Global labour market in grim condition
Labor Markets During the COVID-19 Crisis: A Preliminary View (NBER, 6-page read) Study finds job loss has been significantly more substantial than implied by new unemployment claims with around 20 million lost jobs by April 6 (far more than jobs lost over the entire Great Recession). Second, many of those losing jobs are not actively looking to find new ones. Third, participation in the labour force has declined by 7% relative to the 3% cumulative decline that occurred from 2008 to 2016.
Japan’s Job Security Put to the Test (OMFIF, 3 min read) It is estimated that if the 30% decline in sales continues for more than six months, there will be no difference in the fall in cash reserves between global and Japanese companies. This could threaten the country’s corporate culture which usually protects workers from layoffs.
How Do We Think the COVID-19 Crisis Will Affect Our Careers (If Any Remain)? (IZA Institute of Labour Economics, 15-page read) Survey of Belgian employees reveal 21% of them fear losing their jobs due to the crisis—14% are concerned that they will even lose their jobs soon. Also, 26% expect to miss out on promotions. This fear of a negative impact is higher in vulnerable groups, such migrants.
Why US consumption will squeeze and what is depression?
What Coronavirus Means for the Global Economy (TED, 53 min listen) Ray Dalio discuss in Ted Connects that the current crisis is worse than 2008 and is similar to that of the 1930s. He thinks the economy will take longer than a typical recession to recover due to the current levels of debt (not the virus ) and will require years of financial restructuring, economic reconfiguration and human innovation for the economy to get back on trend growth.
Back-of-the-envelope Estimates of Next Quarter’s US Unemployment Rate (VoxEU, 6 min read) By combining different types of statistics on industry and occupation composition. The study finds that over 52 million people could be unemployed in the US, with a 32.1% unemployment rate 2Q of 2020.
The Coronavirus Pandemic and US Consumption (VoxEU, 20 min read) In the US, consumption is less volatile than income. But this column argues, it is now likely to fall even more than household income. Reasons include: negative shock originates from consumption itself, jump in income insecurity as the unemployment rate rises, fall in asset prices and a contraction in credit availability. It estimates consumer spending in 2Q could fall by 20%, for every 16% fall in household income.
The Human-Capital Costs of the Crisis (Project Syndicate, 6 min read) Unlike natural disasters, the pandemic causes no damage to physical capital stock (economy’s productive capacity). But firm-specific skills of labor loses value when the firm that uses them goes bankrupt. This loss of human capital is why productivity, wages, and economic growth are likely to be affected for years to come.
What is a Recession? What is Depression? (CalculatedRisk, 2 min read) Depression is a prolonged slump with a 10% or more decline in real GDP. The market can only expect a depression if the economic slump in Q2 is prolonged years ahead without recovery. If we try to open the economy too soon without the proper preparedness (testing, masks, guidance) – then the economic damage will be more prolonged.
Alternative Business Cycle and how 34% of jobs can be done from home.
How Many Jobs Can be Done at Home? (NBER, 5-page read) COVID-19 has raised this question. The study finds that 34% of all US Jobs can realistically be done from home.
The Impact of COVID-19 on Gender Equality (NBER, 26-page read) The study finds that current social distancing measures will have a large impact on sectors with high female employment shares, such as schools and daycare centers. After the immediate crisis, there are drivers which may promote gender equality in the labor market. For example, the adaptation of flexible work arrangements’
Expected U.S. Macroeconomic Performance during the Pandemic Adjustment Period (St Loius Fed, 7 mins) St Louis Fed President James Bullard argues for a “National Pandemic Adjustment Period” (NPAP) as an alternative to the traditional business cycle during the pandemic, as a focal point for many policymakers and Americans to understand the current situation.
The macroeconomic spillover effects of the pandemic on the global economy (BIS, 8 Page read) BIS study finds that the reduction of GDP due to lockdown is likely to drag on over several quarters. The total GDP shortfall could be as much as twice that was initially thought due confinement measure. Risks of uncoordinated confinements lead to repeated virus outbreaks and spillover across the globe could drag growth further.
