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Two charts that show the world's economy is thriving; Global output at record high, global unemployment falling
Topic Started: 20 Aug 2014, 09:40 AM (463 Views)
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Two charts that show the world's economy is thriving

Adam Carr

The world’s policy makers will have a lot to discuss when they gather this weekend for the Jackson Hole Conference. The Theme is “Re-evaluating Labour Market Dynamics”, and while that sounds extremely exciting, I think one of the key discussions they should be having instead, is why none of them seems to be able to read economic data!

US Federal Reserve vice-chairman Stanley Fischer gave a good insight into what will no doubt be the tone of the meeting. He bemoaned the weak and fragile state of the global economy and stated that the challenge for policy makers was to “restore growth, if that is possible”. “If”.

Now this all sounds very ominous but it’s not even close to being right. Take a look at the charts below.

Chart 1: Global output is at a record -- well above pre-crisis peaks

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Notice anything? That’s right -- global GDP is skyrocketing and at a record high. On World Bank figures, output was up near $US75 trillion last year, which is about 20 per cent higher than the pre-GFC peak -- with global gross national income about 25 per cent higher (on a purchasing power parity basis). Don’t go thinking real growth rates are weak either -- this is another statement that is misleading at best. Sure, if you only want to look at very short time period, 2004 to 2007, you could conclude that growth is weaker now. Real world GDP growth averaged nearly 4 per cent over those three years -- a strong outcome last seen in the late 1980s. But how representative or ‘normal’ was that period? As I noted in my piece (Take Australia's unemployment rate shocker with a grain of salt) the years immediately preceding the GFC were characterised by a number of booms. It wasn’t normal.

I actually get the sense this is where global policy makers are getting tripped up -- they’re simply not making the correct comparisons and are using a very small sample as their benchmark for what is normal or what should be. It’s the only explanation I can think of for why they constantly describe the global recovery as weak, when it isn’t. History often gives a better sense of perspective and average growth in the 10 years before that was closer to 3 per cent, which as it happens is the post-GFC average as well. The fact is, global growth now is little different from those averages and from what we’ve seen since the 1980s. This puts all this fictitious nonsense about restoring growth “if” that’s possible into perspective. It’s a silly comment.

Note also that the general expectation is that growth will remain robust and even pick up over the next few years. The IMF forecast an above-trend rate of global growth next year, and the RBA noted yesterday in its minutes that “growth in Australia's major trading partners was expected to be a bit above its long-run average pace in both 2014 and 2015”.

The second chart shows that the unemployment rate around the world is low at about 5.9-6 per cent and down from a post-GFC peak of 6.2 per cent. What’s interesting about that number is that it’s the average unemployment rate prior to the GFC boom. Again, comparing it to the 2007 trough is misleading. Credit orgy remember?

Chart 2: World unemployment is falling -- and is low

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When you actually compare the unemployment rate now to historical rates, it looks pretty good. As I noted on Tuesday (Global rates to rise in 2015? Not likely) central bankers speak with a forked tongue, you simply can’t trust them, or rather their assessments on the economy. They’ve got other things to think about, such as currency wars and monetising public debt. Meanwhile in the real world, the global economy looks just fine -- more than fine even.

Read more: http://www.businessspectator.com.au/article/2014/8/20/economy/two-charts-show-worlds-economy-thriving
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Global rates to rise in 2015? Not likely

Adam Carr

The increasingly erratic actions of central banks, especially in the UK and US, suggest the market is overpricing the timing of the first rate hike and the degree to which rates will rise.

Federal funds futures for instance, imply the Fed will start hiking by June next year, with the overnight rate ending 2015 closer to 0.75 per cent. That's roughly three rate hikes. The Bank of England is expected to hike in the March quarter, taking the cash rate to about 1.25 per cent (from 0.5 per cent) by year’s end.

