Euro zone officials hit back at the International Monetary Fund on Tuesday for publishing an article on the way forward for Greece’s fiscal and economic policy that thrust into the open a row between the lenders over Athens’ bailout.
“The European institutions were surprised that the IMF staff published a blog post on the ongoing negotiations with the Greek government as new talks in Athens are starting with the aim of concluding the second review,” said a spokesman for the euro zone bailout fund, the European Stability Mechanism.
“We hope that we can return to the practice of conducting programme negotiations with the Greek government in private.”
The IMF article appeared as the Fund and the euro zone struggle to find common ground on Greek policies that would allow the IMF to take part in the latest bailout, the third one since 2010 and now fully financed by the euro zone.
The IMF, which a group of countries led by Germany very much want to join the latest programme for credibility reasons, says euro zone targets set for Greece are too ambitious and assumptions on reform implementation too optimistic.
It said it was against further austerity in Greece and that a primary surplus target of 3.5 percent of GDP in 2018, on which the euro zone insists, risks damaging the nascent recovery.
The head of the European Department Poul Thomsen and chief economist Maury Obstfeld said a Greek primary surplus of 1.5 percent in 2018 would be enough and stood a better chance of being sustained for several years.
The IMF said the Greek government, with the consent of the euro zone, has already cut investment and discretionary spending too much, while not being able to tackle the more politically sensitive areas like pensions or income tax.
Instead of more austerity which the 3.5 percent primary surplus target would imply, Greece should focus on the creation of a modern welfare system financed with cash from a rebalancing of the Greek tax system and too generous pensions, the IMF said.
The European Commission, which represents euro zone lenders alongside the ESM and the European Central Bank, said there was nothing wrong with the actions envisaged for Greece by the current ESM bailout.
“The European institutions consider that the policies of the ESM programme are sound and if fully implemented can return Greece to sustainable growth and can allow Greece to regain market access,” European Commission spokeswoman Annika Breidthardt told a news briefing.
“Greece has already implemented major reforms under the ESM programme and is on track to reach the agreed fiscal targets. It is important that all institutions recognise these achievements of the Greek programme,” she said.
The size of the Greek primary surplus is directly linked to the scale of possible debt relief that Greece is likely to need.
Germany wants a higher primary surplus target because it means lower, or even no need for debt relief for Athens — an important factor in an election year in Germany where public opinion is suffering from bailout fatigue.
Berlin believes that, if Greece carries out all the agreed structural reforms, there would be no need to grant it any relief on its debt mountain of almost 180 percent of GDP, now mainly owned by euro zone governments.
The IMF has a different view.
“Greece’s debt is highly unsustainable and no amount of structural reforms will make it sustainable again without significant debt relief,” the IMF said.
Euro zone finance ministers agreed earlier this month that they would only discuss the details of a possible reprofiling of existing loans to Greece and lengthening their maturities in 2018, when the current bailout comes to an end and well after German elections in autumn 2017.
Source: Reuters (Reporting by Tom Koerkemeier and Philip Blenkinsop, writing by Jan Strupczewski; Editing by Alastair Macdonald)
The terms of any Brexit deal must be decided on quickly to avoid relying on interim or transitional agreements, said the head of a group promoting Paris as a financial center.
“Things have to be clear as soon as possible,” Gerard Mestrallet, the chairman of Paris Europlace, said in an interview with Bloomberg Television on Tuesday. “Business has nothing to gain from a long transitional period, which will be a period of uncertainties.”
The European Union and the U.K. are preparing for Britain’s exit from the bloc. Chancellor of the Exchequer Philip Hammond told Parliament’s Treasury Committee on Monday that support is emerging “on both sides of the English Channel” for a longer, transitional period to allow Britain set out terms for its new relationship with the EU. Prime Minister Theresa May has pledged to begin the Brexit process by the end of March, starting a two-year countdown for a U.K.-EU deal, unless both sides agree on an extension.
For Mestrallet, while London will remain “a very large, international financial center,” “momentum” is building for Paris to attract more financial jobs and money flows as Brexit talks start and France prepares for presidential elections in mid-2017.
“The elimination of the financial passport” should be part of the Brexit, pushing non-EU financial firms including U.S. and Chinese banks to move some operations elsewhere in the EU, Mestrallet said.
“If they want to have access to the continental market, they have to cross the Channel and come somewhere, Paris we hope or also Frankfurt or Luxembourg,” said Mestrallet, who’s also the chairman of energy company Engie SA.