The case for non-pharma interventions and some projections for US unemployment
Fight the Pandemic, Save the Economy: Lessons from the 1918 Flu (Liberty Street Economics, 6 min read) Areas implementing early and extensive non-pharmaceutical interventions during the Spanish flu saw no medium-term economic damage from the pandemic. By contrast, areas badly hit saw a large and persistent decline in activity.
Back-of-the-Envelope Estimates of Next Quarter’s Unemployment Rate (St Louis Fed, 4 min read) US unemployment could hit 32% (or almost 53mn) by the end of Q2 based on assumptions using data on the number of workers in jobs which are in close proximity to others and on those in jobs deemed to be at high risk.
This Time Truly Is Different (Project Syndicate, 4 min read) The current health crisis is likely to have a bigger economic impact than the global financial crisis and could yet have systemic consequences. Both corporate and EM sovereign balance sheets are weaker than in 2008 and Fed rate cuts are not helping to ease financial conditions in EM given risk aversion and collapsing in oil prices.
Europe’s COVID-19 Crisis and the Fund’s Response (IMF, 3 min read) Most of the nine non-EU emerging economies of CEE have sought IMF help as limited access to capital markets, underdeveloped local markets and less developed banking systems makes it difficult to finance large increases in budget deficits.
A worst case scenario from COVID-19 and Frenkel on his recession call
Why Odds of a Coronavirus Recession Have Risen (The Harvard Gazette, 10 min read) Jeremy Frankel discusses his February (and at the time early) call for a rising likelihood of global recession. Lack of fiscal space in the US won’t help and the economy is likely to face parallels with the financial crisis and the 2001 terrorist attacks.
The Coronavirus and the Great Influenza Epidemic: Lessons from the “Spanish Flu” for the Coronavirus’ Potential Effects on Mortality and Economic Activity (American Enterprise Institute, 25 page read) A worst case scenario for COVID-19 based on the Spanish flu of 1918-1920 could mean some 2% of world population, or 150mn people, may lose their lives, economic contraction of around 6% and real returns on assets falling sharply.
The Coronavirus World Recession (George Magnus, 4 min read) The current economic contraction is a four-fold hit from; a wealth effect from the stock market declines, a demand shock from the quarantine measures, a supply shock from the inability to work and exacerbated credit and default risk. Fiscal support will help but may not be fully able to support spending and borrowing until confidence in public health systems return.
Severe recession now the consensus plus Europe’s need for a catastrophe relief fund
A Coronavirus Recession? A New Survey of Top US & European Economists (IGM Forum, 6 min read) Leading US and European economists now expect a severe recession due to COVID-19 although uncertainty remains over the expected length of the downturn. More than two-thirds of European experts think the Eurozone lacks the necessary tools to response, particularly given the absence of co-ordinated fiscal policy.
COVID-19: Europe Needs a Catastrophe Relief Plan (VoxEU, 12 min read) Europe should immediately develop a catastrophe relief fund to cover both needed healthcare spending and indirect costs from school closures and other containment measures. All temporary spending related to the crisis should also be deducted from SGP budget measures.
Trump’s Trade Policy is Hampering the US Fight Against COVID-19 (Peterson Institute for International Economics, 8 min read) US tariffs on medical imports from China could mean delays and higher costs for needed equipment. Trump has in the past week temporarily reduced some of the tariffs but this does not go far enough with many medical products still affected.
Why containment and mitigation doesn’t work and Hong Kong’s ill-defined fiscal stimulus
Covid-19: A Macroeconomic Plague (JDI research, 8 page read) The strategy of containment and mitigation outside China has not worked due to the high number of individuals needing hospital care. This makes mitigation unworkable and the need for extra hospital beds is likely to outstrip supply in Europe by the end of this month.
Downsides to Hong Kong’s Untargeted Cash Handout (Bruegel, 3 min read) Hong Kong’s cash handout is both untargeted and regressive and may leak out in the form of capital outflows. Diverting these resources to SMEs in sectors hit hardest from COVID-19 could better protect jobs and household incomes.
