Overseas Headlines– July 6, 2018

Date: July 6, 2018 

United States:

Trade War ‘Would Be Horrible’ for the U.S. Economy, Arthur Laffer Says

Arthur Laffer, a former economic adviser to President Ronald Reagan and to Donald Trump’s campaign, said the threat of a global trade was hanging over the U.S. economy and could undo the pro-growth policies that Trump has championed. “I don’t think we’re going to have a trade war, but if we did, it would be horrible,” Laffer told Bloomberg Television in an interview Tuesday. “We’ve got all sorts of things going for us and the only thing blocking is the threat of trade war.” Laffer, perhaps best known for his “Laffer Curve” principle of supply-side economics that argues tax cuts help pay for themselves by spurring growth, said “no economist in his right mind would ever want a trade war.” Laffer praised Trump for an “amazing” performance as president and added, “I don’t think he wants a trade war at all,” citing a potential drag on financial markets. The U.S. has imposed 25 percent tariffs on imported steel and aluminum and threatened to slap more levies on other products from some of its biggest trading partners, including China, Canada, Mexico and the European Union. Tariffs on $34 billion in Chinese goods are set to go into effect Friday. The other nations have vowed to retaliate in what would amount to a trade war that could raise prices and slow the global expansion. “The evidence is so clear that trade wars destroy economies globally,” Laffer said.



BOE Sees Reversal of Decade-Long Slump in U.K. Productivity

Increasing investment by firms in technology means the U.K.’s abysmal productivity growth should soon start to recover, according to a Bank of England staff blog. A shortage of skills and labor is acting as a “catalyst” for firms to introduce productivity-boosting technology such as automation, said Will Holman and Tim Pike, who work in the central bank’s division monitoring businesses across the country. But on the day the BOE published the analysis, data showed that a shortage of workers may be pushing up wages even though productivity is still in the doldrums. Productivity increased an annual 0.9 percent in the first quarter, less than half the average rate before the financial crisis. It fell 0.4 percent from the previous three months, figures published by the statistics office show. At the same time, unit labor costs gained the fastest in four years. “We detect a change in the mindset of business leaders recently, in favor of capital over labor,” they said in a post published Friday. “The fact that examples are becoming more common across sectors suggests that the recent slowdown of labor supply growth may be followed by a sustained productivity recovery.” Packaging and meat-processing companies are investing in robots, the researchers said, while retailers are increasingly using self-service till points and logistics firms are using warehousing automation. Restaurant and bar staff may also be gradually replaced through technology such as self-serving beer pumps, the blog said. Administrative processes including handling invoices are also being automated with cloud-based IT. Until recently, a high availability of labor meant that firms would choose to hire over business investment, the blog post said. Sluggish wage growth meant those choices were affordable and had little impact on profit margins.



Asia’s Worst Currency to Stabilize, Help India Bonds, Kotak Says

India’s rupee, Asia’s worst-performing currency this year, has scared many foreign fund managers away from the nation’s local bond market. Over the next several years, however, the rupee will stabilize, attracting international investors back to the country’s debt market, according to one of India’s leading life insurance companies. The nation’s currency has dropped about 7.3 percent against the dollar this year. That’s part of a correction after it strengthened in the past five years to overvalued levels, Kunal Shah, senior vice president and fund manager of debt and alternate assets at Kotak Mahindra Life Insurance Co., said in a phone interview. The recent weakening has left the currency less vulnerable as it’s no longer as overvalued in real effective exchange rate terms, he said. Outflows from India’s bond market total $6.1 billion year to date, according to Bloomberg-compiled data. The exodus came as India’s current account deficit weighed on the rupee. Higher oil prices have taken a toll, as India is the world’s third-biggest oil consumer and relies on imports to meet about two-thirds of its fuel needs. Brent oil, the global benchmark, is at about $77 a barrel. If crude prices don’t go beyond $80, then the rupee will stabilize against the dollar and attract more foreign players to the bond market, Shah said. It just might not happen right away, as political risks stemming from India’s general elections next year will likely keep the rupee volatile until then, he added.