In France, whoever is elected as president should rapidly adopt a package to raise the country’s attractiveness for business and investment, he said. He called for “a strong improvement” to build on outgoing President Francois Hollande’s “positive” measures such as a special tax regime for foreigners.
Paris Europlace, representing both French financial firms and their large corporate clients, is setting out a series of proposals for candidates in next year’s presidential vote, including a stable and predictable tax regime, more flexible labor laws and expanding the use of pension funds to better link retirement savings and corporate-funding needs.
There is a “sacred union” in France between politicians on both sides to make Paris’s financial center more attractive, Mestrallet said. France’s corporate tax level stands at 33 percent, on par with Germany, and it will decline, possibly to as low as 25 percent, he said. Mestrallet declined to comment on candidates and their specific programs.
The group’s proposals are coming a week after Manuel Valls resigned as prime minister to run in the Socialists’ January primaries. The French government this year committed to corporate taxes falling to 28 percent in 2020, turning more pro-business after Hollande campaigned four years ago on an anti-finance message. Former Economy Minister Emmanuel Macron is also running, but as an independent.
Francois Fillon in November won the nomination for the opposition party, Les Republicains, on a platform for harsh economic change. He has become the front-runner for the April-May two-round presidential vote along with the anti-European, anti-establishment Marine Le Pen.
International rating agency Moody’s Investor Services, on Tuesday, said that its outlook for banks in the Asia-Pacific region remains negative for next year. The rating agency believes that the difficult operating environment, in the 16 banking systems of the region, is likely to affect the asset quality and profitability of banks here, it said in a report.
“Problem assets will rise from a generally low level, due to previous rapid credit expansion, elevated corporate and household leverage in some economies, the ongoing recognition of credit problems, and challenges in commodities and cyclical industries,” Stephen Long, a Moody’s managing director, said in a statement.
“Foreign private capital flows will remain volatile in emerging Asia, pressuring domestic currencies and weakening operating conditions for the banks,” added Long. “And, property price increases in parts of Asia Pacific will further amplify credit risk for the banks.”
Of the 16 banking systems in Asia-Pacific that Moody’s analyzed, six carry negative outlooks as compared with three in early 2016. The stable outlooks for the remaining 10 systems reflect the banks’ greater resilience against higher solvency risks, Moody’s said.
As far Indian banks go, Moody’s has a stable outlook across parameters such as capital, asset quality, operating environment funding and liquidity, profitability and efficiency and government support.
“We expect uneven economic growth in APAC, with risks skewed to the downside; most economies growing at lower rates than their long-term averages,” the rating agency said in its report.
“GDP (gross domestic product) growth slowdown is most pronounced for small and open economies such as Taiwan, Singapore and Hong Kong. By contrast, Australia, India, New Zealand and Vietnam are more resilient,” Moody’s added.
Indian banks do however display one of the highest non-performing asset (NPA) ratio in corporate loans at nearly 9.5%, second only to Mongolia’s 12.5%, the report noted. In a sensitivity test where the EBITDA falls by 25% and the funding costs rise by 25%, Indian companies would prove to be some of the weakest ones in the region, with Japanese firms being the strongest, the rating agency said.
As a share of total gross loans, Indian banks have one of the highest exposures to the metals and mining sector, which means that their profitability is deeply impacted by any adverse developments in those sectors. Mongolian and Indonesian banks are some other lenders with similar conditions, Moody’s said in its report.
As for government support for the banks, Moody’s said such support will stay high, because regulators in Asia-Pacific are not keen to embrace wider bail-in measures. Hong Kong is the only exception in the region, with ongoing progress towards an operational resolution regime.
The Bank of Japan is expected to extend the deadline for its loan programs aimed at boosting lending to industries with growth potential, sources said, bolstering government efforts to lift the country from decades of weak growth.
The central bank’s nine-member board will make the decision either at its rate review next week or a subsequent policy meeting in January, sources familiar with its thinking told Reuters.
The BOJ has three cheap loan schemes for financial institutions – one aimed at boosting bank lending to industries with growth potential, another for banks operating in quake-hit areas, and a program under which it offers four-year loans at zero interest for banks that increase overall lending.
The central bank is set to extend the March 2017 deadline for these programs given solid demand from financial institutions, the sources said.
“The programs are well-received by banks, so there’s not much reason to discontinue them,” said one of the sources on condition of anonymity.
The BOJ has extended the deadlines for these programs several times, usually by about a year, to prompt risk-shy financial institutions to shift money out of safe-haven government bonds into lending.
