Wednesday, March 2, 2016
US economy expands with wage growth; World economy's 2008 moment; New Zealand votes on change of flag
1 US economy expands with wage growth (Straits Times) The US economy continued to expand across most of the country, while wage growth was described as varying widely, "from flat to strong", a Federal Reserve report showed on Wednesday.
Seven of the Fed's 12 regional districts characterised the economy as growing "moderately", at a "modest pace" or "slightly", according to the central bank's Beige Book, an economic survey published eight times a year.
Reports on manufacturing were mixed, with the sector continuing to suffer as a strengthening US dollar and a "weakening global outlook" took a toll on overseas sales. While recent data on jobs, consumer spending and inflation have been mostly positive, concerns about global growth and financial market volatility have reduced expectations for a rate increase this month.
The Fed tightened policy for first time in almost a decade in December, lifting the target range of the fed funds rate to 0.25 per cent to 0.5 per cent. The Beige Book survey showed that while wages generally increased since the start of the year, the growth was inconsistent.
2 World economy’s 2008 moment (Nouriel Roubini in The Guardian) Are we back to 2008 and another global financial crisis and recession? My answer is a straightforward no, but that the recent episode of global financial market turmoil is likely to be more serious than any period of volatility and risk-off behaviour since 2009. This is because there are now at least seven sources of global tail risk, as opposed to the single factors – the eurozone crisis, the Federal Reserve “taper tantrum,” a possible Greek exit from the eurozone, and a hard economic landing in China – that have fuelled volatility in recent years.
First, worries about a hard landing in China and its likely impact on the stock market and the value of the renminbi have returned with a vengeance. Second, emerging markets are in serious trouble. They face global headwinds (China’s slowdown, the end of the commodity super cycle, the Fed’s exit from zero policy rates). Many are running macro imbalances, such as twin current account and fiscal deficits, and confront rising inflation and slowing growth.
Third, the Fed probably erred in exiting its zero-interest-rate policy in December. Weaker growth, lower inflation (owing to a further decline in oil prices), and tighter financial conditions now threaten US growth and inflation expectations. Fourth, many simmering geopolitical risks are coming to a boil, including the prospect of a long-term cold war between the Middle East’s regional powers, particularly Sunni Saudi Arabia and Shia Iran.
Fifth, the decline in oil prices is triggering falls in US and global equities and spikes in credit spreads. This may now signal weak global demand as growth in China, emerging markets, and the US slows. Sixth, global banks are challenged by lower returns, owing to the new regulations since 2008, the rise of financial technology that threatens to disrupt their already-challenged business models, the growing use of negative policy rates, rising credit losses on bad assets, and the movement in Europe to “bail in” banks’ creditors, rather than bail them out with now-restricted state aid.
Finally, the European Union and the eurozone could be ground zero of global financial turmoil this year. European banks are challenged. The migration crisis could lead to the end of the Schengen Agreement, and (together with other domestic troubles) to the end of German chancellor Angela Merkel’s government.
In the past, tail risks were more occasional and the policy response was strong and effective, thereby keeping risk-off episodes brief and restoring asset prices to their previous highs. Today, there are seven sources of potential global tail risk, and the global economy is moving from an anemic expansion to a slowdown, which will lead to further reduction in the price of risky assets (equities, commodities, credit) worldwide.
At the same time, the policies that stopped and reversed the doom loop between the real economy and risk assets are running out of steam. The policy mix is suboptimal, owing to excessive reliance on monetary rather than fiscal policy. Indeed, monetary policies are becoming increasingly unconventional, reflected in the move by several central banks to negative real policy rates.
3 New Zealand votes on change of flag (San Francisco Chronicle) New Zealanders began voting Thursday on whether to change their flag from a design which features the British Union Jack to one which features a native silver fern. The preliminary results will be announced on March 24.
Organizers say that deciding the issue by popular vote represents a world first, and that other countries have changed flags by revolution, decree or legislation. Opinion polls indicate the nation of 4.7 million people will opt to stick with its current flag, although proponents of the new design say they have momentum on their side and that more and more people are embracing a change.
Those favoring change say the current flag is too similar to Australia's and references a colonial past that it's time to leave behind. Those opposed to change say the new design is uninspiring or is an attempt by Prime Minister John Key to create a legacy.
The process of choosing a potential new flag has been long and sometimes amusing. People submitted more than 10,000 designs, including bizarre ones like a kiwi bird shooting a green laser beam from its eye and a stick drawing of a deranged cat.