The paradox of rising wage growth and falling inflation

• ? Strong labour markets and rising wages in advanced economies stand in sharp contrast to recent declines in economists’ inflation forecasts and market expectations. In our view, though, these developments are not necessarily contradictory. Even if wage growth edges higher, we think demand factors will limit any pick‐up in prices. Instead, we expect firms’ margins will be squeezed.
• ? Although the labour share has risen more sharply than we had expected over the past couple of years, we are sceptical that this will translate into substantially stronger underlying inflation. Not only has the rise been small, it has been employment rather than wages that has surprised to the upside. The strength of employment is probably more about firms’ production preferences than workers’ capitalising on a stronger negotiating position.
• ? True, wages adjusted for productivity now look high by historical standards. But neither theory or empirical evidence suggests that this must inevitably lead to stronger CPI inflation in the short‐term. Our forecast for flat wage growth in 2019 and the absence of strong cost pressures elsewhere are also a comfort.
• ? Inflation tends to be more responsive to demand indicators – and the recent GDP growth soft patch suggests any further pick‐up in underlying inflation pressures will be limited (see Chart below).
• ? More generally, we think that the consensus view on inflation for the key advanced economies is high. Market‐based inflation expectations are typically lower than our own, which may reflect the perception that inflation risks are skewed to the downside. Positive economic surprises could lead downside risks to narrow, but ageing expansions and secular stagnation worries suggest this is unlikely, limiting any future pick‐up in bond yields.

     

Can Germany save itself from negative rates?

• German inflation looks set to rise in response to diminishing slack in the economy. But this will be a mixed blessing for those in Germany hit by negative policy rates and ECB asset purchases. Higher German inflation may eliminate the need for further ECB policy action, but it is unlikely to trigger imminent rate hikes. As a result, the rise in inflation will merely lower real interest rates for German savers.
• Structural cross‐country differences mean that the ECB is better able to hit its inflation target when the peripheral economies rather than Germany are the region's growth engine. A key reason for this is that the German Phillips curve is flat by Eurozone standards, meaning that policymakers need to work hard to generate sufficient inflation in Germany to offset sustained weakness elsewhere.
• Despite this, there is evidence to suggest that the tightening labour market is beginning to push German wage growth higher. And if productivity growth remains subdued, this will lead to faster unit labour cost growth.
• While firms could respond by lowering their margins, the strength of household spending suggests that firms may be more inclined than in the past to pass on higher costs to consumers.
• In all, we expect German inflation to rise more sharply than elsewhere to around 2% in 2017, meaning that the ECB will not unveil further unconventional policy support. But it would take much sharper rises in German wage growth and inflation than in our baseline forecast to prompt the ECB to bring forward interest rate rises.

     

World Economic Prospects

Overview: Emerging sell‐off to restrain global growth

• Emerging financial markets have come under renewed downward pressure since mid‐January, with evidence of a general retreat by investors.
• There have been significant currency depreciations in several countries, and interest rates have been forced up in Turkey, India, South Africa and Brazil – with further hikes likely. Emerging stocks have plunged.
• This has prompted a sequence of downgrades to our growth forecasts for the emergers. We now expect Indian growth to be 0.2% lower this year than previously, South African growth 0.6% lower and Turkish growth 1.3% lower. In China and Brazil, growth in 2015 has been cut by around 0.5%.
• Weaker emerging growth will also constrain activity in the advanced economies. Emerging markets account for a modest share of advanced economy exports, but their share in export growth is higher. For the Eurozone, heavily dependent on external demand, this share has been 30–40% since 2010.
• Meanwhile, European listed firms get almost 25% of their revenues from emergers, and US firms 15% (while exports to emergers are 10% and 5% of GDP respectively). There has also been a sharp rise in bank loans to emergers in recent years.
• The biggest risks for global growth relate to China, which dwarfs the other emergers, and where concerns about possible financial instability, especially linked to shadow banking, have risen this year.
• Thanks to robust growth in the US, Japan and the UK, we still expect global growth to pick up in 2014, but downside risks have risen over the past month. With the US Fed set to press on with ‘tapering’ asset purchases, driving up global long‐term interest rates, emergers face potential further pressures.
• US tapering will be only partially offset by more expansionary monetary policy in Japan. What could make a big difference, and reduce the downside risks from emerging weakness, would be aggressive expansion in the Eurozone. At present, however, this seems unlikely – despite lingering deflation risks.

