is of critical importance.’

The RBA has released its latest Financial Stability Review. The summary judgement is that ‘domestic economic conditions remain broadly supportive of financial stability’ with low unemployment and healthy corporate profits offsetting a (consumption-led) slowdown in growth and weak conditions in the housing market. According to the Review:

  • Measures of financial stress among Australian households are generally low and – despite an increase in housing loans arrears, particularly in Western Australia (but where they are still less than two per cent) – low unemployment and low interest rates mean households ‘remain well placed to service their debt’.
  • While large falls in house prices have left some borrowers facing negative equity, the incidence remains quite low. The RBA estimates that nationally only around 2.75 per cent of securitised loans by value (or just over two per cent of borrowers) are in negative equity, with the highest rates in Western Australia, the Northern Territory and Queensland. Almost 60 per cent of loans in negative equity are in Western Australia or the Northern Territory. Elsewhere, rates of negative equity remain very low. By way of contrast, negative equity peaked at more than 25 per cent of mortgaged properties in the US in 2012 and in Ireland it exceeded 35 per cent. That low Australian result reflects (i) the previous large increase in house prices, (ii) the low share of housing loans with very high loan to valuation ratios; and (iii) the fact that many households are ahead on their loans. Of course, if house prices keep falling, those numbers will keep changing . . .
  • Corporate debt remains moderate compared to income and assets, and businesses too ‘are well placed to meet their debt obligations given the strong profit growth’.
  • The large degree of change required by some financial institutions in response to the Hayne Commission ‘raises the significant challenge of managing the implementation in an effective and timely manner.’
  • Banks ‘now have much higher levels of capital, more liquid assets and more stable funding structures’ than they did around the time of the financial crisis.

The OECD’s new report on the ‘squeezed middle class’. Defined as covering those earning between 75 per cent and 200 per cent of the median national income, the report finds that the middle class has shrunk in most OECD economies, with the share of people in middle income households falling from 64 per cent to 61 per cent between the mid-1980s and the mid-2010s. This group has also ‘grown smaller with each successive generation’: while 70 per cent of the baby boomers were part of the middle class in their twenties, that compares with 60 per cent of millennials. At the same time, in many OECD countries ‘middle incomes have grown less than the average and in some they have not grown at all’. Worth noting: according to the short country summary graphics (pdf), at 58 per cent, the size of the Australian middle class is actually somewhat smaller than the OECD average (61 per cent).

What I’ve been reading: books

Ryan Avent on the Wealth of Nations: Work and its absence in the 21st Century. Avent’s focus is on the implications of the ‘Digital Revolution’ for the future of work. Unlike techno-sceptics such as Robert Gordon, Avent thinks that the Digital Revolution is a big deal2. But unlike some of the techno-optimists, he also worries that the implications for work, for our institutions and for society as a whole could be very negative unless they are well managed, citing current features of the global economic landscape (real wage stagnation, rising income inequality, a falling share of labour in total income, growing political polarisation) as indicators of the potential troubles ahead. Avent’s thesis is that it is scarcity that determines relative economic returns, and that in today’s economy, labour has become abundant thanks to a combination of automation, globalisation, and the extremely high productivity of a subset of the most skilled workers. At the same time, he argues that artificial measures that had been designed to improve the relative bargaining power of workers (for example, controls on migration, unionisation, occupational licensing) have also either been eroded or undermined. As a result, Avent worries about what he describes as an ‘employment trilemma’, whereby there is no easy solution to what is effectively a diagnosis of a global labour glut. According to his trilemma, we can only choose two out of three from jobs that (i) can deliver high productivity and wages, (ii) are resistant to automation and (iii) can employ vast amounts of labour. So, for example, jobs that are well-paid and scalable will tend to be automated away, while jobs that are resistant to automation and can employ large numbers of people will tend to be low productivity, low wage affairs. Avent canvasses a range of potential solutions to the challenges posed by his diagnosis of the threats to work and wages, ranging from institutional changes (higher minimum wages, universal basic income, a revival of unionism) to increased education and increased investment to offsetting demographic shifts (ageing and shrinking working age populations) and the sharing economy. But he doesn’t seem to be particularly convinced by any of them.

