Charts of the Week
THE EFFECTIVENESS OF CARBON PRICING Published on 16 Oct 2019 by Raymond VAN DER PUTTEN
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The usefulness of carbon pricing lies in the abatement incentives that it creates. An implicit carbon price can be derived by dividing the revenues from carbon pricing systems and excise taxes on fuels by the total greenhouse gas emissions.

According to this method, prices range from close to 0 in most developing countries but also the US and Canada, to close to 100 euro for 1 tonne carbon emitted in Sweden and Switzerland. The chart confirms that the countries that have relatively high implicit carbon prices also rank high in terms of carbon productivity defined as the amount of GDP produced per unit of carbon emissions.

This suggests that in order to increase carbon productivity, i.e. to reduce emissions per unit of GDP produced, higher carbon prices are needed in countries where this productivity is low. However, gaining popular acceptance to raise prices is a real challenge as it affects lower income households more than higher income households.

US TARIFF HIKES AND TRENDS IN THE YUAN Published on 9 Oct 2019 by Christine PELTIER
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Between the end of March 2018 and the end of August 2019, the yuan lost nearly 13% against the dollar. With each new increase in US tariffs (announced or effective), the Chinese authorities have responded by letting the yuan depreciate to offset partially the impact on export corporates. In September, despite the introduction of new tariffs, the yuan levelled off against the dollar, because Beijing and Washington had agreed to restart trade talks. In the short term, exchange rate policy is likely to be used moderately to stimulate economic growth, especially due to the risk of a vicious circle as the anticipation of currency depreciation fuels new capital outflows triggered by the yuan’s decline. Yet this risk is limited, however, by ongoing controls on resident capital outflows. The slight improvement in the current account surplus and the expected increase in foreign portfolio investment inflows into China’s financial markets (following recent opening measures) might also support the yuan in the short term.

 

Note: The lists of Chinese goods imported by the US and affected by tariff hikes are called “List 1” totalling USD 34 bn, “List 2” totalling USD 16 bn, “List 3” totalling USD 200 bn and “List 4A” of USD 125 bn (first slice of list 4).

 
IMPACT OF LOW RATES ON THE SAVING BEHAVIOR OF JAPANESE HOUSEHOLDS Published on 2 Oct 2019 by Laurent QUIGNON
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Alongside the quasi-uninterrupted decline in Japanese interest rates since the early 1990s, the household savings rate has declined by more than 10 percentage points, from a net rate of 12.9%(1) in 1994(2) to 2.5% in 2017(2). The savings rate consists of a net financial savings rate (gross financial savings flow minus borrowings flow) and a net housing investment rate (gross housing investment flow minus (in Japan) fixed capital consumption). The decrease in the financial savings rate resulted from the decline in the gross financial savings flow rather than from a rise in the borrowings flow. Thus, the flow of gross financial savings not only contracted, but was also reshaped in favour of monetary deposits, owing to the decline in opportunity costs. Gross housing investment flows diminished, falling below the level of depreciation (fixed capital consumption) throughout most of the period, resulting in a net dissaving in housing (in the midst of a slowly deflating housing bubble). Lastly, despite the ongoing decline in financing costs, the household debt rate tended to decline between 2001 and 2012, before picking up mildly again as of 2013.

 

(1) Japan, like the United States but unlike the European Union, reports the net savings rate, i.e. after fixed capital consumption. 

(2) “Fiscal year” n begins on 1 April of civil year n and ends on 31 March of civil year n+1.