     

Government sets 2021 marker for EU trade deal

• ▀ We expect the UK and EU to agree an FTA that will take effect on 1 January 2021, two years earlier than we had previously assumed. The earlier introduction of trade barriers will dampen the post-coronavirus recovery.
• ▀ The economic case for delaying the implementation seemed to have been strengthened by the pandemic, which has left firms and the government ill-equipped to adapt. But political considerations have won out.
• ▀ We think a basic trade deal is more likely than not. The terms of the withdrawal agreement mean that failure to agree an FTA would increase frictions on trade between GB and NI. The UK will also be keen to protect vulnerable sectors.

     

Standardization or localization? Executing corporate philanthropy in international firms

• Corporate social responsibility (CSR) has become a key component of a firm's reputation. The reputational vulnerabilities and pressure for CSR are perhaps greatest among international firms with business activities across many countries and cultures. Although the strategies of firms entering new markets have been well researched, the CSR component of the market entry decision has been largely ignored, despite its significant relationship with the financial performance of the firm. Further, previous research has largely considered CSR from an environmental performance point of view, and thus has focused on a minimum level of investment in CSR as opposed to the optimal form of the investment. Our paper seeks to address this gap by examining market entry decisions as they relate to corporate philanthropy.

Copyright © 2009 John Wiley & Sons, Ltd.     

Soaring corporate debt is a risk to global growth

• ▀ Corporate borrowing is accelerating as a result of the coronavirus crisis. In part, this is a healthy development as firms look to ride out a period of low or even zero sales. But it also brings potential risks to growth, especially in the longer term, including via lengthy balance sheet restructuring that hurts investment and productivity growth.
• ▀ In the advanced economies, we estimate the aggregate corporate debt/GDP ratio could rise as much as 10ppts in 2020, to 95% of GDP - well above the 2009 peak. Debt service ratios may also rise into risky territory despite low interest rates. Risks look especially elevated in France and Canada.
• ▀ Evidence for both advanced and emerging economies suggests high corporate debt levels can damage growth. Highly indebted firms tend to invest less in both the near and medium terms, and some estimates suggest the rise in aggregate debt this year could cut GDP growth by up to 0.2% per year.
• ▀ The coronavirus crisis may also crystallise some pre-existing risks in corporate debt. Despite government assistance, defaults by low-rated firms have started to rise and commercial real estate prices are falling.
• ▀ Sectoral concentrations of risk may also be intensified and new ones created in industries hit hard by the virus like energy and consumer discretionary sectors.
• ▀ Emerging market corporate debt is also on the rise - sharply in some cases. In some economies, this mostly reflects exchange rate effects. But negative balance sheet effects of this kind are also a risk to growth.

     

World Economic Prospects Monthly

Overview: Coronavirus to cut global growth to new lows

• ▀ The rapid spread of coronavirus will weaken China's GDP growth sharply in the short term, causing disruption for the rest of the world. We now expect global GDP growth to slow to just 1.9% y/y in Q1 this year and have lowered our forecast for 2020 as a whole from 2.5% to 2.3%, down from 2.6% in 2019.
• ▀ Prior to the coronavirus outbreak, there had been signs that the worst was over for both world trade and the manufacturing sector. However, this tentative optimism has been dashed by the current disruption.
• ▀ While the near-term impact of the virus is uncertain, the disruption to China will clearly be significant in Q1 – we expect Chinese GDP growth to plunge to just 3.8% y/y. Even though growth there will rebound in Q2 and Q3, it will take time for the loss in activity to be fully recovered and we now expect GDP growth of just 5.4% for 2020 as a whole, a downward revision of 0.6pp from last month.
• ▀ Weaker Chinese imports and tourism and disruption to global supply chains will take a toll on the rest of the world, particularly in the Asia-Pacific region. And the shock will exacerbate the ongoing slowdown in the US and may result in the eurozone barely expanding for a second quarter running in Q1.
• ▀ Weaker oil demand in the short term has prompted us to lower our Brent oil price forecast. We have cut our projection for growth in crude demand in 2020 by 0.2m b/d to 0.9 mb/d and now forecast Brent crude will average $62.4pb in 2020, down from about $65pb in our January forecast.
• ▀ Quarterly global growth is likely to strengthen a little in H2 this year as the disruption fades and firms make up for the lost output earlier in the year and the effect of China's policy response starts to feed through. But for 2020 overall, global growth is now likely to be just 2.3%, 0.2pp weaker than previously assumed as a result of the epidemic.