1 The IMF’s headline forecasts reflect world output shares based on purchasing power parity (PPP) exchange rates, which give a relatively greater weight to faster-growing emerging and developing economies. At market exchange rates, the Fund thinks that the world economy will grow at 2.7 per cent this year and 2.9 per cent in 2020. Since the bigger growth downgrades this time were for developed economies, the slowdown in this measure of global growth for the current year (0.3 percentage points relative to the January 2019 forecast) is somewhat larger than the slowdown in the headline growth rate reported above.

2 One of Gordon’s famous debating points that seeks to downplay the relative merits of recent innovations vs. previous waves is to ask whether people would be prepared to swap indoor plumbing for their smart phone. Avent’s view is that the trade-off is not at all as clear as Gordon thinks it is. Personally, I’m closer to the Gordon view on this one particular test . . .

Summary (week ending 5 April 2019)

  • Inevitably, for the past week, the focus has been on the budget. Just in case you’ve not already overdosed on the traditional deluge of post-budget coverage, you can find our initial take, written on budget night, here, and you can register to watch a recording of a webinar covering some of the key themes, delivered a few days later, here.
  • The RBA Board met on 2 April.  As expected, there was no change to the cash rate. 
  • Australian house prices fell again in March, and while the pace of decline slowed, the geographic spread of house price declines widened.
  • The NAB monthly business survey showed business conditions rising to above average levels in March.  But on a forward-looking basis, business confidence fell again.
  • Australian retails sales staged a strong comeback in February.
  • February’s trade surplus set a new Australian monthly record.
  • And according to the March 2019 Resources and Energy Quarterly, Australia’s resource and energy exports will reach a record $278 billion in 2018-19.
  • The global composite purchasing managers index (PMI) for March told a similar story to last month’s reading, with ongoing strength in services offsetting continued weakness in manufacturing. Attention focused on China, where the official manufacturing PMI delivered its biggest monthly increase since 2012.  The Caixin China general manufacturing PMI also recorded its first improvement in four months, along with the highest reading since July 2018.

What I’ve been following in Australia . . .

What happened:

The RBA Board met on 2 April.  As widely expected, it decided to leave the cash rate unchanged at 1.5 per cent. 

The accompanying statement gave no indication that the central bank has undergone any major rethink in terms of the future stance of monetary policy, noting only that the ‘low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual . . . the Board judged that it was appropriate to hold the stance of policy unchanged at this meeting.’

Why it matters:

No change in policy had been expected for this meeting and no change was what we got.  On the other hand, those hoping for signs of a shift to a more dovish policy stance in the accompanying statement were likely disappointed: arguably, the best they could point to was the rather anodyne closing comment that the board ‘will continue to monitor developments.’

Perhaps of more interest on the monetary policy front was the financial market response to the budget in terms of how it saw the implications for the RBA’s likely policy stance.  One way of interpreting the short-term tax component of this week’s budget measures is to see it as providing fiscal support to households that could potentially substitute for (or at least act as a complement to) easier monetary policy.  Analysis by CBA economists suggests that the personal income tax cuts included in the budget over 2019-20 and 2020-21 would have about the same impact on disposable income as two 25bp rate cuts, for example.  And with monetary ammunition running low, sharing the burden with fiscal policy would certainly make sense.  A look at the level of implied policy rates from a few days before the budget compared to implied levels the day after, however, suggests that the immediate market judgment was that the budget had done little to change expectations of the need for central bank action.


What happened:

Australian house prices across the eight capital cities fell by 0.7 per cent in March over the previous month, according to CoreLogic, and were down 8.2 per cent in annual terms.   The steepest falls in prices came in Sydney (down 0.9 per cent) and Melbourne (down 0.8 per cent) with the only two cities not to see a fall in prices Hobart (up 0.6 per cent) and Canberra (no change).

Sydney dwelling values are now down almost 14 per cent from their peak while Melbourne values are down 10.3 per cent.  In Darwin and Perth, where prices have been falling for longer, dwelling values have fallen by a cumulative 27.5 per cent and 18.1 per cent respectively, since peaking in 2014.