On the Same Theme

Global growth slowdown intensifies 10/10/2019
The slowdown of global growth has gathered pace, forcing the Federal Reserve to cut the federal funds rate on two occasions, whereas the ECB has announced a comprehensive easing package. Nevertheless, the slowdown is expected to continue. Uncertainty is pervasive. Companies question the true state of demand faced with slower growth, trade disputes, Brexit worries, geopolitical risk. Corporate investment suffers and may impact households via slower employment growth. The room to boost growth via monetary policy and, in many countries, fiscal policy has become limited, and this is another factor which could weigh on confidence. Surveys of US corporate executives point towards high concern about recession risk and the US yield curve inversion adds to the unease. However, the picture provided by a broad range of leading indicators is, at least for the time being, less bleak.
US-China trade dispute, how far? 10/7/2019
The feared tariffs dispute between US and China has come to reality. Yet, predicting a rapid easing would be optimistic.
Fed and ECB: diverging approaches to monetary policy 9/20/2019
The Federal Reserve and the ECB are in very different positions: the former has more room to ease policy and it is also closer to its policy targets. The ECB has limited remaining policy leeway but is confronted with an inflation shortfall versus its aim and a risk that this gap would increase, rather than narrow. These differences have led to diverging approaches in the conduct of and communication about monetary policy. The Fed is data-dependent and, except for the projections of the FOMC members, offers no guidance. The ECB is agnostic about the data and builds its communication around state-dependent forward guidance: policy tightening will be solely conditioned by meeting its target. The ECB stance reduces the sensitivity of financial markets to data surprises whereas the Fed stance increases it. This implies a risk of higher volatility in the US but also, via international spillovers, abroad.
Elevated uncertainty slows growth despite lower rates 9/6/2019
Business surveys in the US paint a diverging picture: manufacturing is worsening significantly but services have picked up nicely. Taking a broader perspective, evidence is building of a slowing economy. Less dynamic growth can be observed in engines of growth of the world economy: China and India, although reasons differ. In Europe, Germany is probably already in a technical recession whereas France is resilient. Central banks are back in easing mode but the effectiveness will be hampered by elevated uncertainty, despite the announcement of a new round of trade negotiations between the US and China.
Monetary easing at full employment: how effective? 7/12/2019
Fed Chairman Powell, in his address to Congress this week, has confirmed that easing is coming. In June, ECB President Draghi provided similar hints. This comes on the back of growing concerns regarding global growth and ultimately facing too low a level of inflation. Risks may be mounting, but, on the other hand, the unemployment rate is close to the natural rate. There are reasons to assume that monetary easing under full employment would be less effective than when the economy is marred in recession. Monetary easing could also raise concerns about financial stability, which, if unaddressed, could weigh on the ability of monetary policy to successfully boost inflation.
Growth concerns on the rise 7/10/2019
A sigh of relief followed the publication of first quarter GDP data. However since, growth concerns have picked up again on the back of a collection of new economic data but also — and perhaps more importantly — due to continued high uncertainty. The latter stems from concerns over the extent of the slowdown and its consequences in terms of economic risks. It also emanates from escalating tensions between the US and China over trade. The effects of this confrontation already show up in the Chinese data while in the US, mounting anecdotal evidence also point to its detrimental impact on business and the agricultural sector. The Federal Reserve has turned a corner and indicated that rate cuts are coming, much to the joy of the equity market. The ECB has also changed its message: with risks tilted to the downside and inflation going nowhere, it considers more easing is necessary.
Exogenous versus endogenous uncertainty and monetary policy 7/5/2019
 A high level of uncertainty can act as a drag on growth. Whether monetary easing will succeed in boosting growth will depend on the nature of uncertainty. Endogenous uncertainty follows from the normal development of the business cycle and rate cuts should succeed in reducing this uncertainty by boosting confidence of economic agents. Exogenous uncertainty is not driven by the business cycle but is triggered by other factors, such as, in the current environment, ongoing trade disputes. In this case, monetary policy effectiveness suffers and, despite rate cuts, the growth slowdown should continue until its root cause (exogenous uncertainty) is addressed.  
Uncertainty: persistently high 7/5/2019
High levels of uncertainty can have a profound impact on economic activity and financial markets. Our Pulse presents different metrics.
Climate change: public sector 6/28/2019
This last episode focuses on the impact of climate risk on the public sector balance sheet. How will states address the challenge of climate change? How will they manage the climate debt? Will they be able to implement the appropriate investment policies in a context of pressure on tax revenues? William De Vijlder exposes in this podcast the tremendous challenge faced by the public sector and the answers it is starting to provide.

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