MYEFO shows Canberra sticking to its fiscal guns

The Mid-Year Economic and Fiscal Outlook (MYEFO) saw the government stick with (pared back) targets for budget surpluses this year and next but refrain from offering any significant fiscal stimulus.

In a strong monthly performance, the economy added nearly 40,000 jobs in November, taking the unemployment rate down to 5.2 per cent. The RBA minutes from December’s meeting showed the central bank planning to reassess the economic outlook – and the case for any further rate cuts – in February. The IMF thinks Australian growth will pick up a little bit next year. The AICD’s latest Leaders’ Pulse survey saw respondents nominate the outcome of the Federal election as the most important development affecting their business decision-making this year and low GDP and productivity growth as the most important development affecting the Australian economy overall. Global markets have rallied on lower uncertainty around the US-China trade conflict and Brexit, and some signs of a recovery in economic activity.

This week’s readings include the outlook for Australian resource exports, the impact of climate variability on Australian agriculture, the Davos manifesto, and some thoughts on why economists got the past decade so wrong.

This is the final Weekly of 2019. We’ll be back from the Summer break on 31 January 2020.

Until then, many thanks for your readership this year, and I wish you and yours a happy and peaceful holiday season.

What I’ve been following in Australia . . .

What happened:

The government published the Mid-Year Economic and Fiscal Outlook (MYEFO), updating the numbers from Budget 2019-20.

The economic backdrop to the MYEFO looks more challenging than the one that originally faced the budget. For example, back in April, the government thought that the world economy would grow by 3.5 per cent this year and next. It now thinks global growth will be closer to three per cent this year and 3.25 per cent in 2020. Closer to home, the outlook for the domestic economy has also been trimmed. The budget expected real GDP growth of 2.75 per cent in 2019-20 and the same again in 2020-21. Instead, the MYEFO reckons that growth will be 2.25 per cent this financial year, although the forecast for 2020-21 is unchanged. The budget expected nominal GDP growth of 3.25 per cent in the current financial year and 3.75 per cent in the next financial year. The MYEFO sees nominal GDP growth unchanged in 2019-20 but down to 2.25 per cent the following year.

Behind those downgrades to domestic activity this financial year are substantial cuts to projected growth in household consumption (down from 2.75 per cent to 1.75 per cent), in dwelling investment (down from a fall of seven per cent to a fall of nine per cent), and to business investment (down from five per cent to 1.5 per cent). As a result, private final demand is now expected to grow by just 0.75 per cent in 2019-20 against original forecasts of 2.25 per cent growth. That’s only been partially offset by an upgrade to expected growth in public final demand, which has been hiked from 3.25 per cent in the budget to 4.75 per cent in the MYEFO. There’s also an increase in the expected contribution of net exports to GDP growth, up from 0.25 percentage points to 0.5 percentage points.

Private demand growth overall is expected to pick up in 2020-21 to 2.75 per cent due a smaller expected contraction in dwelling investment and a stronger recovery in business investment than expected in the budget (reflecting the worse than expected performance this year), but growth in household consumption has been downgraded to 2.5 per cent from three per cent in the original budget projections.

Labour market performance is also expected to be somewhat weaker than predicted in the budget outlook. The unemployment rate, which had had been forecast to be five per cent in both 2019-20 and 2020-21, is now expected to be around 5.25 per cent in both years. And instead of wage growth of 2.75 per cent and 3.25 per cent, the MYEFO pencils in 2.5 per cent growth this financial year and next.