Women Have Been Hit Hard by the Loss of Routine Jobs, Too (Liberty Street Economics, 5 min read) Job losses for women aged 25-54 in “routine” roles in production and admin are three times greater than for men over the past two decades. Women have moved into jobs in healthcare and into low skilled service sector roles. The share of women not working has also increased.
Peak supply chain disruption imminent plus PIMCO on why it gets worse before it gets better
How Coronavirus Could Impact the Global Supply Chain by Mid-March (Harvard Business Review, 4 min read) Peak supply disruption from COVID-19 is likely by mid’ March as the pre-Chinese New Year manufacturing shipments arrived in the US/Europe in late February.
COVID‑19: Repercussions Could Worsen Before They Improve (PIMCO Blog, 3 min read) As a combined demand and supply shock COVID-19 will cause a meaningful, but temporary, hit to economic growth. The Fed will likely cut rates by 50bps to counteract the tightening in financial conditions, the ECB may cut too.
A Pandemic of Deglobalization? (Project Syndicate, 4 min read) COVID-19 could reinforce the deglobalisation trend already underway, reminiscent of how the Black Death in Europe brought an end to the Middle Ages.
Japan’s economy shrinks while India moves up the global rankings, for now anyway
Japan isn’t Headed for Recession, it’s in Recession (Money Maven, 4 min read) Japan’s 6.3% QoQ annualised GDP decline in Q4 was the deepest contraction since the last VAT hike in 2014. Given this came before the hit from the coronavirus the country is already in the midst of a severe recession.
Growth, Inflation, and the Potential for Disruption (PIMCO blog, 4 min read) Global growth will slow then rebound ahead of the US with global PMIs already improving, particularly in EM, while business sentiment in Europe has started to improve. Meanwhile, the US faces a hit from the Boeing production cut and political uncertainty ahead of the presidential elections.
India is Now the World’s 5th Largest Economy (World Economic Forum, 2 min read) India has now overtaken the UK and France to become the world’s fifth largest economy (in nominal USD terms). But with growth slowing sharply in recent quarters and the country still accounting for 25% of the world’s poor India faces huge challenges ahead.
How to add unemployment into business cycle dating and why subprime auto delinquencies are at all-time highs
Reading the Tea Leaves of the U.S. Business Cycle—Part Two (Liberty Street Economics, 6 min read) Using a “threshold rule” for the unemployment rate provides a good fit with the dates of NBER-defined business cycles. With limited revisions to the unemployment data it also provides a stable and timely gauge of the cycle.
The Accuracy of Long-term Growth Forecasts by Economics Researchers (VoxEU, 4 min read) Real and nominal GDP growth forecasts for Japan show an upward bias over the past 10 year even when excluding the 2008-09 crisis. Government forecasts have a larger upward bias than those made in the private sector.
Subprime Auto Loans Explode, “Serious Delinquencies” Spike to Record. But There’s No Jobs Crisis, These Are the Good Times (Wolf Street, 4 min read) Nearly one quarter of all subprime auto loans are more than 90 days overdue, yet delinquencies on prime auto loans are at historic lows. The divergence reflects aggressive subprime lending and investor demand for high yielding auto loan ABS.
Leveraged loans and the next US recession plus how to avoid an empty planet
Corporate Credit, Housing, and the Next Recession (PIMCO Blog, 3 min read) Corporate credit is one possible trigger for the next US recession, in particularly from leveraged loans, high yield debt and private credit. By contrast, the housing market is seen as an area of strength rather than weakness.
The End of Economic Growth? Unintended Consequences of a Declining Population (Stanford University, 43 page read) Negative population growth can result in a stalling of living standards and population decline towards an “empty planet”. Waiting too long to shift to a higher optimal population growth risks still being stuck in the empty planet outcome.
A Roadmap for Digital-led Economic Development (VoxEU, 7 min read) Developing countries can use digital technology to improve efficiency through automation, lower transaction costs and better system design. But conditions must also be put in place to ensure technology is inclusive.
