The future of globalization

Video

TEDx lecture by Richard Baldwin. Globalization will change dramatically in a foreseeable future. We will always trade goods but we will mainly trade services that we do not currently do. Technology will make it possible as it will geographically dissociate services between those who do and those who receive. The world will become truly global. It’s fascinating.

Click on the picture

The pace of the US labor market is changing

T he US job market has really changed pace in the past six months. It stabilizes but the trend is not on the downside yet. It will be for the second half of the year.
Households have the perception that the trend is no longer improving and the number of available jobs no longer increases. As growth slows, the job market will inevitably change pace. It will be interesting just a few months before the presidential elections

The Fed cuts its rate

The #Federal Reserve drops it’s rate by 25bp to 2.00-2.25%. Reasons are too low inflation rate and global uncertainty. It’s a kind of preemptive move which is quite weird. Usually the US central bank drops it’s rate when the environment is already bleak.

One reason for that comes from the fact that we don’t know the future, neither the Fed nor us. There is therefore a risk of credibility for the Fed if there is a rebound in the economic activity of a size that has no relation with the rate cut. The other risk is associated with political pressures from the White House. It’s also a source of concern.

ECB will reduce its rates as expected

The ECB will cut interest rates in September with probably a differentiated deposit rate regime depending on the amount of deposits. It is considering the resumption of asset purchases.

The analysis I was doing this morning always seems correct to me (see here).
I will add another remark nonetheless. The risk of recession appears low according to Draghi. What will the ECB do in the event of a recession? It will be necessary at all costs a proactive fiscal policy to get out. That’s a risky bet

A more accommodative ECB, ok but for what ?

Mario Draghi will most likely announce, for September, measures for a more accommodating monetary policy. A possible rate cut and the resumption of QE would lead to an increase in financial repression. Debt issuers will benefit to the detriment of the savers. This will give additional margins to euro area governments since they will be even less constrained by any financial element.

Four questions

1- Will household behavior be affected? The drain on their savings will only be gradual via the decline in bond yields (I am thinking here of life insurance for example). Do not count on an acceleration of consumption. This has already occurred when the refi rate has fallen to 0%.

2- The rate on corporate bonds will remain very low especially if the QE includes purchases of companies’ securities. The risk is to have more fragile financial structures because the debt will not stop.

3- The financial repression favors governments which appropriates an additional part of the savings. The question is: what for? If it is to finance operating expenses then the efficiency will be zero and the monetary measure will only increase the discomfort. This means that expenditures must be on capital expenditures to expect the convergence to a higher growth trajectory. In this case, monetary policy will have been effective. This brings back Olivier Blanchard and Martin Uribe’s discussions.

4- These questions bring us once again to fiscal policy and its effectiveness. Draghi discusses this issue at each press conference. Eurozone fiscal policy will not exist for lack of support and not just from Germans.

This means that to be effective the measures announced by the ECB will have to reflect a strong fiscal awareness of all the countries in the zone. One can be dubious unless Germany enters a recession. In this case the purse strings would relax.

What to expect next week ? (July 15 – July 21, 2019)

Highlights


> The Chinese GDP growth number for the second quarter (July 15). During the first three months of the year growth was at 6.4% It should be lower as monthly date on industrial production and imports show a poor momentum.
> Retail sales and Industrial production in the US (July 16). They will show the strength of the US economy. These will be important benchmark that may influence the Fed’s strategy. Powell just mentioned this week that there was no improvement despite the strong labor market report.
Associated to these numbers, the Fed’s beige book (July 17) will highlight the Fed’s perception of the economy at a regional level.
> The NY Fed (July 15) and the Phylli Fed (July 18) indices on economic activity will also provide data on the business cycle strength.

> ZEW index in Germany (July 16). A weak number following weak numbers in recent months may force the government to adopt a more proactive economic policy.
> Employment numbers in the UK (July 16) and CPI in the UK (July 17)
Weaker numbers on employment are still to come and will be seen after this summer with the strong slowdown expected in the manufacturing sector.

The document is available here NextWeek-July15-July21-2019