The schemes are separate from the BOJ’s main asset-buying program dubbed “quantitative and qualitative easing” (QQE), under which it pumps money into the economy via purchases of government bonds and risky assets.
To encourage banks to use the lending programs, the BOJ exempts funds procured from the schemes from a 0.1 percent negative interest it charges to excess reserves financial institutions park with the central bank.
Japanese bank lending remains weak despite the BOJ’s massive money printing as companies are reluctant to borrow for investment on uncertainty over the business outlook.
One of the key objectives of premier Shinzo Abe’s “Abenomics” stimulus policies is to boost Japan’s growth potential with reforms so that companies increase spending on prospects of a stronger economy.
Source: Reuters (Reporting by Leika Kihara; Editing by Jacqueline Wong)
Japan’s government has taken a large step toward an overhaul of its most important macroeconomic data to address long-standing concerns about volatility, collection methods, sample quality and accuracy.
A timetable agreed by a government panel of private-sector economists on Tuesday said improvements in statistical calculations of household spending and capital expenditure used in gross domestic product (GDP) should start from the end of 2017.
The overhaul could reduce the big swings often seen between preliminary and revised GDP data, which stem from incomplete capital expenditure data. It may also give economists an earlier picture of capex trends.
The plan calls for the government to consider streamlining the Finance Ministry’s corporate survey so it can be compiled more quickly and used in preliminary GDP data.
It also urges a study of how to adjust residential rents in the consumer price index (CPI) and whether Internet retail prices should be included in Japan’s benchmark measure of consumer prices.
The panel’s report comes shortly after the Cabinet Office, which publishes some economic indicators, adopted a new method to calculate capital expenditure for GDP, bringing it in line with the United Nations’ System of National Accounts.
The government is likely to adopt the plan in full, but it is uncertain whether proposed changes will push GDP and CPI up or down, Cabinet Office officials told reporters.
The plan calls for the government to use on-line forms to collect capital expenditure data from 2019 to increase replies and make compiling the data easier.
The government should do the same for the household spending survey, which will ease the burden on respondents and increase responses, the plan said.
The plan calls for new quarterly data on disposable income and savings from fiscal 2018, the streamlining of services sector data from fiscal 2019 and a study on how to measure the “sharing economy” to start this fiscal year, which ends in March 2017.
The “sharing economy” loosely refers to companies that use the Internet to quickly form a dispersed network of people that provide services such as delivery, taxi rides or temporary lodging.
Source: Reuters (Reporting by Stanley White; Editing by Richard Borsuk)
Small-business sentiment jumped by the largest monthly amount in more than seven years after Republicans swept to an election victory.
The National Federation of Independent Business on Tuesday said its small-business optimism index jumped 3.5 points to a seasonally adjusted 98.4 in November, marking the strongest monthly gain since April 2009.
That is only the third time since 2007 the optimism index has broken into what’s considered above-average territory.
The difference was stark when comparing responses before and after the election.
According to an NFIB spokesman, the optimism index was 95.4 for those who responded before the election, and 102.4 for those who responded after the election. He said there were roughly equal number of responses before and after. The NFIB received responses from 724 small businesses during the month.
After Donald Trump became president-elect and Republicans retained control of both chambers of Congress, job creation plans edged higher amid a spike in expected better business conditions and expected higher sales.
Trump has pledged to lower taxes and the regulatory burden and increase infrastructure spending. Congressional Republicans have signaled strong support for the first two parts of the Trump agenda, if not the infrastructure investment.
“If higher optimism can be sustained, I expect that in the coming months we’ll see an increase in business activity, such as hiring and expanding,” said Bill Dunkelberg, chief economist of the NFIB.
U.S. President-elect Donald Trump’s challenges to China on trade and Taiwan are rattling American companies who have long benefited from stable relations between the two countries but now fear retaliation by Beijing if Trump were to act.
Trump jarred Chinese officials on Sunday by saying the United States did not necessarily have to stick to its long-standing position that Taiwan is part of “one China.” Beijing expressed “serious concern” about Trump’s remarks.
Four U.S. industry sources who follow China policy closely said they were unsettled by any suggestion of abandoning the “one China” policy, which they said had served the business community well for several decades.
The sources, who spoke on condition of anonymity because of the sensitivity of the issue, stressed the importance of stability for businesses. They said Beijing could retaliate against U.S. companies that do business in China if Trump takes his tougher line too far.