The implications of this softer outlook are reflected in cuts to forecast government receipts. In 2019-20, total receipts are now expected to be $502.5 billion, down $3.0 billion from the budget forecasts, while in 2020-21, receipts are now expected to be $5.7 billion lower. The revisions continue into the next two years, with revenue downgrades of $11.8 billion and $12.1 billion, for a cumulative reduction in receipts of $32.6 billion over four years. Projections for individual tax receipts (excluding policy decisions) were revised up by $2.1 billion for 2019-20, largely due to higher than expected capital gains and dividend income relating to previous income years. But over the four years to 2022-23 individual tax receipts have been revised down by $7.4 billion, mainly on the back of those projections for lower average wage growth. Company tax receipts (again, excluding policy decisions) have also been revised down by $7.9 billion over the four years to 2022-23, largely reflecting downgrades to forecast corporate profits as a result of the cuts to the projections for the terms of trade. And estimates for GST receipts are down $1.8 billion for 2019-20 and down $9.9 billion over the four years to 2022-23, reflecting the downgrades to expected consumption and dwelling investment.

On the other side of the budget, estimates for total cash payments have been lowered by $1.4 billion in 2019-20 and by $11.5 billion over the four years to 2022-23. That’s despite a modest increase in policy-related spending measures, which have seen total cash payments increase by $2.4 billion in 2019-20 and by $8.3 billion over the four years to 2022-23. That includes accelerated spending on infrastructure (up $0.75 billion in 2019-20 and $4.2 billion over the four years to 2022-23), and increased spending on drought support ($0.766 billion to 2022-23) and aged care. At the same time, there are offsetting falls in anticipated total cash payments of $1.8 billion in 2019-20 and $9.9 billion over the four years to 2022-23 due to so-called parameter variations, including falls in GST payments to the States in line with the lower GST receipts described above and lower debt service costs.

The net effect of all these changes on the fiscal bottom line has been that the government has been forced to pare back its estimates for projected budget surpluses. As a result, 2019-20 is now expected to see a $5.0 billion surplus instead of the $7.1 billion one anticipated in April’s budget, and over the four years to 2022-23 the cumulative budget surplus presented in the MYEFO is now expected to be about $21.6 billion lower than the corresponding estimate in Budget 2019-20.

As a share of GDP, the revised fiscal projections in the MYEFO see the underlying cash balance moving from zero in 2018-19 to a surplus of 0.3 per cent in 2019-20 and 2020-21. That surplus is then projected to edge up to 0.4 per cent of GDP in 2021-22 before slipping back to 0.2 per cent of GDP the following year.

The MYEFO puts net debt as a share of GDP at 19.5 per cent in 2019-20, instead of the 18 per cent of GDP predicted in the budget. A substantial part of that increase is the result of the impact of an increase in the market value of Australian Government Securities due to lower yields. Net debt is now projected to fall to just 16 per cent of GDP by 2022-23.

At the same time, net interest payments on government debt are now anticipated to fall from 0.6 per cent of GDP in 2019-20 to just 0.3 per cent of GDP by 2022-23. A significant fact here is the decline in the cost of government borrowing: the MYEFO has the assumed weighted average cost of government borrowing over the forward estimates period at around 1.1 per cent, down from an assumption of 1.9 per cent at the time of the budget.

Why it matters:

The MYEFO was expected to tell us three important things about the economic outlook. First, the extent to which the government would be forced to trim its forecasts in line with the soft economic performance seen across this year. Second, the implications of those forecast adjustments to the government’s ambition to deliver a budget surplus. And third, would Canberra come to the aid of the RBA and deliver any additional fiscal stimulus in advance of next year’s budget.

On the first point, there have been quite significant downgrades to the expected performance of the real economy this year. The fall in dwelling investment is now expected to be larger and the recovery in business investment much smaller than had been assumed back in April. Household consumption is also expected to be weaker on the back of higher unemployment and lower wage growth. The only major upgrades have been to public spending and the contribution from net exports. By way of contrast, on the nominal side of the economy there has been no change to expected growth for the current financial year, as slower real growth has been offset by a stronger than expected performance by the terms of trade. By 2020-21, however, nominal growth is expected to be a percentage point lower.

Next, the implications of these changes have been felt in a reduction in the size of the projected budget surpluses, which now look rather thin, never quite managing to make it to 0.5 per cent of GDP. And should private demand turn out to be even weaker than forecast, that narrow buffer means that the surplus target would be at risk.