That doesn’t sound too onerous, and it isn’t. A prudent central bank should have taken those steps several years ago. Even so, there a couple of signals being transmitted by central banks that suggest the global tightening cycle may not start until toward the end of 2015 or 2016 at the earliest.

Of the more bizarre signals, the seemingly confusing commentary from the Bank of England’s Canadian governor Mark Carney is an extraordinary development. One conservative MP noted that Carney had “given a lot of guidance, not all of it seeming to point in the same direction”. The question arises as to why the governor of the Bank of England has repeatedly given mixed and inconsistent signals to the market.

It’s an important question, as the art of central bank public relations or ‘communications policy’ is highly refined. The market doesn’t simply put this confused rhetoric down to a gaffe-prone L-plater, as they once did with Fed chair Janet Yellen’s similarly confused commentary. Especially as Carney was also head of the Bank of Canada for about five years. That Carney still remains as governor shows that he still enjoys official endorsement, notwithstanding his rhetorical acrobatics and criticisms from MPs on both sides of parliament. This suggests this confusion must enjoy official sanction from the government -- it has been going on for a long time.

Wage growth is at the centre of BoE’s latest communications foray. Earlier in the year, Carney said that markets were underpricing the risk of a rate hike and could be surprised by an early move. Indeed committee members had expressed surprised at the time that markets were only pricing in a low probability of a move in 2014. That position appeared to be reversed in the latest inflation report, when the bank seemed to imply that slow wage growth could delay a rate hike. The governor then said in an interview some days later that slow wage growth wouldn’t stand in the way of a rate hike.

There is nothing unusual in looking at wages. Wage growth has always featured in policy analysis alongside a large number of other indicators. In our current circumstances, the argument is that it’s prudent to look to wage growth to help clarify questions over labour market strength. Jobs growth in the UK and US is strong and unemployment rates are tumbling. But then again, labour participation is falling.

If labour markets are tight, then logically enough wage rates should start rising. That they’re not rising (or even falling) suggests more capacity than indicated by the unemployment rate. The obvious problem is that by the time wage growth actually starts to accelerate, inflationary pressures are already well established. It’s well known that wage growth lags the most important of the lagging indicators: the unemployment rate.

The broader issue is that this new wage target is only one of a series of targets that have been dropped once met. The inflation target was the first, and both the Fed and the Bank of England dropped this early in the program when inflation rates were above their thresholds of comfort. More recently, both banks had an unemployment rate objective, again discarded when it became apparent that the targets were in danger of being hit. The Bank of England cleared the way; the Fed followed. This new wage target that was adopted by both banks must be seen in that broader context -- just one more Clayton's target (the target you have when you don't want to have a target) that will be ignored if it suits.

All of this strongly suggests that central banks (the Fed and the BoE) are just playing for time. They are constantly shifting the goal posts by using inconsistent rhetoric and choosing a variable noted for its long lags to the cycle as a key target. Remember this whole conversation is taking pace against record low interest rates. This isn’t a debate about whether monetary policy should be restrictive or not; even if cash rates were tripled they would still be highly accommodative.

I suspect a large part of the problem is that the world isn’t in a good position to deal with a genuine or sustained divergence in policy between the ECB, the Fed and the BoE. The volatility unleashed could have unpredictable and potentially dire consequences for the US and UK economies -- not something the UK government is going to want going into a general election in early to mid-2015.

Indeed a successful and smooth transition out of this ultra-loose monetary policy world will likely require central bank coordination. Yet the fact is the ECB is not even close to entertaining a rate hike. Recent data shows that growth has slowed and that inflation still remains subdued. Until those changes, and given past behaviour, markets should and increasingly do hold a great deal of scepticism over any forward guidance provided by central banks. It's a lesson that should hold for the RBA as well.

Read more: http://www.businessspectator.com.au/article/2014/8/19/global-news/global-rates-rise-2015-not-likely
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Black Panther
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Dont ruin the Bear Pity Party Alex.

They need their delusions about RE prices collapsing even if they arent.

OK ?
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