“The Chinese are deeply concerned and we hear now from reliable sources in Beijing who suggest the Chinese government, the Communist Party, are developing lists of U.S. interests against which they could retaliate, commercial interests, and obviously one merely has to look at top U.S. exports to China to get a quick sense of whose heads may be on the chopping block,” said one China trade policy expert who interacts closely with U.S. business.
The expert pointed out that more than 30 states have over $1 billion in exports to China and that there is over $500 billion in commercial engagements by U.S. companies in China. All of that would be at risk if China retaliated.
“That commercial engagement supports American jobs, many American jobs here in the United States,” the expert said.
Another source said there had been “quiet outreach” by the U.S. business community to Trump’s advisers but companies were wary of discussing their concerns about the China policy publicly for fear of becoming a target for the president-elect, who has singled out companies such as Carrier and Boeing.
From Detroit’s car makers to Silicon Valley’s technology champions, China is both a critical source of revenue and profits, and a vital link in global supply chains.
More than four decades after President Richard Nixon upset the status quo of his time with a surprise visit to Beijing, what’s good for U.S.-China relations is good for General Motors and Starbucks and Apple and Wal-Mart Stores Inc.
China has hit U.S. goods with retaliatory tariffs in the past when disputes flared. China in 2011 slapped duties on U.S.-made large cars and sport utilities as part of a trade dispute.
The stakes are higher now.
More than one-third of the 9.96 million vehicles General Motors Co sold globally in 2015 were delivered to Chinese customers. Profits from Chinese operations, including joint ventures, accounted for about 20 percent of GM’s global net income of $9.7 billion in 2015. Ford Motor Co’s China JVs represented about 16 percent of its global pre-tax profit of $9.4 billion in 2015.
U.S. retail giant Wall Mart Stores Inc has 432 stores in China, while coffee chain Starbucks Corp has 2,500 stores there and outgoing CEO Howard Schultz told investors China will one day be a bigger market for the firm than the United States.
Aircraft maker Boeing Co plans to build a “completion” factory in China for its 737 jets, anticipating the country will need 6,800 new jetliners worth $1 trillion over the next 20 years.
“The United States and China are in a symbiotic relationship, we are wed to each other and do best when we grow together,” said Susan Aaronson, a professor at George Washington University who teaches corruption and good governance.
The total value of U.S. trade with China was $599 billion in 2015, according to the U.S. Census Bureau, of which $116 billion was exports to China from U.S. producers, while U.S. companies imported $483 billion in goods from China.
Alan Deardorff, professor of international economics and public policy at the University of Michigan, said that if U.S.-China trade tensions were to reach a boiling point, “the pain would be widespread and deep” for U.S. businesses.
Trump and his advisers have said the U.S.-China trade deficit reflects bad trade deals and currency manipulation by the Chinese government, which they said justifies a tougher response than in the past.
George Washington University’s Aaronson said that while Taiwan is a sensitive topic, if Trump pushes ahead with trade tariffs that is far more likely to translate into retaliation against U.S. firms in China.
“China’s leaders need stability and Trump is totally disruptive,” Aaronson said. “They will need to signal their strength in return.”
Source: Reuters (Reporting by Nick Carey in Chicago and Ginger Gibson in Washington; additional reporting by Paul Lienert and Bernie Woodall in Detroit, Meredith Davis and Tom Polansek in Chicago, Alwyn Scott in Seattle, Caren Bohan and David Brunnstrom in Washington; editing by Joseph White and Grant McCool)
When President-elect Donald Trump returns to this factory town on Friday for a victory celebration, he will find a region that is already experiencing the manufacturing renaissance he promised on the campaign trail.
With local factories employing more workers than any time since the late 1990s, assembly line jobs are not hard to find. Those that pay a decent wage, however, are harder to come by.
“We can barely make ends meet and we’re stuck going nowhere,” said auto parts worker Michael Baum, 22, as he smoked a cigarette in the parking lot of a Family Dollar discount store.
Trump won the White House thanks to strong support from workers in Midwestern cities like Grand Rapids who have seen their living standards erode as the United States shed manufacturing jobs. He beat Democratic rival Hillary Clinton by a margin of 14 percent in the four counties that make up the Grand Rapids metropolitan area, helping him carry Michigan by a margin of 0.27 percent.
Trump has promised to punish companies that shift work overseas, pressuring manufacturers like United Technologies Corp. to reverse their outsourcing plans.
“Our jobs are being stolen like candy from a baby,” Trump said at a rally here the night before the Nov. 8 election.
