Overseas Headlines- May 20, 2019

United States:

Fed’s Kaplan Says Watching Trade War Impact on Economy, Prices

Federal Reserve Bank of Dallas President Robert Kaplan says trade tensions might have a chilling effect on the U.S. and global economy, and he’s also watching for the potential effects on inflation. Some end-markets may be jeopardized by the U.S.-China trade dispute, but “the bigger thing is logistics and supply chain arrangements,” Kaplan said Saturday during a wide-ranging discussion at the Society for Advancing Business Editing and Writing’s annual conference in Phoenix. “It’s more likely to slow global growth” and “it’s more likely to slow U.S. growth ultimately,” but it’s also possible some of the threatened tariffs won’t be enacted, he said. President Donald Trump last week increased duties to 25% from 10% on some $200 billion in Chinese products, and has threatened to impose tariffs on almost all imports from the world’s No. 2 economy. That would pull in consumer products like mobile phones and toys that so far haven’t been affected, as well as everything from flashlights to billiard balls. As for the effects of tariffs on inflation, it’s “too soon to judge, you’ll have to see the currency reaction and how businesses deal with it,” said Kaplan, who doesn’t vote on monetary policy this year. He noted that the Fed will have to examine, “is this transitory, or is this something that will be more persistent?” Kaplan also echoed concerns that technological advances are muting inflation, which has been stubbornly below the Fed’s target. “We think that’s intensifying,” fueled by the low cost of capital, he said. The high ratio of corporate debt to U.S. GDP is a concern, said Kaplan. While manageable for now, it “could be an amplifier” if the economy turns down. Many leveraged loans aren’t on banks’ balance sheets and “we need to be vigilant and watch the non-bank financial sector,” Kaplan said. The Fed has less visibility into the well-being of that sector, he said. Kaplan also pointed to the several hundred billion dollars in high-yield debt in exchange-traded funds and other vehicles with daily liquidity, noting that there’s a mismatch between the liquidity held and the rights of holders to get high liquidity. As to whether Trump’s criticisms of the Fed and jawboning for an interest rate cut have had “any impact on decisions around the table, the answer is ‘no,’” Kaplan said. He also talked about the increase in government debt in recent years, and that some “people are assuming the dollar will always be the world’s reserve currency” when they dismiss concerns about the issue, Kaplan said.



Theresa May’s Economic Legacy Dominated by Brexit Fallout

Theresa May’s economic legacy is dominated by the same thing that consumed her turbulent premiership: getting Britain out of the European Union. On many metrics, the economy is indistinguishable from the one inherited from David Cameron. Productivity growth remains abysmal, austerity continues, homes are largely unaffordable for first-time buyers and deep divisions persist. That’s despite May’s pledge in her very first statement as prime minister in July 2016 to tackle “burning injustices” and help those struggling to get by. Though the Brexit recession predicted by some economists back in 2016 never materialized, and the economy kept growing, there are scars, notably the weakness of investment. Better was job creation, which has boomed, and wages are once again rising more quickly than prices. May has agreed to set out a timetable next month for her exit. As she prepares to step down after almost three years, here’s the state of Britain today. The referendum delivered an initial shock to living standards by driving down the pound and pushing up import prices; now business investment is under pressure and export prospects are weakening, leaving Britain heavily dependent on consumers. But households have little left in the tank. They saved just 4.2% of their income last year, less than half the rate of 2015. The economy is widely estimated to be around 2% smaller than it would be had Britain voted to stay in the EU. Since the second quarter of 2016, U.S. GDP has increased 7.3% and the euro area by 5.5%. Britain has lagged behind at 4.8%.The labor market has been the standout performer. The number of people in work has risen by almost 1 million since May took office, taking the jobless rate to the lowest since the mid-1970s. Almost all of the growth has come from full-time employee jobs. One theory is that firms are choosing labor over capital investment because hiring is easier to reverse if the economy turns sour. Pay growth is picking up too, though real wages aren’t expected to recover their pre-recession levels until 2023. Record employment is good news for living standards but British workers are barely more productive than they were before the financial crisis. Output per hour grew just 0.5% last year, extending a long-running malaise. That’s depressed wages and restricted how quickly the economy can grow without generating inflation.



Japan’s Unexpected Growth Spurt Comes With Reasons for Caution

Japan’s unexpected growth spurt in the first quarter masked weakness in the economy just as policy makers prepare to hike the sales tax in October. Gross domestic product expanded an annualized 2.1%, but the biggest driver was imports falling even faster than exports, which meant that net exports technically fueled growth in the economy. Declining imports is a sign of weakness in demand, so the GDP figure is somewhat misleading. The economy’s pillars of growth — exports, capital spending and private consumption — all declined during the quarter, with exports tumbling 2.4%, the most since 2015. Picking up some of the slack were public spending and rising inventories, neither of which are signs of a strong economy. Supporters of the tax hike are likely to point to the GDP figure to argue that the hike should go ahead, amid growing concern in Prime Minister Shinzo Abe’s ruling party that it could derail the economy at a time of weakness. Economy Minister Toshimitsu Motegi said Monday there is no change in the government’s plan to raise the tax. Another reason for caution is that the GDP figure is subject to large revisions. A 2015 study found that Japan’s revisions to year-on-year growth figures were the second-largest among 18 OECD economies. When Abe decided in late 2014 to postpone the sales tax hike the first time, a preliminary GDP figure had shown the economy shrinking 1.6% the previous quarter. The figure was later revised to growth of 0.3%.”The discussion about the tax hike delay might settle down,” said Hiroyasu Ando, senior economist at Sumitomo Mitsui Banking. “But when I look at the numbers closely, they are not strong. Household spending and capital investment are negative, which shows that internal demand during the quarter was sluggish. There are some worrisome factors.” While capital spending held up much better than expected during the first quarter, slowing global growth–especially in China, Japan’s biggest market–and rising trade tensions have hit corporate sentiment. Japan’s GDP is expected to grow in the second and third quarters, thanks partly to fiscal stimulus, before contracting in the fourth quarter after the sales tax hike takes effect. Economists expect private consumption — which fell 0.1% in the first quarter — to pick up ahead of the tax increase.


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