     

Central bank hawks unlikely to gain the ascendancy

• ? Although further financial market weakness could delay or scale back central bank tightening this year, the waters are being muddied by the perception that underlying inflation pressures are building and that past exceptional measures to counter downside risks may no longer be needed. On balance, we think that it is more likely that central banks will push back, rather than bring forward, rate hikes, especially if the recent oil price weakness persists.
• ? The most crucial issues for the path of monetary policy are likely to be the outlook for inflation and the risks to growth prospects. While there may be grounds to reverse past ‘insurance’ cuts in interest rates, only a slow pace of normalisation is justified at present, in our view. In Europe in particular, sustained lowflation remains a risk.
• ? Central banks may develop a taste for raising rates if they perceive the neutral interest rate to be trending up. There may also be a desire to normalise policy to create space for future loosening, but this will only affect policy at the margin. Meanwhile, although problems such as banking troubles and the zombification of firms are often blamed on low interest rates, they are probably more a symptom of low growth and other more structural issues. Raising interest rates is unlikely to resolve these problems.
• ? At the margin, central bank behaviour may become less dovish. However, with the global economy slowing and some recession warning indicators flashing amber, the wings of the hawks will likely remain clipped.

     

The global monetary boom - no cause for panic

• ▀ Global monetary growth has been its fastest for decades over recent months, but we continue to believe inflation risks are lower than many think. A modest inflation overshoot in the coming years is possible but would not be very damaging.
• ▀ While headline money growth figures still look strong, heavy precautionary borrowing by firms in March-April is already starting to unwind in the US and UK. About 80% of the rise in borrowing by large UK firms has been repaid.
• ▀ In addition, tightened lending standards at banks are likely to weigh on future corporate borrowing and money growth. A net 70% of US banks tightened corporate credit standards in the latest Fed survey. Rising loan defaults risk exacerbating this.
• ▀ Heavy government borrowing and accompanying central bank QE have been key drivers of monetary growth and are likely to remain so, notwithstanding a slowdown in the pace of central bank bond purchases. This is the main risk factor those who fear inflation cite.
• ▀ But if credit to the private sector starts to shrink, deficit financing of this sort may be essential to prevent long-term weakness in money, credit, and economic growth. Japan's experience in the 1990s and 2000s is relevant here.
• ▀ Inflation also has room to overshoot current targets, if necessary, given the substantial undershoots of the last decade. This consideration in part explains the recent shift in Federal Reserve thinking towards targeting an average inflation rate over time

     

Coronavirus: Short-term pain but strong rebound likely

• ▪ Attention has understandably focused on limiting the damage from the short-term effects of the coronavirus outbreak. But it's likely that, once disruption and uncertainty fade, the rebound in activity will be strong. It's important for firms to position themselves for such a recovery.
• ▪ Historical evidence supports this view. In the past 200 years, short recessions have typically been followed by robust recovery. Long-term impacts from natural disasters have generally only been evident for specific hazards. Except for AIDS, longer-term pandemic effects also appear to have been contained.
• ▪ Surveys during the 2003 SARS and 2009 influenza outbreaks highlight one explanation for time-limited impacts. Public fears increased alongside rising infection rates, but they dissipated promptly as outbreaks came under control.
• ▪ Our modelling is consistent with these stylised facts. In our coronavirus pandemic scenario, global growth grinds to a halt in Q2 2020 but then rebounds to a rapid pace within a year. With much of the initial output loss recovered in a relatively short period of time, long-term impacts are limited.
• ▪ But there are risks to this view. The period of disruption could be longer than anticipated, depending on the potential spread and seasonality of COVID-19 and policy actions to mitigate the fallout. Opinion polls also highlight the potential risk of larger, more persistent effects for some countries.
• ▪ Moreover, coronavirus-related weakness and associated financial distress could expose other key vulnerabilities - for example related to deteriorating corporate sector balance sheets and fragile trade relations. These would be expected to have persistent effects on global activity over the coming years