Grand Rapids, a hub of furniture makers and auto parts suppliers, has not been immune to outsourcing. At least 488 people have lost their jobs over the past year as two manufacturers, Dematic Corp and Leon Automotive Interiors, have shifted work to other countries, U.S. Labor Department filings show.
But new hiring has more than made up for those losses. The number of factory jobs in the region has grown by 40 percent since the depths of the recession in 2009, according to the U.S. Bureau of Labor Statistics, and unemployment stands at 2.9 percent, well below the national average of 4.6 percent.
Local businesses now say their top concern is finding qualified workers, according to Rick Baker, president of the Grand Rapids Area Chamber of Commerce.
Even as jobs have returned to Grand Rapids, earnings remain low. At $846 per week, average weekly wages in the region rank 46th among the 50 largest U.S. metropolitan areas, BLS data show.
The Heart of West Michigan United Way, a local charity, said demand for its services has remained steady over the past several years even as the economy has picked up.
While manufacturing helped lift millions of unskilled workers into the U.S. middle class in the 20th Century, that is no longer the case, said Lou Glazier, president of Michigan Future, a think tank that focuses on the state’s economy.
Factories still pay good wages to workers who have specialized skills, such as welding or computer programing, but routine work no longer pays enough to cover living expenses, he said.
Grand Rapids is “participating in the old economy and doing well in it, in terms of jobs. It’s just that the economy is no longer producing high wages,” Glazier said.
MORE WITH LESS
While Trump and others blame global competition for the decline in factory work, automation has played a large role as well, economists say. The U.S. manufacturing sector has more than doubled output over the past 35 years even as it had shed one-third of its work force, according to the nonpartisan Brookings Institution.
“We’re doing more today with the same amount of people that we had eight years ago,” said Bob Roth, chief executive officer of RoMan Manufacturing, which make glass and electrical components.
At RoMan, assembly line workers start at $13 per hour but skilled workers can earn up to $30 an hour, Roth said. The company pays community college tuition for those who wish to upgrade their skills, but those who fail to improve their productivity enough to justify a higher wage within two years are fired, he said.
Such prospects come as little consolation to workers like Baum, who are trying to figure out a way to boost their earnings on their own. For now, they are pinning their hopes on Trump.
“If he can bring good paying jobs back to America,” he said, “I’ll vote for him again.”
Source: Reuters (Reporting by Nick Carey in Grand Rapids and Andy Sullivan in Washington; Editing by Tom Brown)
U.S. President-elect Donald Trump questioned whether the United States had to be bound by its long-standing position that Taiwan is part of “one China” and brushed aside Beijing’s concerns about his decision to accept a phone call from Taiwan’s president.
“I fully understand the ‘one China’ policy, but I don’t know why we have to be bound by a ‘one China’ policy unless we make a deal with China having to do with other things, including trade,” Trump said in an interview with Fox News Sunday.
Trump’s decision to accept a congratulatory telephone call from Taiwan President Tsai Ing-wen on Dec. 2 prompted a diplomatic protest from Beijing, which considers Taiwan a renegade province.
Trump’s questioning of long-standing U.S. policy risks antagonizing Beijing further and analysts have said it could provoke military confrontation with China if pressed too far.
Beijing had no immediate comment on Trump’s remarks.
The call with Trump was the first such contact with Taiwan by a U.S. president-elect or president since President Jimmy Carter switched diplomatic recognition from Taiwan to China in 1979, acknowledging Taiwan as part of “one China.”
Taiwan is one of China’s most sensitive policy issues, and China generally lambastes any form of official contact by foreign governments with Taiwan’s leaders.
After Trump’s phone conversation, the Obama administration said senior White House aides had spoken with Chinese officials to insist that Washington’s “one China” policy remained intact. The administration also warned that progress made in the U.S. relationship with China could be undermined by a “flaring up” of the Taiwan issue.
Following Trump’s latest comments, a White House aide said the Obama administration had no reaction beyond its previously stated policy positions.
In the Fox interview, Trump criticized China over its currency policies, its activities in the South China Sea and its stance toward North Korea and said it was not up to Beijing to decide whether he should take a call from Taiwan’s leader.
“I don’t want China dictating to me and this was a call put in to me,” Trump said. “It was a very nice call. Short. And why should some other nation be able to say I can’t take a call?”
“I think it actually would’ve been very disrespectful, to be honest with you, not taking it,” Trump added.
Trump plans to nominate Iowa Governor Terry Branstad as the next U.S. ambassador to China, choosing a long-standing friend of Beijing after rattling the world’s second largest economy with tough talk on trade and the call with the leader of Taiwan.
