Secular stagnation ‐ are we stuck in Summers' long winter?

• Stunningly low global long‐term bond yields provide some credence to a secular stagnation view of the world. We present an analytical framework – culminating in a simple scorecard – for assessing the extent to which purported drivers and manifestations of secular stagnation match global economic and financial developments and we compare with a complementary narrative focusing on balance sheet boom and bust. We find some support for each, but think global rates will not stay as low for as long as markets price in.
• Larry Summers has used the term to refer to a situation where demand and supply for savings deliver very low equilibrium real interest rates. The bulge in middle‐aged savers, falling prices of investment goods, and flows of savings ‘uphill’ from emerging markets may have all led to real rates trending much lower in recent decades.
• Another version of the story is that slow technical progress depresses demand for borrowing, and pushes down on real rates. This is less compelling, and based more on anecdote than anything else. There are as many reasons to be optimistic, as pessimistic, about the supply side.
• There are holes in the secular stagnation narrative. Until very recently, G7 savings rates have trended down rather than up, partly because of another decades‐long trend of financial innovation. Furthermore, few economists, nor the Fed or the BoE, expect policy rates in the US or UK to stay low for as long as is priced in to markets.
• A complementary narrative would stress the role of the credit‐fuelled mega‐boom and subsequent balance sheet blow out and Great Recession, and then the long road to financial repair. This is more consistent with the path of savings rates over recent decades, and the policy response – including QE – can explain much of the rest.
• We see the two explanations as complementary and reinforcing. In global terms, they appear no better or worse than each other. Comparing across countries, Japan comes closest to resembling secular stagnation, followed by EZ, US and UK, according to our scorecard.
• We think ultra‐low long rates will not be borne out by the future path of short rates, but acknowledge a significant risk they might, for example, if monetary policy remains too tight on average because of zero bound effects on interest rates and limited scope for fiscal accommodation.

     

Brexit and world growth – what are the risks?

• The initial global market reaction to the UK Brexit vote was very negative and in our view overdone. Nevertheless, we expect the uncertainty to linger for a while, with the vote having refocused investors on existing vulnerabilities in the world economy. Our new forecasts see the main negative impacts on growth being in the UK, the Eurozone and Japan. Risks to our new forecasts remain skewed to the downside, with a significant danger of world growth dropping below 2% this year.
• Our new forecasts see UK growth dropping to 1.4% a year in 2017–18, down from 2.2–2.3% a year before. In the Eurozone, growth will be around 0.2% a year weaker in 2017–18 and Japan is also a loser as a result of the risk aversion‐driven stronger yen, with growth at just 0.3% in 2017 from 0.5%.
• The size of the initial global market sell‐off makes no sense in the context of the likely impact from a weaker UK. In part, it seems to have reflected the pricing in of very negative scenarios in the Eurozone. But investors may also be worrying about other global problems glossed over in recent months.
• One risk to our forecast is that confidence effects on businesses and consumers are larger than we expect – but such effects are often overstated. Another danger is that more of the recent financial market weakness will ‘stick’ than our new baseline forecasts assume.
• Our world recession indicator is already at elevated levels and suggests a significant danger of world growth slipping below 2% this year; not a recession, but it might feel like one. Global policymakers need to act quickly to head off the risks.

     

The Brexit can is kicked again – where do we go next?

? The UK and EU have agreed to kick the can further along the road, extending the Article 50 period to 31 October. But our analysis of the various political scenarios suggests that the chances of Parliament using the extra time to form a consensus are low, particularly if MPs believe that further extensions are possible. Should the EU make clear that it has run out of road along which to kick the can, Parliament will be forced to choose between the three options it has always had – in this situation we would still see an “orderly” Brexit as most likely, with a sizeable risk of “no deal” and a low probability on “no Brexit”.     

EUROPE – HOW CAN THINGS GET BETTER?

In the 2010 Wincott Lecture, the author – a former European Commissioner – explains how the process of policy‐making within the European Union can be improved. In order to gain the full benefits of an open and integrated single market, the EU must stop interfering in areas that should properly be the responsibility of member states. However, in the context of the current economic crisis, the EU should take a greater role in financial regulation and in ensuring fiscal responsibility among members of the eurozone.     

Europe: Common Money – Political Union?

Monetary Union marks the crowning step in the process of economic integration in Europe. This scenario of one currency, one market and 11 member countries raises the issue of whether further political integration is needed to complement the union already achieved in the monetary and economic fields. While there are pressures for change to the current status quo from several directions, further political integration will depend on the success of Monetary Union which crucially requires that countries tackle their reform challenges.     

At the bottom of a global commodity chain––how different really are hourly wage rates and piece rates?

Employers have a number of different ways in which they can pay their employees. Discussions of the forms of wage payment were once very fashionable and they still remain important in terms of practice, but in theoretical terms, they have disappeared from the radar and been less central to recent analysis of work. On the surface, without any theoretical analysis and primarily empirical evidence, it appears that there is a major difference between ‘time wage’ rate and ‘piece wage’ rate. This article via Marxist theoretical analysis and primarily empirical evidence from Australian, New Zealand, Chinese and Fiji garment firms argued that there is a high level of similarity between time rate and piece rate. The empirical research findings of the Fiji garment industry shows that a time rate is not really much different from a piece rate, and in fact, a time rate is a disguised form of piece rate because workers are required to meet their targets per hour via very close monitoring of output and performance. The article further argued that there exist greater work intensification and exploitation via strict management control systems such as close supervision and punitive factory rules. The article also highlighted some of the limitations of existing social science theories because they can not account for what is going on garment firms in Fiji (especially Chinese firms). The article argues that we must either expand the earlier social science theories or move beyond and developed new theories to fully capture the new emerging trends of contemporary capitalist global production system.     