That said, however, it’s important to note that the MYEFO takes a very cautious approach to forecasting the iron ore price, a critical variable for the terms of trade and for revenue outcomes. The MYEFO now assumes that the iron ore price will fall to US$55/tonne by the end of the June quarter of 2020 (April’s budget had assumed that this would occur slightly earlier, by the end of the March quarter), compared to the current price of more than US$90/t. Sensitivity analysis presented in the MYEFO shows that a US$10/t permanently higher iron ore price results in an increase in nominal GDP of about $6.3 billion in 2019-20 and more than $13 billion in 2020-21. That in turn would imply tax receipts would be $1.2 billion higher in 2019-20 and $3.7 billion higher in 2020-21. With many market economists expecting the iron ore price to do better than the MYEFO’s conservative estimates, there is significant scope here for an upside surprise for budget revenue. In fact, the government’s own commodities forecaster is much more upbeat, with the latest projections from the Department of Industry seeing the iron ore price average around US$80/t across 2019-20 before declining to average US$60/t by 2021 (see this week’s readings).

Third, the MYEFO did little to deliver any additional fiscal support for the economy, with the government instead preferring to concentrate on its target of delivering a budget surplus. Additional spending increases this year were extremely modest, with only slight hikes in infrastructure expenditure, aged-care and drought-related support. Despite all the pleas from Martin Place, that leaves monetary policy to continue to do the hard lifting in terms of buttressing growth, at least until next year’s budget.

What happened:

According to the ABS, monthly employment increased by 39,900 people in November (seasonally adjusted). Full-time employment increased by 4,200 and part-time employment jumped by 35,700.

The unemployment rate fell by 0.1 percentage points to 5.2 per cent while the underemployment rate fell by 0.2 percentage points to 8.3 per cent, bringing the underutilisation rate down to 13.5 per cent.

Why it matters:

October had seen a disappointingly weak labour market report, with employment down by almost 25,000 and the unemployment rate edging up to 5.3 per cent from 5.2 per cent in September. In contrast, November’s outcome was much stronger with the near-40,000 increase in jobs significantly exceeding consensus expectations for a 15,000 increase, demonstrating a much healthier performance.

That said, the unemployment rate has averaged 5.2 per cent since the start of the year, so in that context November’s result was arguably just more of the same, balancing good news on job creation with an unemployment rate that remains stuck some distance from the RBA’s estimate of a ‘full employment’ unemployment rate of 4.5 per cent.

What happened:

The RBA released the Minutes for the 3 December Monetary Policy Meeting of the Reserve Bank Board, at which the central bank decided to leave the cash rate unchanged.

Members ‘discussed the transmission to the economy of the interest rate reductions since the middle of the year’ and noted ‘that the available evidence suggested that more stimulatory monetary policy had been working through the usual channels of lower bond yields, a depreciation of the exchange rate and lower interest rates on mortgages. There had also been an effect on housing prices, increased housing turnover in the established market and some early signs of a stabilisation in housing construction activity. The upturn in the housing market was a positive development for the economy in the near term, but could become a source of concern if borrowing were to run too quickly ahead of income growth.’ The Board also ‘discussed community concerns about the effect of lower interest rates on confidence, noting the decline in business confidence and consumer sentiment this year’ but concluded that ‘the impact of these effects was unlikely to outweigh the stimulus to the economy from lower interest rates.’

The discussion highlighted the ‘long and variable lags’ applying to the impact of monetary policy in general and acknowledged that ‘indebted consumers may take some time before increasing their spending in response to a decline in their mortgage interest payments’. While low growth in household incomes (and therefore in consumption) ‘continued to be a source of concern’, in contrast there ‘was no real concern of inflation rising quickly.’

The summary of the discussion concluded by noting that Board members ‘agreed that it would be important to reassess the economic outlook in February 2020, when the Bank would prepare updated forecasts.’ And as has become usual, the RBA reminded us that ‘it was reasonable to expect that an extended period of low interest rates would be required in Australia to reach full employment and achieve the inflation target’ and that the central bank is ‘prepared to ease monetary policy further if needed’.