But in the Fox interview, Trump brought up a litany of complaints about China which he had emphasized during his presidential campaign.
“We’re being hurt very badly by China with devaluation, with taxing us heavy at the borders when we don’t tax them, with building a massive fortress in the middle of the South China Sea, which they shouldn’t be doing, and frankly with not helping us at all with North Korea,” Trump said. “You have North Korea. You have nuclear weapons and China could solve that problem and they’re not helping us at all.”
Economists, including those at the International Monetary Fund, have widely viewed China’s efforts to prop up the yuan’s value over the past year as evidence that Beijing is no longer keeping its currency artificially low to make Chinese exports cheap.
Source: Reuters (Additional reporting by Doina Chiacu and Jeff Mason; Editing by Phil Berlowitz)
U.S. President-elect Donald Trump on Friday said that China and other countries often devalue their currencies as the U.S. economy improves, vowing to combat currency manipulation and the dumping of foreign products into U.S. markets below cost.
“We’ll renegotiate our trade deals, stop the product dumping and the currency manipulation which is a disaster for our country,” Trump said at a rally in Baton Rouge, Louisiana. “Every time we get going, China and others, they just knock the hell out of the value of their currency and we have to go back and back, and it just doesn’t work, folks.”
Source: Reuters (Reporting by David Lawder; Editing by Jonathan Oatis)
Pulling off a renaissance in U.S. manufacturing employment will be extraordinarily tough.
After hitting a record of nearly 20 million in 1979, the number of American factory workers has plunged during each of the last five recessions and each time has never recovered. Today, 12.3 million people are employed in U.S. factories, a loss of nearly eight million jobs.
Forecasters in The Wall Street Journal’s monthly survey of economists doubt the numbers of bygone years can be restored. They estimate the U.S. will add about 7,000 manufacturing jobs by the end of 2017, about 40,000 by the end of 2018 and about 50,000 by the end of 2019, according to the average forecast—moving upward in coming years, but at a pace far too slow to replace what has been lost.
“Manufacturing employment is now back to 1941 levels and falling,” said James Smith, chief economist of Parsec Financial. “This is a global trend and not at all specific to the U.S. It is caused by labor productivity growth.”
Mr. Smith’s figure about 1941 is correct. In December of that year, the month the U.S. entered World War II, the nation had about 600,000 more manufacturing workers than today, even though today’s overall U.S. labor force is nearly triple the size.
The decline in manufacturing employment became a flashpoint during the presidential election. President-elect Donald J. Trump has vowed to renegotiate U.S. trade deals so American workers are better protected from foreign competition. Last week, he traveled to Indianapolis to announce that Carrier Corp. would retain about one-third of the jobs at an Indiana factory that previously were going to be entirely shipped to Mexico.
Yet many of the economists in the survey agree with Mr. Smith that the biggest reason so many fewer people work in today’s factories are advances in automation. Improvements in assembly-line technologies and the deployment of industrial robots allow U.S. manufacturers to produce more goods than ever before, but with much smaller workforces. Even if all outsourcing were ended immediately, the march of technology would put steady downward pressure on manufacturing employment.
Asked about the primary cause of the decline of manufacturing jobs, 47% of respondents pointed to automation while 18% said automation and offshoring had played roughly equal roles. About 28% said offshoring had been the primary culprit.
The survey of 62 economists was conducted from Dec. 2 to Dec. 6. The respondents were a mix of academic, financial and business economists.
Despite having doubts about the prospects for manufacturing, they were generally optimistic about the economic outlook in coming years. The economists expect 2.4% economic growth over the next two years, up from pre-election estimates of 2.1%.
They expect the unemployment rate to be somewhat lower, and interest rates and inflation to be somewhat higher, with many crediting Mr. Trump’s priorities of infrastructure spending and tax cuts for the boost. The odds of a recession in the next 12 months declined slightly in this month’s survey to 17%, down from 20% in the survey before the election.
Not everyone is pessimistic about manufacturing. Among the optimists is Deloitte senior U.S. economist Daniel Bachman.
“Deloitte believes that automation will push the U.S. to become the most competitive manufacturing nation by 2020,” said Mr. Bachmann.
Every three years, Deloitte compiles a Global Manufacturing Competitiveness Index, which concludes that U.S. manufacturing is getting increasingly competitive. As manufacturing becomes more high-tech and specialized, the U.S. stands to benefit. Although U.S. workers have higher wages, they are more skilled and productive than international counterparts, Deloitte’s report argues.
