The relationships between government debt, economic growth and interest rates are complex and varied. In general, a recession causes an increase in government debt and a decline in government borrowing costs. A prolonged period of monetary accommodation during a cyclical upswing can cause the average nominal interest rate on government debt to drop below the rate of nominal GDP growth. Depending on the level of the primary balance, such a situation can, under certain conditions, create leeway for fiscal expansion in order to support growth.
May Day is approaching. It is the occasion to celebrate progress made in improving workers’ rights. It can also be an opportunity to recall how much the quality of social dialogue matters for a well-functioning of the labour market. According to 2018 Global Competition Review of the World Economic Forum, the quality of labour-employer relations is relatively high in continental northwest Europe and Japan. At the same time, these countries score very well in terms of labour market outcomes. The lightly regulated labour markets in the English-speaking countries have also achieved low unemployment levels, although jobs are less well protected. In the southern European countries, the social dialogue seems to function less well. Unemployment in these countries has remained persistently high
Recent data in China and the eurozone point towards a stabilisation of growth and have been met with relief. Although the US economy is slowing, growth should remain at a satisfactory level in the near term. Yet there are lingering concerns about the underlying strength of the global economy. The IMF has again scaled down its forecasts and only expects a modest growth pickup later this year. The flattening of the US yield curve fuels worries that growth will disappoint. The Fed insists it is confident about the outlook and patient in setting its policy. Markets have welcomed this accommodative message. Yet the signals sent by equity and bond markets about future growth are quite different. It only adds to the list of concerns.
The different uncertainty measures are sending mixed signals. The Economic Policy Uncertainty Index, which is based on media coverage about policy uncertainty, is no longer increasing but a downward trend has not yet started.
Strong job creation in March in the US has brought relief after the disappointing data the month before. The Chinese manufacturing indices have rebounded and crossed the 50 level. In the eurozone, the pressure on the manufacturing sector continues but the services PMI has improved. Retail sales have beaten expectations. For the manufacturing sector, a lot will depend on how uncertainty evolves. In this respect there are hopeful signs. The likelihood that an agreement will be reached between the US and China has increased whereas in the UK, cross-party negotiations seek to avoid a hard Brexit.
The Federal Reserve will conduct a review of its monetary policy framework and the conclusions will be made public in the first half of 2020. Three questions will be addressed: should the monetary policy stance take into account past misses of the inflation objective? Are the tools adequate? How can communication be improved? The initiative should be welcomed because it shows the Fed’s efforts for being ready when the next recession hits. Facing similar challenges, the ECB is likely to be interested in the outcome of the Fed research.
When households (companies) feel more uncertain, they will spend (invest) less. After a jump last year, the number of media articles mentioning uncertainty, has declined somewhat recently (top left chart).
The latest survey data show a very mixed picture. In the manufacturing sector, China saw some signs of stabilisation, whereas Japan experienced a deterioration. In Germany, manufacturing remains under pressure. The picture in the eurozone is quite diverse, depending on the country and the sector. Looking at the broadest survey indicator for the eurozone, one observes a stabilisation. Whether this will be confirmed depends to a large degree on developments in China and on the well-known sources of uncertainty (trade, Brexit).
Since early 2018, based on the purchasing manager indices, a large number of countries have witnessed a decline in the assessment of new export orders which was bigger than the decline of the general climate in manufacturing. This suggests a dominance of foreign demand shocks, rather than domestic shocks, in explaining slower overall growth. The drop in new export orders echoes the significant slowdown in world trade growth. This is probably related to slower Chinese growth and, in many countries, slower growth in capital expenditures, which have a higher import content than consumption. Trade-related uncertainty may also play a role.
The Paris climate deal, concluded at the COP21 in 2015, pleads for keeping global warming below 1.5°C above pre-industrial levels. However, in its latest report, the IPCC (Intergovernmental Panel on Climate Change) warns that current mitigation policies are insufficient to obtain this objective. Investments in renewable energy and electricity infrastructure have to be stepped up. The power sector has to be decarbonised, the use of electricity increased, and energy efficiency improved. Low carbon policies are difficult to implement because of commercial interests and social impact, in particular concerning the increase in carbon prices
The recent “economists’ statement on carbon dividends” offers important policy prescriptions for the US to address global warming. It explicitly refers to the need for a border carbon adjustment system so as to maintain competitiveness versus countries that would not have introduced a carbon tax. The authors recommend that the carbon tax proceeds be equally distributed to US citizens. It could be envisaged to use these proceeds in a way which takes into account the distributional aspects of environmental taxes whilst promoting energy efficiency investments.
The slowdown is spreading widely. Although it is reasonable to expect growth to normalise, several sources of uncertainty (fears of a trade war, Brexit, the US government shutdown, etc.) are acting as headwinds. China has already announced new measures, and in the United States, the Federal Reserve is insisting on its patience (concerning inflation) and flexibility when it comes to adapting monetary policy.
The COP24 only succeed in agreeing on rules on measuring, reporting and verifying carbon emissions. In the meantime, the world is falling behind the objective to limit global warming to 1.5°C. CO2 emissions are set to rise to 2030, whereas they should peak by 2020. Countries are underestimating the urgency for action or held back by commercial interests. Moreover, environmental legislation is met by growing public resistance. It demands a better framing of climate policies. Moreover, the climate change discussion should be broadened to the WTO.
The economic policy uncertainty index, which is based on media coverage of this topic, has seen a huge increase since the middle of last year, even surpassing the previous high reached at the end of 2016. Measures of business uncertainty in Germany and the US have also risen. The dispersion of individual stock returns, a third measure of uncertainty, has also increased in the US and to a lesser extent in the eurozone.