Why it matters:

This was the last formal communication from the RBA in 2019 and so sets the tone for the forthcoming summer break until the Board reconvenes on 4 February. The Minutes contained some familiar themes: the RBA still thinks that the economy has reached a ‘gentle turning point’ (although note that the meeting occurred before soft Q3 GDP reading), that monetary policy continues to be effective despite some concerns that very low interest rates might be damaging for confidence, that there are no signs of inflationary pressures on the horizon, and that we’re in for an extended period of low interest rates. The central bank also indicated that it sees the recovery in the housing market (mainly in Sydney and Melbourne) as a positive development for the economy and that it will only start to worry ‘if borrowing were to run too quickly ahead of income growth.’

The RBA is now in wait and see mode until February, no doubt hoping that by then, the impact of lower interest rates and the payments from the Low and Middle Income Tax Offset (LMITO) will have started to be a little more visible in the data flow beyond the housing market. Many commercial bank economists continue to think that those hopes will be disappointed, and that the February Board meeting will see the RBA deliver its first rate cut of 2020. With the effective lower bound at 0.25 per cent, that would leave policymakers with just one 25bp cut to the cash rate in their conventional arsenal. Market pricing, on the other hand, has been relatively volatile over the past couple of weeks – at the time of writing, for example, the implied probability of a rate cut on 4 February had fallen from around 59 per cent before the release of November’s labour market data to about 45 per cent afterwards – but nevertheless still sees a cash rate down at 0.5 per cent sometime in the first half of next year.

What happened:

The CBA ‘flash’ composite PMI for December fell to 49.4 from 49.7 in November. Both the services and the manufacturing PMIs dropped slightly in December, with the former down from 49.7 to 49.5 and the latter easing from 49.9 to 49.4.

Why it matters:

This was only the second time that both the manufacturing and service sector readings fell in the same month since the CBA started producing the data in 2016. With both PMIs falling below 50, the readings suggest that the relative weakness that has dogged the Australian economy for much of 2019 has continued through until the final month of the year, although a continued rise in the reading for ‘new orders’ (now up for nine consecutive months thanks to growth in new business for services) provides some offsetting optimism.

CBA economists also noted that there were some ‘early indications’ that the disruptions associated with the current bushfires were having an impact on the PMI results, as disruption to deliveries meant that suppliers’ lead times lengthened at the strongest pace for ten months.

What happened:

According to the ABS, total lending for housing rose by 2.0 per cent (seasonally adjusted) over the month in October and was up 0.9 per cent over the year. Lending for owner occupiers was up 2.2 per cent over the month and 5.7 per cent over the year while investor lending was up 1.4 per cent in monthly terms but down 9.7 per cent in annual terms.

Personal fixed term loans were up 3.1 per cent over the month and down 0.4 per cent over the year.

Why it matters:

New loan commitments for housing are now up 15.2 per cent on their trough in May 2019, consistent with the story of a turnaround in the housing market that has been told by rising house prices. To date, the increase in lending has mainly been driven by lending to owner occupiers, which has now increased for five consecutive months.

What happened:

At the end of last week the IMF published the Staff Concluding Statement of this year’s Article IV consultations with Australia. IMF staff reckon that growth ‘should continue to recover gradually toward its medium-term potential’ (which the Fund now puts at 2.5 per cent, or a quarter of a percentage point below Treasury’s estimate of a 2.75 per cent potential growth rate) but also caution that risks are ‘tilted to the downside amid subdued domestic confidence, heightened global policy uncertainty and the risk of a faster slowdown in China.’