The risks from slower global trade growth and global unemployment linkages
A Global Economy Without a Cushion (Project Syndicate, 4 min read) Former Chairman of Morgan Stanley Asia, Stephen Roach, points out that global trade growth last year was the fourth weakest since 1980, and the three weakest were all associated with global recession. Global growth is already close to stall speed leaving significant risks from the much-reduced buffer from trade growth.
Tracking Long-run Growth in the Euro Area With an a-theoretical Tool (VoxEU, 6 min read) During the past 30 years institutional integration, competitiveness and monetary policy all supported long run growth. Equity cycles, debt ratios and sovereign stress all have a negative or mixed impact on growth.
Forecasting Unemployment Rates with International Factors (Munich Personal RePEc Archive, 22 page read) A global unemployment series is constructed to show linkages between unemployment rates in seven OECD countries. Migration and common business cycles are possible explanations.
Roubini’s pessimistic view on global growth and avoiding Japanification of East Asia
How to Prevent the Japanification of East Asia’s Economies (Project Syndicate, 4 min read) Productivity-enhancing investments to raise potential growth, alongside increased labour force participation rates for women and older cohorts are needed in East Asia to avoid the entrenched low growth-low inflation experience of Japan.
Dr. Nouriel Roubini: Global Economic Slowdown Likely to Continue (The Sounding Line, 4 min read) Lack of improvement in major economies points to the global slowdown persisting this year. Global recession will, however, be avoided but stagflation is a risk given deglobalisation and rising populism. [Bearish equities]
Housing Speculation and its Economic Consequences (VoxEU.org, 6 min read) The share of non-owner-occupied home purchases is an additional factor explaining the US real estate bubble and subsequent collapse in the 2000s. It is independent of the surge in subprime lending and had consequences for house prices, employment and wider business conditions.
India’s role in determining whether we have reached peak global growth and the benefits of an H1-B visa for US tech start-ups.
Has the World Economy Reached Peak Growth? (Project Syndicate, 3 mins read) Former Goldmans guru Jim O’Neill argues the 2020s will need a productivity miracle to offset the ageing population in China and the West. India has the greatest potential to influence global growth in the 2020s due to its relatively young population. But current government policies are far from supportive. [Bearish global equities]
The Sahm Rule and Recessions (The Dangerous Economist, 3 mins read) Claudia Sahm’s rule defines predicts recession based on the three-month average unemployment rate rising half a percentage point or more above its low during the previous 12 months. With no false positives and more timely predictions than other recession indicators, it’s well worth using.
The United States is Starved for Talent (NBER, 40 pages) Winning the lottery for a high skilled H1-B visa significantly improves a tech start-up’s likelihood of attracting venture capital funding. Shows access to the best talent in the world is an edge for the US.
As fourth quarter GDP releases start to trickle in later this week we feature one take on achieving a growth target. Plus, the winners and losers in three decades of globalization.
How to Boost Your Country’s GDP Figures Like China (The Sounding Line, 3 min read) Ahead of Friday’s Q4 China GDP release this article gives a simplified take on the country’s heavily criticised national accounts data. From building bridges to nowhere, rounding up and underestimating the past, this is the 101 guide to what is in reality a highly complex task.
Three Decades of Globalization: Which Countries Won, Which Lost? (Wiley, 30 page read) They find education and macroeconomic stability as robust determinants of a country’s share in world exports. In contrast to earlier decades, countries across income groups experience marginalization and globalization.
Economic Policy Uncertainty in the Euro Area: an Unsupervised Machine Learning Approach (ECB, 45 page) The paper presents a novel machine learning approach to estimate economic policy uncertainty and its sub-components using news articles from Germany, France, Spain and Italy over almost twenty years. The paper concludes the fiscal policy uncertainty component was quite significant for Spain and Italy when the sustainability of public finances was in focus. Investment for France, Italy and Spain reacts heavily to political uncertainty.
Recession worries linger on.