     

HRM in dynamic environments: Exploitative,exploratory, and ambidextrous HR architectures

Abstract

The current economic crisis has brought to the fore the need for firms to deal with ambiguity and complexity. Hence, firms need a specific balance between exploration and exploitation in order to keep pace with varying and changing environmental conditions. Hitherto, there is limited research that has examined the nexus of HR architectures, ambidexterity, and environmental dynamics. In this conceptual paper we ask: How do HR architectures serve as a means of balancing exploitative and exploratory learning in different dynamic environments? We explain how exploratory, exploitative, and ambidextrous HR architectures with their embedded HRM systems on the business unit level enable organizations to meet different environmental requirements. Thus, firms in which heterogeneous demands for flexibility and for innovation co-exist need to develop internally differentiated HR architectures. In particular, we elucidate how critical the organization’s ability is to connect different HRM systems to create an ambidextrous HR architecture to find an appropriate balance between exploration and exploitation.     

Overview: Strategic human resource management in five leading firms

This article synthesizes findings from five case studies conducted in firms known to be leaders in the management of people. We drew three broad conclusions:

• 1 The foundation of a value‐added HR function is a business strategy that relies on people as a source of competitive advantage and a management culture that embraces that belief;
• 2 A value‐added HR function will be characterized by operational excellence, a focus on client service for individual employees and managers, and delivery of these services at the lowest possible cost; and
• 3 A value‐added HR function requires HR managers that understand the human capital implications of business problems and can access or modify the HR system to solve those problems.

© 1999 John Wiley & Sons, Inc.     

Impact of EU exit on our UK industry forecasts

• We have lowered our forecast for UK economic growth following the vote to leave the EU on 23 June. GDP growth is now forecast at 1.1% in 2017 and 1.4% in 2018, and the medium‐term outlook has also been nudged down. We have also lowered our forecast for all of the main industrial sectors, with the biggest reductions in the long‐term forecasts for construction and manufacturing, although the weak pound could provide some short‐term boost to the latter.
• Our baseline forecast assumes that the government triggers Article 50 by the end of this year and that the UK leaves the EU by end‐2018. We assume that the government draws a red line under the freedom of movement and thus loses access to the single market. Trade relations revert to WTO rules.
• A number of factors determine the relative impact on each sector. First, in the short term, heightened uncertainty will hit business confidence, causing firms to delay capital spending. Second, less favourable trade relations with the EU could see export‐oriented sectors migrate production away from the UK. Finally, restrictions on migration will reduce the potential size of the labour force.
• Consequently, investment‐oriented sectors such as construction and machinery have seen some of the largest downgrades. Moreover, transport equipment is heavily exported to Europe, so increased trade barriers could see some production move out of the UK. Meanwhile, labour shortages could weaken growth prospects in labour‐dependent sectors. In addition, the vote has created uncertainties around the long‐term viability of London as Europe's major financial centre.
• The outlook for more consumer‐focused sectors is less downbeat, although an uptick in inflation may erode household purchasing power in the near‐term, and the multipliers from lower economic activity are likely to permanently reduce household incomes in the long term relative to our last baseline

     

An investment‐led expansion is no pipe dream

• Contrary to some perceptions, the UK's economic recovery has not been a disproportionately consumer‐led one. In fact, business investment has punched well above its weight in supporting growth. And the conditions look good for this outsized contribution to continue.
• Consequently, we think that the threat of ‘secular stagnation’, reflecting a lack of appetite to spend on the part of firms, is one that the UK should avoid. Moreover, strong investment growth should have desirable by‐products in the form of more accommodative monetary and fiscal policy.