But even the optimists concede that significant missteps remain a possibility. In an open-ended question about the biggest risk to the economy, the most common response (from 46% of respondents) was the potential for trade to deteriorate.
“Even if we manage to avoid a full-out trade war, our companies are now going to face more hurdles selling abroad,” said Diane Swonk, founder of consultancy DS Economics in Chicago.
After all, the U.S. has an $18 trillion economy, but the world’s is more than $73 trillion. A deterioration or collapse of international trade relationships could see U.S. factories facing less competition over the domestic economy while increasingly being locked out of the much larger global economy.
Financial markets have been remarkably resilient to rising bond yields and sudden shift in outlook following last month’s shock U.S. election result, but the sheer scale of uncertainties ahead means the adjustment will be “bumpy”, the BIS said on Sunday.
While the resilience to recent market swings following the U.S. election and Brexit vote have been welcome, investors should be braced for further bouts of extreme volatilty and “flash crash” episodes like the one that hit sterling in October, the Bank for International Settlements said.
“We do not quite fully understand the cause of such unusual price moves … but as long as such moves remain self-contained and do not threaten market functioning or the soundness of financial institutions, they are not a source of much concern: we may need to get used to them,” said Claudio Borio, Head of the Monetary and Economic Department at the BIS.
“It is as if market participants, for once, had taken the lead in anticipating and charting the future, breaking free from their dependence on central banks’ every word and deed,” Borio said.
This suggests investors may finally be learning to stand on their own two feet after years of relying on central bank stimulus, signaling a potential “paradigm shift” for markets, he said.
“But the jury is still out, and caution is in order. And make no mistake: bond yields are still unusually low from a long-term perspective,” Borio said.
The BIS, often referred to as the “central banks’ central bank”, acts as a forum for the world’s major monetary authorities. Its commentaries on global markets and economics give an insight into policymakers’ thinking.
Bond yields have risen sharply since the middle of the year. The benchmark 10-year U.S. Treasury yield has jumped 100 basis points since July’s multi-decade low, with a growing number of investors saying the 35-year bull run in bonds is now over.
That rise has come against the political shocks of Britain’s vote in late June to leave the European Union and Donald Trump’s election victory last month.
The surge of 20 basis points in U.S. bond yields the day after the election was the largest since the “taper tantrum” market sell-off in 2013, and greater than all but 1 percent of one-day moves in the last quarter century, the BIS said.
Yet U.S. stocks are chalking up record highs, market volatility is anchored at historic lows and corporate spreads have remained relatively tight. Liquidity has been “adequate”, according to the BIS.
This all points to investors anticipating stronger growth resulting from easier U.S. fiscal policy, lower taxes and looser regulation, particularly in the financial sector, the BIS said.
Banks will generally benefit from higher rates and a steeper yield curve, and the recent surge in U.S. bank stocks is “a telling sign of a brighter perceived outlook,” the BIS said.
But higher yields and a stronger dollar also pose risks, especially to emerging markets, even though some EM equity and credit markets held up better than they did at the time of the taper tantrum in 2013.
The starting point for emerging markets wasn’t so severe as investors had already withdrawn “massive” amounts from EM funds between 2013 and 2015, while loans in recent years had generally been taken out over long maturities and at fixed rates.
Still, nearly 10 percent of dollar-denominated corporate debt in EM comes due next year, meaning firms must either pay back $120 billion or refinance it at a higher and rising cost, according to the BIS.
Dollar funding costs and money market spreads rose sharply in the latest quarter as investors adjusted to new U.S. money market rules that took effect in October. Short-term dollar funding from money market funds shrank by some 70 percent.
But unlike 2008 when widening spreads tightened financial conditions and torpedoed banks’ creditworthiness, this was a regulation-driven move that had “limited” spillover effects on broader financial markets. Borrowers simply raised cash elsewhere, the BIS said.
Meanwhile, the BIS also said that new data show that banks in China are the 10th largest lenders in the international banking market and banks in Russia the 23rd largest.
Source: Reuters (Reporting by Jamie McGeever; Editing by Toby Chopra)
In a year of political shocks, the unexpected strength of the global economy going into 2017 may be the most enduring surprise for financial markets.
Despite all the electoral upsets – Donald Trump’s U.S. presidential victory plus referendums in Britain and Italy that have pushed both countries into deep uncertainty – economic data are consistently beating forecasts.
Activity seems resistant to the surprises that once might have provoked major market drops, helped by huge sums that many central banks are still pumping into the financial system – and the prospect of government largesse in the United States where the Federal Reserve is reducing its stimulus.