CEOs Still Consider Recession to be the Biggest Business Risk in 2020 (CNBC, 3 min read) Corporate CEOs for the second year in a row cite recession as their biggest worry amid “continued uncertainty around global trade, increasing competition, global political instability and tightening labour markets”. [Bearish equities]
Will Recession Strike in 2020? (The Dangerous Economist, 3 min read) Studies the reliability of the US Conference Board’s LEI indicators in predicting recessions or stock market corrections. Good news is that it did predict the past eight recessions, but the lead time was often as high as 18 months. Plus there were many false signals. [Bullish equities]
Can Latin America Avoid Another Lost Decade? (Project Syndicate, 4 min read) The region has faced a multitude of problems, both from an unfavourable global environment and domestic factors resulting in anaemic growth in the past five years. The region can nevertheless foster re-industrialization and invest in science and technology, together with active social policies to help regain economic footing. [Bearish Latam]
Will The US Economy Accelerate In 2020? (Capital Spectator, 4 min read) A series of forecasts and graphical illustrations arguing that the recent downshift in the economic growth of the US will stabilize by early 2020 (with acceleration in output and consumption). Note that industrial production will continue to remain weak. [Bullish US Equities excluding Industrials, Bullish US Growt]
Is Growth Moral? (Democracy – A Journal of Ideas, 12 min read) In modernizing America, where wealth had become the ‘conventional basis of esteem’, American economist Thorstein Veblen saw that it was the rich who determined ‘what scheme of life the community shall accept as decent or honorific’. In this piece, Stuart Whatley provides an overview of Veblen’s views and contrasts his theory with a selection of other prize winning ones. He also covers the intersection between society’s net benefits and individual net gains. An excellent read.
Is the Fall of Unemployment Good?(Econ Lib, 4 min read) You could argue that the reduction of unemployment in the US might have been driven by an increase in the number of individuals necessary to produce the same or lower GDP per capita (meaning there was a fall in productivity or a fall in consumption expenditures per capita). This piece argues that this is not the case. In fact, Trump policies such as the reduction of tax rates and easier regulation have lowered unemployment. [Bullish US Growth]
Economic Growth Is the Answer(Project Syndicate, 5 min read) Rising inequality has led to political extremism (on both the left and right). One way to alleviate this is by tackling the sluggish economic growth; this will improve living standards among all groups and, it is argued, improve the redistribution of wealth. In turn, this will reduce political extremism.
This week we look at longer-term forces. In the UK, it appears that more people are topping up their state pensions with private pensions. Also, the impossibly perfect Nordic countries may have a dark side – their environmental impact.
Pension Wealth in Great Britain: April 2016 to March 2018 (ONS, 31 min read) The last decade saw an increase of around 10 percentage points (from 43% to 53%) in the number of adults below State Pension age who actively contribute to a private pension, which is very likely the result of automatic enrolment introduction that happened between 2012 and 2018. Median pension wealth for pensions in payment for men is double that for women. [Bullish private pension funds]
The Dark Side of the Nordic Model (Al-Jazeera, 4 min read) Scandinavian countries may top every ranking on human development, but their ecological impact on the planet is outsized. They have some of the highest levels of resource use and CO2 emissions in the world with sustainable level of resource consumption at 32 tons per year compared to the average of 7 tons per year. If everyone in the world consumed like Scandinavians, we would need nearly five Earths to sustain us. [Bullish ESG]
There’s a wave of articles trying to explain why productivity is low. For some it is related to low mobility, for others it is low real rates. Then some are looking at mismeasurement issues.
