Sunday, April 10, 2016

‘The New Mediocre’ (excerpt)

Global Economy I: The IMF Director’s Speech. It’s official: The New Normal is now the New Mediocre! Christine Lagarde, the managing director of the IMF, isn’t ringing the alarm bell, but she is on full alert about the sorry state of the global economy. She said so in a 4/5 speech titled “Decisive Action to Secure Durable Growth.” More specifically, she warned:
The good news is that the recovery continues; we have growth; we are not in a crisis. The not-so-good news is that the recovery remains too slow, too fragile, and risks to its durability are increasing. Certainly, we have made much progress since the great financial crisis. But because growth has been too low for too long, too many people are simply not feeling it. This persistent low growth can be self-reinforcing through negative effects on potential output that can be hard to reverse. The risk of becoming trapped in what I have called a ‘new mediocre’ has increased.
Lagarde is good friends with Fed Chair Janet Yellen. They must have had dinner together recently because the IMF chief’s speech sounded a bit like Yellen’s latest one, at the end of March. They both said we are in a time of uncertainty about the global economic outlook. They both mentioned the slowdown in China. Lagarde said:
China’s transition to a more sustainable economic model--which is good for China and the world--means that its growth rate, while still strong, is lower.
In her speech, Yellen said:
There is a consensus that China’s economy will slow in the coming years as it transitions away from investment toward consumption and from exports toward domestic sources of growth. There is much uncertainty, however, about how smoothly this transition will proceed and about the policy framework in place to manage any financial disruptions that might accompany it.
While on the subject of emerging economies, the IMF chief added:
Downturns in Brazil and Russia are larger than expected. The same is true for the Middle East--hit hard by the oil price decline. Many African and low-income nations also face diminished prospects.
As for advanced economies, they have lots of challenges as well, including “high debt, low inflation, low investment, low productivity, and, for some, high unemployment. In some countries, balance sheets of banks, and increasingly non-bank financial institutions, are strained by non-performing assets and low operating profit margins.”

As her speech progressed, Lagarde’s alarm escalated--over the slowdown in global trade, the increase in financial instability, frequent acts of terrorism, global epidemics, more refugees, and worsening income inequality. She noted that while income inequality “on a global, cross-country scale has been declining,” the widespread perception is that it is getting worse. She mentioned Oxfam’s recent report, which claims that the world’s richest 62 individuals own the same amount of wealth as the poorest 3.6 billion. She warned:
These frustrations are leading people to question established institutions and international norms. To some, the answer is to look inward, to somehow unwind these linkages, to close borders and retreat into protectionism.
Her solution is mostly more government. In the US, she wants to see the Earned Income Tax Credit expanded, the federal minimum wage increased, and “family-friendly benefits” strengthened. In the Eurozone, she advocated “better training and employment-matching policies to help more people find jobs, especially young people.” Her recommendation for emerging economies is “increased diversification.”

In addition to these “supply-side measures,” she wants to see more fiscal spending on infrastructure everywhere, and she is all for a continuation of ultra-easy monetary policies, including negative interest rates. There was no mention in her speech of true supply-side measures like cutting taxes and reducing government regulations.

I have been monitoring the subpar pace of global economic growth for the past few years. I’ve characterized it as “secular stagnation.” The IMF chief prefers to call it the “new mediocre.” She thinks that more government can end the mediocrity. I think that it is too much government that got us into this mess in the first place.

Global Economy II: More Mediocrity. The latest batch of global economic indicators are mediocre. Consider the following:

(1) US. The Atlanta Fed’s GDPNow model forecast for real GDP growth (saar) in Q1-2016 was lowered to 0.4% from 0.7% on April 1 following the release of relatively weak auto sales data for March. The forecast remained at 0.4% after April 6's merchandise trade report. Real imports rose more than real exports during February, with the former up 6.8% y/y, while the latter was up just 0.5%.

February’s nondefense capital goods orders excluding aircraft fell 2.5% m/m and 0.7% y/y. Among machinery orders, the strength in demand for industrial, metalworking, and material-handling equipment continues to be offset by weakness for construction, farm, and mining gear.

On the other hand, there is more good news in the US labor market, as new hires jumped to a cyclical high of 5.42 million in February. The total number of job openings, at 5.45 million, remained near its recent record high. Furthermore, the ISM nonmanufacturing PMI rose to 54.5 last month, the best reading since December. (See our US Business Surveys.)

(2) Eurozone. There have also been a few strong and weak economic indicators in the Eurozone lately that add up to a mediocre mix. The volume of retail sales excluding motor vehicles rose 2.4% y/y to a cyclical high that matches the previous record high during February 2008. However, German factory orders fell 1.2% m/m and were basically flat with last February’s level. German manufacturing output also fell during February by 0.5% m/m but is up 1.2% y/y.

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