     

The nature and influence of motivation within the MOA framework: implications for social marketing

• Social marketers acknowledge that to achieve optimum programme outcomes, identification and targeting of the non-conforming cohort is paramount. This article discusses the application of the social marketing framework, motivation, opportunity and ability (MOA) with a particular focus on the motivation aspect of the model. Motivation is considered from the perspectives of intrinsic and extrinsic motivation.
• Previously, the degree or level of motivation has been used in the operationalisation of the motivation construct, while in this paper the type of motivation is used as the basis for the construct. The construct is then applied to an environmental land management study, namely a rabbit control programme.
• Specifically, the aims of this paper were to further develop the MOA constructs, with a particular focus on motivation, including intrinsic and extrinsic motivation, to develop an understanding of the factors that are associated with ineffective behaviour and to develop a model to predict effective/ineffective control behaviour.
• Scales were developed to enable a study of the relationship between the MOA constructs, including intrinsic and extrinsic motivation, and the respondents control behaviour. Data were collected from a random sample of 566 respondents who were involved in the control programme. Using ANOVA and MANOVA techniques, significant differences were found between those landholders that exhibited effective control and ineffective control with regard to all MOA constructs.
• A multinomial logit (MNL) regression model was then developed to predict behaviour. This model showed that ability and intrinsic motivation were significant predictors of behaviour. The estimated model was able to predict recalcitrant landholders with 98% accuracy. The results of this study therefore provide a significant contribution to social marketing as it is the recalcitrant cohort that social marketers wish to understand and whose behaviour they frequently attempt to rectify in order to achieve stated social and/or environmental objectives. The implications for related social market theory, policy development and environmental management programmes are discussed.

Copyright © 2006 John Wiley & Sons, Ltd.     

Why the surge in savings won't last

• ▀ The coronavirus lockdown caused UK savings to surge. We think the household saving ratio will average over 15% in 2020 - almost twice its long-run average - while the corporate sector is likely to run a hefty financial surplus.
• ▀ Evidence suggests that economic shocks usually push up the desire to save, to the detriment of growth. But the uniqueness of the Covid crisis and its aftereffects could limit the extent of the private sector's increased prudence.
• ▀ Scarred by recent events, consumers may remain thriftier as normality returns. But the short duration of the economic contraction and the windfall nature of lockdown savings mean any long-term rise in savings rates could be modest.
• ▀ Meanwhile, post-pandemic, a more cautious attitude to investment and efforts to repair balance sheets suggest higher saving by firms. But the prospect of weak corporate profit growth will, in our view, offset those forces.

     

Mission or money? Competitive challenges facing public sector nonprofit organisations in an institutionalised environment

• This paper exposes the impact of competitive grant funding on public sector nonprofit volunteer organisations, using institutional theory to explain developments within this sector. A conceptual model is developed from which five propositions are derived. Bushcare units, in experiencing institutional pressures, respond in ways that affect their culture, structure and routines, resulting in the possibility that their mission will be compromised. In the process of targeting competitive grants, preparing grant applications, managing increased reporting requirements and recruiting volunteers, Bushcare units should apply a mission ‘filter’ to ensure their mission is not compromised in the pursuit of money. Bushcare New South Wales (NSW), an Australian environmental organisation, provides an empirical illustration of the proposed conceptual model.

Copyright © 2007 John Wiley & Sons, Ltd.     

Why deflation may be a bigger risk than inflation

• ▀ Concerns about high inflation in the medium term are in our view overdone. In fact, we think the bigger risk is some economies sliding into deflation, due to the coronavirus pandemic's long-lasting negative impact on demand, which will intensify existing global disinflationary trends.
• ▀ We do not think the recent acceleration of monetary growth will lead to rapid inflation, despite the strong historic relationship between the two. The current monetary growth is taking place in extremely unusual circumstances, which may alter the usual link with inflation, and may also be temporary.
• ▀ Meanwhile, most market-based measures of deflation risk have risen recently – in some cases to historic highs. Some household surveys point to slightly higher inflation, but this may reflect short-term volatility in prices for key goods.
• ▀ A slide into deflation would have a variety of negative consequences, including feeding back into private saving, weakening growth, and potentially raising debt sustainability issues in some economies.

     

Brexit — velvet divorce or messy breakup?