The Fund thinks the economy will grow by about 1.8 per cent this year and then by 2.2 per cent in 2020 while inflation is expected to stay below target until 2021. In that context, the IMF view is that monetary policy has been ‘appropriately accommodative, and continued data-dependent easing will be helpful to support employment growth, inflation and inflation expectations.’ In the case of fiscal policy, it thinks that the consolidated fiscal stance is ‘appropriately expansionary for FY2019/20’ but worries that a decline in state-level infrastructure investment will turn fiscal policy contractionary in FY2020/21 and urges states to reconsider their policy stance. The Fund judges that in the event of downside risks hitting the economy, the authorities have ‘substantial fiscal space’ and that ‘the Commonwealth and state governments should be prepared to enact temporary measures such as buttressing infrastructure spending, including maintenance, and introducing tax breaks for SMEs, bonuses for retraining and education, or cash transfers to households. In case stimulus is necessary, the implementation of budget repair should be delayed.’ The Fund also notes that ‘unconventional monetary policy measures such as quantitative easing may become necessary in such a scenario as the cash rate is already close to the effective lower bound.’

Turning to longer term growth prospects, the IMF argues that ‘efforts to boost private investment and innovation should be stepped up’, including by reducing domestic policy uncertainty, supporting SMEs’ access to finance and accelerating structural reforms. The Fund sees scope for supporting new investment through tax measures ‘possibly including targeted investment allowances’ and issues the familiar suggestion for ‘a further shift from direct to indirect taxes…by broadening the goods and services tax (GST) base and reducing the statutory corporate income tax rate for large firms.’ Also on the Fund’s wish list: transitioning from a housing transfer stamp duty to a general land tax and ‘reducing structural incentives for leveraged investment by households, including in residential real estate.’

Why it matters:

The IMF’s assessment of the current state of Australia’s economy contains few surprises: it’s broadly in line with the RBA’s forecast of a gradual recovery in economic growth, but with the pace of that recovery unlikely to be strong enough to allow the central bank to hit its inflation target. The Fund also appears broadly sympathetic to Martin Place’s view that a bit more fiscal support would be helpful. And it continues to make the case for the economically attractive but politically challenging rebalancing of the taxation system from direct to indirect taxes.

What happened:

The AICD conducted the final Leaders’ Pulse survey of this year and asked Directors to nominate some of the key developments influencing business decision-making and the Australian economy in 2019, and to nominate some of the top governance-related challenges facing their organisations over the past year.

Why it matters:

According to survey respondents, the most important factor influencing business decision-making in 2019 was the outcome of the Federal election, followed by increased regulation, the outcomes and impact of Royal Commissions, and intensified climate pressures.

In terms of the Australian economy overall, the most significant developments were slow GDP and productivity growth and weak household spending. Policy uncertainty overseas and intensified climate pressures were also seen as important.

Finally, the top governance-related challenges in 2019 were regulatory / compliance burdens, the outcomes and impact of Royal Commissions, and hurdles / time allocated to strategic matters (for example, innovation or long-term growth strategies).

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

What happened:

Global stock markets have reached new record highs on growing optimism about the outlook for the world economy. For example, the MSCI All Countries World Index has now surpassed its previous high reached in January 2018.

Why it matters:

2019 has been a tough year for the world economy, with global growth expected to be the weakest since the global financial crisis. It’s also been a year marked by high levels of policy uncertainty, initially regarding the stance of US monetary policy, but then increasingly around the path of the US-China trade and technology conflict, along with a supporting role for Brexit-related shenanigans.

That in turn spilled over into the real economy, helping to drag down trade, manufacturing activity, and business investment.

Yet now global share markets are finishing the year on a high. So, what’s going on? Three key factors have been at play here.

First, the world’s leading central banks have been working hard to prop up activity. Indeed, on some measures, 2019 saw the fastest rate of central bank policy easing since the global financial crisis. Most importantly, the US Fed abandoned its plans for monetary policy ‘normalisation’ after hiking interest rates four times in 2018. Instead, it delivered three rate cuts in the second half of this year, with 25bps of easing in each of July, September and October. It also announced that it would resume purchases of short-term US treasury securities to expand its balance sheet to avoid a repeat of the disruption to the US repo market that unfolded in September this year. And while the December meeting did see Fed Chair Powell indicate that the Fed was now done with rate cuts, he also stressed that it plans to leave rates unchanged until it sees a rise in inflation in what some observers have interpreted as a relative rebalancing of priorities towards employment. And of course, the Fed hasn’t been alone in its stimulus efforts, with September seeing the ECB for example cut interest rates even deeper into negative territory as well as restart its QE bond-buying program after a ten-month hiatus.