The consensus among forecasters had been too gloomy well before Trump’s election last month electrified markets with the promise of fiscal stimulus via tax cuts and infrastructure spending.
But it’s not just soundings from the United States that have been underestimated amid the political noise, leading Edinburgh-based Standard Life Investments to refer this week to the “quiet strength” of the world economy.
A range of Economic Surprise Indices compiled by Citi have all turned positive this week for the first time since February 2014 – almost three years ago. And a dive into the data shows how widespread the resilience has been.
This is only the 16th time since comparable records began in 2003 that all eight indices – U.S., euro zone, Asia Pacific, Japan, UK, emerging markets, China and G10 nations – have been in positive territory. The euro zone reading is the highest since October 2010.
A surge in optimism among investors in the month since the U.S. election – apart from on the bond and some emerging markets – has been remarkable given the previous consensus on Trump.
Economists at Citi, led by chief global economist Willem Buiter, warned about the risks of global recession for most of this year and in August said a Trump victory could cut world growth by 0.7-0.8 percentage points.
They said this would “easily” push growth below the 2 percent threshold that indicates overall global recession. However, this week, they raised their 2017 global growth outlook to 2.7 percent, up from an estimated 2.5 percent this year.
The Organisation for Economic Cooperation and Development is even more optimistic. Last week it raised its 2017 global growth forecast to 3.3 percent, compared with 2.9 percent this year, as Washington prepares to rev up the U.S. economy.
“The prospect of a U.S. recession in 2017 has diminished,” said Nadege Dufosse, Head of Asset Allocation at asset management firm Candriam, which has around 100 billion euros of assets. “We are therefore overweight on equities, in particular in the U.S. and Japan.”
COME ON, IGNORE THE NOISE
If you’d blinked on the morning of Nov. 9, the day after the U.S. election, you could almost have missed the plunge in stocks, debt yields and the dollar as Asian and European markets reacted to Trump’s win.
U.S. equities quickly recovered, and the S&P 500 .SPX and Dow Jones .DJI haven’t looked back, rocketing to fresh highs. The VIX .VIX measure of stock volatility – Wall Street’s “fear index” – has rarely been lower in its 26-year history.
This is despite the surge in bond yields and a punchy dollar, both of which are tightening global financial conditions even before the Fed starts raising interest rates in earnest – and could yet choke off growth.
In a Reuters poll this week, equity strategists forecast the bull run would continue next year – provided Trump’s plans to stimulate the economy come to pass. His threats to consider imposing new import tariffs and the possibility of a yet stronger dollar limited their enthusiasm.
The policy outlook is fraught too as the shift to government action from central bank money printing gets underway. The transition is unlikely to be totally smooth, yet as JP Morgan points out, the close relationship between policy uncertainty and the VIX index has broken down recently.
If the last few years, particularly 2016, revealed anything, it’s that most political, economic and financial risks around the world have failed to make much of a dent in world markets.
Extreme caution may not be the right response to events like Britain’s vote to leave the European Union, Greece’s brush last year with financial collapse and resulting turmoil in the euro zone, or U.S. government shutdowns due to disputes in Congress.
Mouhammed Choukeir, chief investment officer at wealth manager Kleinwort Benson, told the Reuters Global Investment Outlook Summit last month that investors should not be “too concerned by political noise”.
“If I were to roll the clock back five years and told you there was going to be a Greek crisis, EU crisis, the end of the euro was imminent, that Brexit would happen, that this businessman with radical ideas was going to be president and the U.S. was going to have a shutdown … everybody would be saying we’ll just hoard cash,” said Choukeir, who manages 5.4 billion pounds ($6.71 billion) of assets.
“But that would have been the wrong decision.”
Of course, the last five years have been marked by the most extraordinary central bank stimulus in history, from zero – and even negative – interest rates and quantitative easing bond buying programs running into the trillions of dollars.
Now, the Fed is pulling back but the European Central Bank and Bank of Japan will still be priming financial markets with substantial stimulus next year. The ECB will buy a minimum 780 billion euros of bonds.
The Bank of England in August cut rates to a record low 0.25 percent and resumed its quantitative easing to mitigate any negative effects from the EU departure.
With the formal Brexit process scheduled to begin in March and general elections due in France, Germany and the Netherlands, the European political calendar will again be heavy next year. That central bank support may come in handy.
Source: Reuters (Additional reporting by Mike Dolan; Editing by David Stamp)