Why it matters:

The March report painted something of a mixed picture of housing market health since, despite another monthly fall, the pace of decline has been easing over recent months, prompting CoreLogic to suggest that the housing downturn is ‘losing steam’.  Set against that, however, price weakness is now spreading geographically.

What happened:

The NAB monthly business survey showed business conditions rising by three points in March, with increases across each of the index components, including the employment index, which is now well above average.  But business confidence fell two points from February.


Why it matters:

The recovery in business conditions following on from last month’s fall was welcome news, and the strength of the employment component was again consistent with the positive aspects of recent labour market outcomes.  But the continued slide in confidence since last month indicates that businesses continue to view the future with some concern.

What happened:

Australian retail sales in February rose by 0.8 per cent over the month (seasonally adjusted) and by 3.2 per cent over the year, according to the ABS.  That was better than consensus forecasts of a 0.3 per cent monthly increase and marked something of a recovery following two weak monthly results (a 0.4 per cent fall in December and a 0.1 per cent rise in January).


Why it matters:

It’s only one month’s number, but after disappointing results in December and January, and with a heightened focus on the conjunction of weak income growth and falling house prices and their combined consequences for consumer spending, the bounce back in February provides grounds for hoping that the adverse wealth effect on household spending is not – yet – biting too deeply.

What happened:

Australia’s trade balance reached a record surplus of $4.8 billion in February.  That comfortably exceeded market expectations for a $3.7 billion result and follows on from a chunky $4.4 billion surplus in January.   Export values were up more than 13 per cent over the year, while growth in imports was closer to four per cent over the same period


Why it matters:

The monthly trade numbers help highlight how much Australia continues to benefit from a strong performance in resource exports, including a dramatic surge in the value of exports of natural gas over the past several years.  The implications of these developments have been apparent in the fiscal position and played an important role in supporting this week’s budget bottom line.  (See also the following section on the March 2019 Resources and Energy Quarterly.


What happened:

The Department of Industry, Innovation and Science published the March 2019 edition of Resources and Energy Quarterly (REQ).  According to the REQ, Australia’s resource and energy export earnings are forecast to reach a record of $278 billion in 2018–19 after the prices of some of our major commodity exports hit seven-year highs.  That represents an upgrade of about $13.9 billion to the estimates in the December 2018 REQ.  Moreover, the new forecast for 2019-20 (which sees the expected value of resource and energy exports drop only slightly next year, to $272 billion) is now an impressive $31 billion higher than the projections in last December’s REQ.


Why it matters:

As already noted in this Weekly, high commodity prices have pushed up resource exports and contributed to a stronger budgetary position.  One key message from the REQ is that a large part of this strength has been driven by supply disruptions (iron ore mine closures in Brazil following the collapse of Vale’s Brumadinho mine tailings dam have had the biggest impact, but there have also been disruptions to global copper and oil producers, as well of course as weather-related disruption here in Australia) that have pushed up US dollar commodity prices.  That, along with weakness in the Australian dollar which boosted local currency returns, helped drive the record result for 2018-19.  As supply problems are overcome, prices will adjust, and export values are forecast to fall back over the next five years, dropping to a still relatively healthy $256.2 billion by 2023-24 (in nominal terms).


. . . and what I’ve been following in the global economy

What happened:

The JP Morgan global composite PMI suggested that the pace of global economic expansion accelerated in March (pdf). As was the case in February, a stronger performance by the services sector was enough to offset continuing subdued conditions in manufacturing, as services activity increased for a second successive month, while the global manufacturing PMI was unchanged from February.


Why it matters:

While the global PMI story triggered only moderate interest, news about developments in China attracted rather more attention.  China’s own official manufacturing PMI rose to 50.5 in March from 49.2 in February.  That was the biggest monthly increase since 2012 and took the index back into expansionary territory.  The measures for new orders and new export orders also staged sharp increases (although note that the latter remained deep in negative territory).