Fast Locations and Slowing Labor Mobility (Philadelphia Fed, 45 Pages) This study posits that home attachment is to blame for the declining rates of internal migration within the United States, suggesting that fewer people are willing to relocate for a job that would take them outside their preferred home destination. [Bearish productivity, bearish stocks]
The Circular Relationship Between Productivity Growth and Real Interest Rates (VOX CEPR, 5 min Read) The prevalence of low real interest rates allows for a weak productive companies and projects to continue to exist and remain moderately profitable. The fall in real interest rates since the ‘90s explains why we’ve seen decelerating productivity over that time range. [Bearish stocks]
Are We Under Measuring Productivity Gains from The Internet? Part II (Marginal Revolution, 2 min read) Productivity growth in the US is much lower than historical standards. New research argues that this is NOT due to mis-measuring tech innovation. [Bearish stocks, bullish bonds]
Does Recession Risk Rise as The Expansion Ages? (The Capital Spectator, 4 min read) Econometric evidence and the analysis of experts argues that economic expansion is not duration dependent. For example, the US is growing for 125 months, does not mean the likelihood of a downturn has increased. [Bullish equities]
Demographics and Technology Explain Secular Stagnation and More (Vox EU) Argues that lower fertility and population ageing are likely to generate more automation, which will lead to a reduction in GDP per capita growth and the labour income share. [More Populism]
Involuntary Part-Time Work a Decade after the Recession (Federal Reserve Bank of San Francisco) San Fran Fed identify shifts in the US labour market over the past decade. The bottom line is that full-time work has become scarce and voluntary part-time employment has exceeded its pre-recession level. [More Populism]
The Intellectual Spoils of War? Defense R&D, Productivity and International Spillovers (NBER Working Paper) Empirical evidence from major OECD countries shows that a 10% increase in government-funded R&D in the defense sector generates privately-financed defense R&D by 4.3% and encourages private investments in other nations. [Bullish Big Military Countries]
More negative economic trends are coming to the surface. Credit growth appears to be faltering, temporary hires are declining and trade restrictions are on the up.
Slouching Towards a Producer-led Recession? (Seeking Alpha) The often ignored US Senior Loan Officer Survey is showing contracting demand for commercial loans in Q3. Typically such dynamics are seen before recessions. [Bearish equities]
A Yellow Flag from Temporary Hiring (Angry Bear) Temporary hiring in the US is now showing a 7% y/y decline as of November. Only in 2007-2008 have we seen a worse number. This could be a harbinger of negative payrolls. [Bearish equities]
Does Intergenerational Mobility Increase Corporate Profits? (Fed Working Papers) Fed finds that companies based in areas with high intergenerational mobility move up and tend to see greater profitability. This likely reflects greater equality of opportunity.
Trade Restrictions Among G20 Economies Remain at Historic Highs (WTO) Latest WTO report for G20 economies finds that from mid-May to mid-October 2019 new import-restrictive measures covering USD 460.4 billion worth of traded goods were introduced. This represents a 37% surge over the previous period. [Bearish global companies]
There’s growing awareness that we may be experiencing decreasing returns to scientific research – this has major implications for policy and companies. Better then to rethink the work week, perhaps. In the short-term, though, politics will continue to be a big risk for economies.
On the Decline Of R&D Efficiency (VOX EU) The empirical evidence of Japan following the Great Recession suggests that the marginal benefits of R&D spending may not be sufficient to drive growth in developed economies. [Bearish high investment companies]
Is the Rate of Scientific Progress Slowing Down? (Marginal Revolution) In-depth review of different strands of literature and metrics such as total factor productivity, patent measures, researcher productivity, crop yields, life expectancy and progress of computing power, shows some evidence that the rate of scientific progress had indeed slowed down. [Bearish high investment companies]
Is Economic Winter Coming? (Project Syndicate) Former RBI governor and current Chicago Professor, Raghuram Rajan, argues that the biggest risk factor for a recession is the White House, not the Fed or any one sector of the economy.
Economics of A Four-Day Working Week: Research Shows It Can Save Businesses Money (The Conversation) Several businesses that adopt this scheme report an annual saving of GBP 92 billion and an experiment carried out by Microsoft Japan shows a 40% increase in productivity.
We focus on the much-feared trend of declining productivity and find surprising reasons behind it, such as obesity. Technology might also be hampering growth long-term. We also look at ways the US can learn from Australia’s mild and short-lived recessions.
Where Is That Confounded Recession? (Nevins Research) Daniel Nevins argues against the general market sentiment about an upcoming recession by conducting examinations on the housing sector, public policies and real spending capacity. [Bullish equities]
Why Does Australia Have Mini-Recessions? (EconLib) Scott Sumner argues that Australia’s recessions have been much milder than in the US, as they do monetary policy more efficiently. They track the price of money (exchange rate) rather than the rental cost of money. It is far more powerful and unambiguous.