Inflation perceptions and expectations in Sweden – Are media reports the missing link?

We analyze the interrelation between consumers' quantitative inflation perceptions and expectations as well as actual inflation rates in Sweden. The role of media reports about inflation is emphasized. Structural vector error correction models show stable cointegration between actual, perceived and expected inflation. Impulse responses and forecast error variance decompositions suggest strong interaction between perceived and expected inflation, with a lesser role for actual inflation. Media effects are generally small, but imply an asymmetric reaction of inflation expectations and perceptions to news on increasing vs. decreasing inflation. Thus, to anchor inflation expectations, central banks should explore better communication channels to inform consumers about actual inflation.     

Sustainable Tuna – Can the Marketplace Improve Fishery Management?

Tuna is a major global seafood commodity and thus of significance to retailers in most countries, but especially in countries consuming large quantities of canned tuna such as the United Kingdom, United States and many European countries. Some key species are under heavy fishing pressure, and companies realize that without conservation oriented management their future supplies may be in jeopardy. Sustainable sourcing policies are becoming an integral part of supply chains for seafood products. Under the influence of public opinion bodies such as the media and environmental NGOs, many retailers have adopted seafood sourcing policies in the past decade. The business strategy of any particular company in seeking to support sustainable fishing can vary, but may include the pursuit of market opportunities, protection from damaging publicity and corporate social responsibility commitments. Companies that seek to involve themselves in fishery sustainability issues need to be committed to broad based partnerships with other companies and NGOs, and transparency about all aspects of their decision making, intentions and progress. The sustainable seafood movement has proven persistent and adaptable, and this is increasing the number of retailers seeking sustainable tuna. In a demand driven market economy this growth will surely be influential. Copyright © 2013 John Wiley & Sons, Ltd and ERP Environment     

THE ORANGE BOOK – TURNING RIGHT OR CHANGING GEARS?

The Liberal Democrats becoming kingmakers in 2010 did not depend solely on the numbers adding up on May 5th. Did The Orange Book pull the party to the right, making coalition with the Tories a meeting of minds? Or was it better viewed as an element in an overall strategic shift towards greater professionalism, making a deal with either of the major parties more likely?     

Mitigating climate change – how do corporate strategies differ?

Many companies are facing increasing pressure by governments, shareholders and other stakeholders to reduce their CO₂ emissions in order to mitigate climate change. The importance of managing CO₂ emissions and crafting adequate CO₂ strategies has increased for those companies affected. We present a framework that conceptualizes a company's CO₂ strategy as the focus on one or a combination of several strategic objectives: CO₂ compensation, CO₂ reduction and carbon independence. In order to investigate the CO₂ strategies of a worldwide sample of 91 electricity producers we perform a content analysis of their answers to the Carbon Disclosure Project (CDP). We demonstrate the measures the companies take to manage their emissions, the CO₂ strategies they adopt and antecedents that influence these strategies. We find that half of the companies take parallel emission management measures that aim at all three strategic objectives, while the other half pursue selected objectives only. We also find that companies with different CO₂ strategies significantly differ in terms of regional affiliation, company size and absolute amount of CO₂ emissions, while we could not identify a significant difference in relative CO₂ emissions. Copyright © 2008 John Wiley & Sons, Ltd and ERP Environment.     

The global bond sell‐off – why and where next?

• The rise in global bond yields since mid‐April has taken markets by surprise. Our analysis suggests that, on balance, some upward correction in yields was justified – especially in the Eurozone. For the US, the evidence is more mixed.
• A variety of explanations have been advanced to explain the bond sell‐off including Eurozone reflation/inflation, looming US rate hikes and associated uncertainty, liquidity and other technical factors, Chinese reflation and a simple reversal of yields overshooting to the downside.
• Some of these explanations are more convincing than others: in our view there is some modest evidence for increased uncertainty and liquidity effects but we also think bonds have corrected from overbought levels, especially in the Eurozone.
• Using some econometric models of bond yields suggests that the recent upward correction of German yields was probably justified; markets had pushed yields too low earlier in 2015. Indeed, the model implies a further ‘corrective’ rise in yields is possible.
• For the US, different models give slightly different results – a variant of the well‐known Shiller‐Modigliani model suggests yields should still be below 2%. However, a broader error‐correction model including factors such as fiscal variables and foreign flows into US bonds suggests the recent rise in yields was broadly justified.

     

What Drives Fraud in a Credence Goods Market? – Evidence from a Field Study

This paper investigates the impact of competition on an expert firm's incentive to defraud its customers in a credence goods market. Controlling for the competence of car repair shops, their financial situation, and reputational concerns, we use and complement the data set from a nationwide field study conducted by the German Automobile Association that regularly checks the reliability of garages in Germany. We find that more intense competition lowers a firm's incentive to defraud its customers.