Next, two big sources of policy uncertainty have been lowered. First, the conclusion of the so-called phase one agreement between Beijing and Washington marks the start of a truce in the trade war between the two superpowers (see also this week’s readings, below). Beijing has promised to increase its purchase of US exports, work to meet US concerns around IP protection and the forced transfer of technology, and cancel the introduction of retaliatory tariffs that were due to come into force this month. In return, Washington has cancelled the planned imposition of 15 per cent tariffs on about US$156 billion of Chinese imports that was due to come into force on 15 December and has also scaled back the tariff rate it introduced in September on US$120 billion of Chinese imports, lowering it from 15 per cent to 7.5 per cent. US tariffs of 25 per cent on a further US$250 billion of Chinese imports will remain in place, however. While significant questions remain over both the durability of the current agreement and the future status of US-China bilateral economic relations, the de-escalation in the trade war has already given market confidence a significant boost. Second, the sweeping victory secured by the Conservative Party in the UK’s December general election has been interpreted by markets as reducing the uncertainty around Brexit, presumably on the view that any deal is better than the purgatory of ongoing negotiations, postponements and extensions. Not to mention ruling out the possibility of a radical Corbyn-led government. That said, some of that initial market optimism has since been eroded by early signs that the Johnson government is planning to play hardball with the EU over negotiations of a trade deal in a way which appears to restore the risk of a no-deal exit.

Finally, there have been signs of improving conditions in the real economy. The global manufacturing PMI edged up to 50.3 in November, marking a seven-month high and moving above the line dividing expansion from contraction for the first time since April. The global composite PMI also rose to a four-month high in the same month.

Likewise, the latest batch of data from China showed that economy strengthened in November, with industrial output growth rising to more than six per cent and retail sales growing by eight per cent. And US labour market numbers showed the unemployment rate was back down to a 50-year low of 3.5 per cent in November, as the economy added 266,000 jobs, comfortably exceeding market expectation for jobs growth of 180,000.

What I’ve been reading

The Department of Industry, Innovation and Science has released the December 2019 edition of Resources and Energy Quarterly (REQ). According to the report, Australia’s resource and energy export earnings are set to hit a record of $281 billion in 2019-20, supported by higher export volumes and a lower-than-expected Australian dollar relative to the September version of the REQ. Notably, iron ore export earnings are forecast to reach a record $84 billion in 2019-20 – up more than $5 billion from the previous record set in 2018-19 – thanks to higher prices. The REQ thinks that the iron ore price will average around US$80/t across the current financial year before declining to average US$60/t by 2021. Lower resource prices across the board plus the impact of an expected strengthening in the Australian dollar are then expected to see export earnings in 2020-21 fall to $256 billion.

Johnathan Kearns, Head of Financial Stability at the RBA, spoke on changes in banking. Kearns’ focus was on how banks have changed in Australia post-GFC and what issues might see further changes in coming years. Developments include higher tier 1 capital holdings, greater holdings of liquid assets, a reduction in risk-taking and a decline in liquidity and maturity transformation, and the divestment of life insurance and wealth management operations. Drivers of possible future changes include: the arrival of big data and the consequences for the potential emergence of new competitors; tighter regulatory frameworks and the implications for the cost of financial intermediation; and shifting community expectations manifested in reforms targeting banking governance and culture.

The ATO’s corporate tax transparency report for 2017-18.