What are the Real Reasons for Declining Productivity? (Mish Talk) Some of the Top 10 reasons include wrong measurement of productivity, time wasted on Facebook and surging obesity levels. [Bearish equities]
Is Rising Concentration Hampering Productivity Growth? (San Francisco Fed) The increase in productivity brought by the IT revolution for large firms in the US has caused lower profit margins across other businesses and a decrease in market competition. In the longer term, this phenomenon will lead to weaker growth in productivity. [Bearish small caps]
This week we see a series of pessimistic signals around the future of the workforce. Automation could be a dehumanizing force, real wage growth has been sticky, and ageing populations create more than just financial problems.
My Favourite Job Market Paper So Far This Year (Marginal Revolution) Professor Tyler Cowen of George Mason University flags a recent MIT Paper about wage rigidity, finding that the real wages for the same position at the same establishment decrease over time. So stable jobs lead to lower wages. The solution would be reallocating similar jobs across firms.
Intergenerational Mobility of Immigrants in the US over Two Centuries (Abramitzky, Boustan, Jacome, Perez) Finds that the ‘American Dream’ rings true: children of immigrants from nearly every country have higher rates of upward mobility than US-born children.
What is the Problem with Rising Dependency Ratios in Japan – Part 1? (Economic Outlook) Japan’s rising dependency ratios result from its ageing and shrinking population. MMT advocate argues that these dynamics lead to real reductions in productivity and social resources, but do not cause fiscal issues. [Bearish rates]
Amid heated debates on Big Tech’s market power, the new legislation in California, called AB5 is gaining traction. We feature Laura Tyson, a former chair of the US President’s Council of Economic Advisers arguing that rather than allowing technology to accelerate the hollowing out of the middle-class, governments at all levels should be strengthening worker protections. We also feature analysis claiming that the determining factor behind your wealth seems to be pure luck.
Middle Management, Geographic Frictions, and Firm Establishment (VOX EU) Geographic frictions, such as the distance between a firm’s headquarter and its establishments, may adversely impact the firm’s performances. Hiring “middle managers” who function like CEOs in regional offices is an effective way to offset this negative externality. Argues middle management may be positive for international firms.
A New Approach to Protect Gig Workers (Project Syndicate) California has passed a new law to make it harder for the Ubers and Lyfts of the World to classify workers as independent workers instead of employees. Given that Trump is against the legislation, it can expected to spur major legal and political battles in 2020. Could see higher wages, so potentially negative gig economy companies.
If You’re So Smart, Why Aren’t You Rich? Turns Out It’s Just Chance (MIT Technology Review) Researchers from the University of Catania simulate how people utilise their talents to exploit opportunities in life and accumulate wealth. Results show that the wealthiest individuals are nowhere near “the most talented” – an important factor is, in fact, pure luck. Suggests taxing the rich.
The new IMF Managing Director, Kristalina Georgieva, started her mandate on a gloomy warning of a global slowdown. We look at what weak growth might mean for monetary policy and why ageing populations are even more of a threat than previously thought.
The World Economy: Synchronized Slowdown, Precarious Outlook (IMF Blog) IMF downgrades growth for 2019 to 3%, the slowest pace since the 2008 crisis. Also flags bubble risks of monetary policy and need for macro-prudential policies.
Sailing into Unchartered Demographic Waters (VOX EU) David Blooms discusses the implications of the global population ageing. He proposes reforms in healthcare policies, human capital management and social securities to take on these challenges.
Reviving Innovation in Europe (McKinsey) A highly fragmented market and a lack of scale are what hinder Europe’s edges on technology innovation, causing it to fall behind the US and China. McKinsey suggests five approaches that Europe plays to its strengths including building on its industrial strength.
Despite fears of doom and gloom across all indicators, the labour market is thriving in the US.
Initial Claims Still Positive, Negative Near term Recession(The Bonddad Blog) Debunks current predictions about a looming recession by scrutinising labour market data . The average on claims remains low and the monthly YoY% change is at the same level as last year – no worries in sight.