At the same time, the Caixin China general manufacturing PMI also showed the Chinese manufacturing sector finishing the first quarter of this year on a positive note, with operating conditions improving for the first time since last November, and the highest reading since July 2018.

With the Chinese economy having started the year on a relatively rocky footing, the two PMI readings for March provide some early evidence that Beijing’s latest bout of stimulus efforts, including via infrastructure spending, may now be having a positive effect on economic activity.



What I’ve been reading: articles and essays

A smaller offering on the readings section this week (although I suppose I could have included the budget papers to bulk things out a bit).

The Parliamentary Budget Office (PBO) has released a new report on the fiscal impacts of Australia’s ageing population.  The old-age-dependency ratio is the ratio of those people aged 65 and over to the prime working age population (defined as those aged between 15 and 64).  Between 1971 and 2011, this ratio increased from 13 per cent to 21 per cent (that is, by 2011 there were 21 people aged 65 and over for every 100 people of working age).  Since 2011, the rate of increase in the ratio has doubled, and between 2011 and 2031, Australia’s old-age dependency ratio is expected to increase from 21 per cent to 29 per cent, with the next decade representing ‘a unique period of population ageing for Australia’. According to the PBO, that coming decade of demographic change is projected to subtract 0.4 percentage points from annual real growth in budgetary revenues while at the same time adding 0.3 percentage points to annual real growth in spending, resulting in an annual cost to the budget of about $36 billion by 2028-29.  That’s projected to be larger than the cost of any one of Medicare, NDIS, or Commonwealth funding for schools and hospitals in the same year.

Adam Tooze asks, Is this the end of the American century?  Tooze reckons talk of an end to the US world order is – for now – a ‘gross exaggeration.’ The two key pillars of US power – military and financial – are ‘still firmly in place’ and much less has changed than is often claimed, since ‘Republican policy is just Republican policy, American military power is waxing not waning, and the dollar remains at the hub of the global economy.’  The biggest shift is the relationship with China, where he writes, intriguingly, ‘we may find ourselves facing not so much an end of the American-led order, as an inversion of its terms. Where the US previously offered soft-power inducements to offset the threat of communist military power, backed up by hard power as a last resort, in the next phase the US may become the provider of military security against the blandishments offered by China’s growth machine.’  Almost worth reading just for the arresting closing image of President Trump on a golf cart, careening around the flight deck of a nuclear-powered aircraft carrier engaged in ‘dynamic force deployment’ to the South China Sea.  (By the way, if you don’t mind bulky books, Tooze’s Crashed from last year is definitely worth a look, although I preferred The Deluge.)

Adair Turner wonders whether zero interest rates are the new normal, and warns that while in the current environment monetary financing will certainly have its attractions, ‘excessive monetary financing is hugely harmful’ and is far from a costless solution.

Veteran environmentalist and journalist Bill McKibben ponders a future without fossil fuels, proposing that the question ‘At what point does a new technology cause an existing industry to start losing existing value?’ may ‘turn out to be the most important economic and political question of the first half of this century.’ 

The IMF has released the analytical chapters for its April 2019 World Economic Outlook.  Topics covered are the rise of corporate market power, the price of capital goods, and drivers of bilateral trade.  Full disclosure: strictly speaking, these should really be on my ‘yet to read list’, rather than on my ‘currently reading’ one.  But I did have time to read Christine Lagarde’s speech on what she’s describing as a ‘delicate moment for the global economy.’  Key takeaway: while 2017 saw 75 per cent of the global economy enjoy a synchronised upswing, this year the IMF expects 70 per cent of the global economy to undergo a slowdown in growth.

An interesting note from Branko Milanovic contrasting some of the ideas of Francis ‘end of history’ Fukuyama with those of mainstream economics (and Hayek).

The WTO foresees continued headwinds for global trade growth.  It now thinks world trade volumes will only manage to grow at 2.6 per cent this year, down from three per cent last year and much slower than the 4.6 per cent achieved in 2017 (see also the previous Weekly’s piece on slowing momentum in global trade).  Previously, the WTO had been expected trade to grow at 3.9 per cent in 2018 and 3.7 per cent this year.