• We use a ‘scenario tree’ approach to look at the possible outcomes of the negotiations around the UK's exit from the EU. Given how little common ground there is between the two sides, we find that a relatively loose relationship is the most likely outcome, with the UK set to leave the EU in early‐ 2019.
• The negotiating positions of the UK and EU are diametrically opposed. The UK wants to end the free movement of labour, cease making contributions to the EU budget and regain ‘sovereignty’ from Brussels, while retaining as much access to the single market as possible. But the EU's starting position is that single market access is dependent upon agreeing to the four freedoms and that this is non‐negotiable.
• So far all signs are that the UK will prioritise the ability to control immigration over single market access. Thus remaining a member of the EEA is very unlikely to be viable over the longer‐term – our scenario tree analysis gives it a probability of just 6% – although it may be adopted as an interim step. Remaining part of the customs union is also unlikely (18%) as it will preclude the UK from making FTA with third countries.
• If the EU takes a mercantilist approach, it will have little incentive to come to an agreement with the UK over single market access for services, given the UK's large trade surplus with the EU for these activities, implying that UK firms may face growing non‐tariff barriers after the UK has left the EU. The UK's large deficit on goods trade with the EU gives a better chance of agreeing a FTA for goods, though with any FTA requiring agreement from all 27 EU members, the UK would have to be prepared for lengthy negotiations and make extensive concessions. Therefore, we think that a reversion to WTO rules (37%) is slightly more likely than agreeing a FTA (36%).

     

Japan

Our outlook for domestic demand remains reasonably optimistic, notwithstanding recent financial market turmoil. A tight labour market and a pick‐up in wages will bolster consumption and incentivise investment in labour‐saving technology. Meanwhile, firms continue to expand capacity and raise R&D expenditure for new technologies, boosting investment. While growth in 2018 was set back by weather‐related contractions in Q1 and Q3, we expect demand to have rebounded in Q4 and look for GDP to have grown by 0.8% in 2018 as a whole. We expect growth of 1.0% in 2019 but just 0.3% in 2020, with the key drivers being:

• ? Robust labour market to support consumption: as the labour market continues to tighten, we expect household spending to continue to support growth in 2019. We project consumption to accelerate ahead of the scheduled rise of the consumption tax in Q4 2019, before falling back as the tax hike feeds through. However, given the stimulus measures planned by the government to soften the impact of the tax rise, we then expect consumption to show a faster recovery relative to previous consumption tax increases.
• ? Solid investment intentions despite rising uncertainty: business sentiment and investment intentions remain above historical averages and firms continue to expand capacity and increase R&D for new technologies, despite rising uncertainty over the durability of global economic momentum. And although softening recently, machinery orders remain high. Looking ahead, we expect investment growth to lose some momentum as the investment cycle begins to turn and global trade continues to ease.
• ? Low export growth to carry over into 2019: export volume growth has been weak of late, reflecting the softening in external demand. Import volumes have continued to grow at a robust pace, given solid domestic momentum. We expect export growth to remain weak going into 2019, in line with slowing global trade.
• ? Industrial production to continue growing: industrial output has recovered of late, after weather‐related disruption had weighed on growth earlier in 2018, while the PMI has remained stable at 52–53. We expect industrial production to continue growing in line with domestic demand, but slower than in previous years given less buoyant external prospects.
• ? No fiscal consolidation without economic revitalisation: the government is planning measures to support growth after the consumption tax rise in Q4 2019 including a diverse range of policies to incentivise consumption and an expansion of free childcare and education. It has also signalled that it stands ready to provide additional stimulus if needed.
• ? Monetary policy to stay put amid low inflation and falling bond yields: inflation has remained stagnant while 10‐year government bond yields fell into negative territory for the first time in two years, putting an end to speculation about monetary policy tweaks. With the consumption tax rise drawing closer, we do not expect the BoJ to move again any time soon.
• ? Equity sell‐off to prove temporary, but yen strength will persist: we expect current equity weakness to be temporary, but market volatility and more cautious Fed tightening indicate a stronger yen in 2019. Ongoing trade frictions and political attention on the exchange rate will also support the yen, which we see averaging 107 yen per US dollar in 2019.