Predicting Recessions: Financial Cycle Versus Term Spread (BIS) Measuring the financial cycle has a better predictive power for incoming recessions than the more common measure of term spreads.
The Myth of Income Stagnation, Again (Dr. Ed’s Blog) Further analysis on the state of the labour market – this piece maintains that productivity growth is increasing and consequently results in a rise in wages. Thereby, undermines theories of income stagnation.
The Best Economic News No One Wants to Talk About (The Atlantic) Looks at why neither politicians nor the media want to highlight the healthy labour market – wage growth for low-income earners has doubled poorest workers are now paid more.
The Surprising Decline of Entrepreneurship and Innovation in the West (The Conversation) Observes various indicators of entrepreneurship such as the ratio of new firms to total firms and concludes that they all point to a decline in overall innovation.
Aging populations across the Western World comes with a number of issues while it is transforming the labour market. Established tech exporters such as Japan are losing their edge. We also look at how tech is revamping retail banking.
Why Japan Lost its Comparative Advantage in Producing Electronic Parts and Components(VOX) A sharp appreciation of the yen after the Financial Crisis, caused by capital seeking safe havens has hurt Japanese competitiveness in electronic parts, their bread and butter. Yen export prices tumble relative to production costs. Highlights a need for “craftsmanship” instead of pure price competitiveness going forward.
Population Aging and Structural Transformation(Cravino, Levchenko, Rojas) Shows that the older the population of a country, the more expenditure end up in the service sector. Population aging played a much larger role than changes in real income in the structural change observed in the US between 1982-2016.
Seven Transformative Shifts in US Retail Banking Inflection Point (McKinsey) – Pinpointing to seven transformational shifts which are advancing changes in the US retail banking industry. They have to quickly adapt – a growing number of consumers are trusting Big Tech players (Amazon, Google, Apple and Facebook) with their money instead.
Financial integration in Europe through the lens of composite indicators (Hoffman, Kremer, Zaharia) Financial integration within the Euro area, within money, bond, equity and banking markets is an important driver of growth and heavily influences per capita GDP. Another testament against Brexit.
How Informative Are Real Time Output Gap Estimates in Europe? (IMF) Basically finds that potential growth is typically over-estimated and real-time estimates of output gaps are useless in forecasting inflation/
One Ring to Rule Them All? New Evidence on World Cycles (IMF) Counterintuitive findsing that the world growth cycle is weak for most countries and that synchronisation between economies has not increased over time (at least for growth, rather than inflation).
Why Are Some Societies More Entrepreneurial than Others? Evidence from 192 Countries over 2001-2018 (Wharton) Academic paper finds institutional factors like R&D expenditure, STEM education and density of established firms has little bearing on rates of entrepreneurship. Instead, cultural factors like gender equality, societies that value performance and acceptance of status privilege/hierarchy matter more.
Financial Conditions and Purchasing Managers’ Indices: Exploring the Links (BIS) Finds that equity prices, credit spreads and the dollar predicts PMIs
Yield Curve Inversion and Recession Risk (BIS) Decomposing components of yield curve inversion finds mixed signals for recession.
Some Observations on Determining Business Cycle Chronologies (Econbrowser) Provides a survey of how recessions and business cycles are dated. There’s a big variety of definitions – and two negative quarters of GDP is not the best.
The economy is changing thanks to tech – but increasingly the response is for more regulation, whether gig workers or automation-linked processes. We shouldn’t also forget about the dramatic disruption of the retail sector.
Working Conditions on Digital Labour Platforms (VOX) Gig economy workers on these platforms have low wages and poor labour market protections. Expect this area to be regulated soon!
The Economic Consequences of Automation (Project Syndicate) Keynes expert Robert Skidelsky argues that much automation may lead to job losses even in long-run if Karl Marx was right in the need for “reserve army of the unemployed” to keep profits high. Argues for government intervention.
Annual Report on Global Preparedness for Health Emergencies (World Health Organisation) Get scared by reading about all the bad things that can happen (see chart)
Death of Shopping Malls and Department Stores in Five Charts (Mish Talk) Battery of charts showing the rise of online shopping and its deflationary impact.
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