ABARES’ Neal Hughes, David Galeano and Steve Hatfield-Dodds have produced a new Insights Paper on the impacts of drought and climate variability on Australian farms. On their numbers, for a typical cropping farm, profit decreases from around $230,000 in a ‘typical year’, down to a loss of $125,000 in a ‘dry year’ while for a typical Australian beef farm, profit falls from $60,000 in a ‘typical year’ down to a loss of $5,000 in a ‘dry year.’ Australian average temperatures have increased by about one degree since 1950 while recent decades have also seen a trend towards lower average winter season rainfall in the southwest and southeast of Australia, a drying trend which the ABARES paper points out is the largest sustained change in Australian rainfall since records began. ABARES estimates that changes in climate over the period 2000 to 2019 (relative to the period 1950 to 1999) have had a negative effect on the profitability of Australian farms, including both cropping and livestock sectors, reducing average annual broadacre farm profits by 22 per cent, or around $18,600 per farm. Cropping farms have been hit particularly hard, with a 35 per cent ($70,900) fall in average profits, for a typical farm. Farmers have also had to cope with an increase in downside risk, with the chance of very low profits (defined as below a two per cent rate of return) more than doubling since 2000 for a typical cropping farm.

The ABS reported that Australia’s population grew by 1.5 per cent during the year ended June 2019, rising to 25.4 million people. Natural increase accounted for 37.5 per cent of the increase in population and net overseas migration for 62.5 per cent. Victoria recorded the highest growth rate of all states and territories at 2.1 per cent while the Northern Territory recorded the lowest, with population falling by 0.5 per cent.

The IMF’s Damien Puy on how financial markets react to news. Fund research finds that (1) media tone in general is a good proxy for investor sentiment and (2) foreign news (defined as news involving multiple countries and their relationships as opposed to local news involving a single country) is more important than local news in driving local asset prices. For example, while the Fund study found that sudden optimism in global news sentiment generated a strong and permanent impact on asset prices around the world, the effect of optimism in local news was more muted and only temporary.

The WSJ’s Greg Ip asks why US economists got the decade all wrong. Why was US growth the most subdued of any expansion since the 1940s, with inflation stuck below the Fed’s target and interest rates at record lows, and yet at the same time the US enjoyed its longest economic expansion on record, saw a record bull market in share prices, and had unemployment drop to a 50-year low? Diagnoses such as the debt hangover theory and secular stagnation only seem to capture some of what’s happened, while another part of the story is the fall in the natural rate of unemployment.

Related, Adam Posen thinks that the current mix of extended economic expansions, subdued growth and low inflation in many of the world’s advanced economies are mostly a product of the nature of recovery from a severe financial crisis. Households and businesses rebuild balance sheets, risk aversion rises, and workers trade off wage growth for stable employment, all of which contributes to lower inflation and lower levels of financial imbalances.

Also from the WSJ, the world’s disappearing cash.

Klaus Schwab introduces the World Economic Forum’s ‘Davos Manifesto’ for a ‘better kind of capitalism’ – basically a call for stakeholder capitalism as a third and superior alternative to either shareholder capitalism or state capitalism.

How a monetary policy of negative interest rates works.

A selection of pieces on US-China trade. Reuters provides a short summary of the US-China ‘phase one’ trade deal here. Christopher Balding gives his assessment of the deal, arguing that it is about much more than agriculture, and that on net the agreement offers substantial benefits to the United States. But he also puts the risk of the deal failing to last to 2021 as close to 50 per cent. Tyler Cowen sees the agreement as marking the start of a new ‘jerry-rigged’ era for international trade, ‘not so much a repudiation of free trade as an attempt to keep trade free-ish as it gets increasingly complex.’ And here is the take from the East Asia Forum’s Editorial Board.

Gideon Rachman on the drive for ‘decoupling’ that has dominated the international environment this year.

No, banks don’t create money out of thin air.

This FT politics podcast provide an early take on the possible implications of Boris Johnson’s crushing victory in the UK general election. Particularly interesting for me were the speculations as to how the new wave of conservative MPs from traditional Labour seats might influence the future direction of UK government policy (for the first time since it was recreated in 1950, the constituency in which I grew up will be represented by a Conservative rather than a Labour MP).