Europe

On balance, the available data for Q3 appear to point to a broadly similar pace of growth as in the preceding quarter. Although the September composite PMI fell to its lowest level since the announcement of the ECB's QE policy, the index still points to quarterly GDP growth of about 0.3%. And other survey indicators have risen – the EC's Economic Indicator is at its highest since January.     

Eurozone

The Eurozone economy probably reached its peak velocity in Q2, when GDP rose 0.6% q/q. The figures available for Q3 provide something of a diverging picture between soft and hard data. The composite PMI – which has been the best predictor for quarterly GDP growth – averaged 56.0 in Q3, only slightly below the 56.6 seen in Q2. And the EC's Economic Sentiment Indicator was actually stronger in Q3 after reaching a new multi‐year high in September. But some of the hard data suggest that growth may be softer than indicated by the strong surveys. In particular, retail sales have been surprisingly weak despite high consumer confidence and strong employment growth, although we suspect weatherrelated factors have been at play.     

Forecast Overview

Q2's national accounts reaffirmed the ONS's previous estimate that GDP fell by 0.2% in Q2, as the economy suffered both payback from Brexit‐related stockpiling in the first quarter of this year and a drag on manufacturing output from some car makers bringing their annual summer shutdowns forward to April. But growth in both Q4 2018 and Q1 2019 was revised up by 0.1ppt to 0.3% and 0.6% respectively.     

Japan

After Q3 2015's eventual 0.3% quarterly growth rate, the economy appears to have maintained modest growth into Q4 according to the available monthly data. But a significant threat to the economy could arise from financial market volatility and consequent upward pressure on the yen. Since the US Federal Reserve raised interest rates on 16th December the yen has appreciated by 3% against the US dollar and by over 5% on a trade‐weighted basis.     

Why has the UK's export performance been so poor?

The UK's export performance since 2008 has been disappointing, especially when sterling's depreciation in 2008–09 is taken into account. This reflects a deterioration in relative wage costs, particularly relative to the US and Germany. In the four years from Q2 2009, export volumes grew by 17%. In contrast, Germany's exports grew by 34% over the same period. The poor performance of exports is one of the key reasons for lacklustre growth in the UK, with GDP still below pre‐crisis levels…     

Japan

Data from Q2 point to a steep fall in GDP after April's consumption tax rise. The composite PMI was in contraction territory in April and May, and only just recovered to the 50 mark in June. Official data for retail sales and industrial output similarly show that spending and production were cut back in Q2. We estimate that GDP fell by 1.5% in Q2, driven by a reversal of Q1's strength in consumption and investment…     

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.

     

Eurozone

The recent flow of economic data supports the view that Q1 will have seen stronger quarterly GDP growth than Q4's 0.4% gain. Indeed, given the composite PMI's healthy end to Q1, the strength seen in Q1 may continue next quarter. As a result, we have upgraded our forecast for GDP growth in Q2 and now pencil in a second consecutive quarterly gain of 0.5%.     

UK Forecast Overview

We have nudged down our forecast for GDP growth in 2015 from 3% in January to 2.8% now, reflecting the likelihood of a soft initial reading for Q1 growth. But the outlook remains favourable, with a period of low inflation underpinning strong growth. March's Budget did little to alter the outlook, with fiscal policy in a holding pattern until after May's General Election…     

Exploring environmental,social, and governance disclosure effects on the S&P 500 financial performance

Much of the literature measuring the relationship between environmental, social, and governance (ESG) scores and firm performance treats the score as a measure of sustainability performance. In this study, we treat a firm's ESG score as a demonstration of strategic choice in the level of transparency that results in increased firm performance as measured by Tobin's Q and return on assets. Performance differences are a result of choice moderated by the size of the firm as measured by employees and sales. We analyze 467 firms in the S&P 500 from 2009 to 2015. Applying legitimacy and stakeholder theory, we find that there is significant difference between groups with respect to disclosure and performance. The results of quartile analysis by sales, capitalization, and Tobin's Q are relevant to understand the influence that the ESG score has on financial performance. ESG influences on Tobin's Q are greatest for large firms as measured by sales, as opposed to the ESG affects on Tobin's Q and return on asset for smallest firms as measured by market capitalization.     

Goodbye grey skies? 2018's global shocks may be fading

• ? It may be premature to declare the onset of happy days for the global economy, but our trawl through the various drivers of weakness over the last year or so suggests the worst is behind us.
• ? Our lengthy list of lifting clouds is led by China, where policy stimulus is showing signs of boosting lending, but there are other sources of optimism too. The eurozone's run of bad luck may be turning, and there are reasons for optimism on trade wars. Plenty of 2018's bad news was interconnected and centred around adverse global financial conditions, US dollar strength and very tough external conditions for EM. These have reversed in Q1 2019 amid receding fears that global inflation is set to surge.
• ? But we are not yet proclaiming hello to blue skies. After all, recent shocks – good or bad – should on average fade over time. The context is one of weakening trend growth (we are partial believers in the secular stagnation hypothesis) and of pockets of weakness in global balance sheets, including in China.
• ? And we see three conspicuous potentially negative drivers for the global economy. First, there is the fading impact of the US fiscal boost. Second, there is a small probability that some of the ongoing negatives – such as trade wars – could blow up into something very nasty. Third, there is a possibility that negative momentum from past and ongoing shocks may push weakness into Q2 and beyond.
• ? But on balance, all of this adds up to a receding risk of global recession. We now attach a 20% probability to a fall in advanced economy GDP per capita over the next two years, down from 25% previously. Our increased optimism is based on (i) the analysis in this article, (ii) our growing confidence that soft landings are attainable and (iii) our assessment that late‐cycle vulnerabilities may be overstated.

     

QUALITATIVE EASING IN SUPPORT OF A TUMBLING FINANCIAL SYSTEM: A LOOK AT THE EUROSYSTEM'S RECENT BALANCE SHEET POLICIES

Attention has recently been drawn to compositional changes in the Federal Reserve System's asset holdings and in particular the deterioration of the balance sheet of the Fed in the face of the current crisis. However, an analysis of the balance sheet policies of the Eurosystem is still missing. In this article we fill this gap by analysing the Eurosystem's balance sheet during the recent subprime crisis. The calculation of certain balance sheet ratios supports the assessment that a significant decrease in the quality of money has occurred.     

Trading income and bank charter value during the financial crisis: Does derivatives dealer designation matter?

Derivative markets have exploded over the last decade, remained active in the midst of the 2007–2009 financial crisis and continue to be dominated by a small group of bank holding companies (BHC). BHC motives for derivative usage are usually tied to hedging purposes (balance sheet risk management), trading purposes (profit motives) or some combination thereof. This paper examines the relationship between derivative trading income and bank charter value for 27 BHC between 2001Q1 and 2011Q3. We find that the impact of derivative trading income on bank charter value, using Tobin's Q, is very small and seems to be tied to BHCs derivatives dealer trading designation. We also find that trading incomes are a modest fraction of net operating revenue, highly volatile, and did not contribute to overall BHC income during the crisis.     

Forecast Overview

Though GDP rose by 0.2% in November, this came on the back of a poor run and, with July’s surge dropping out of the calculation, the rolling three‐month rate slowed to a six‐month low of 0.3%. The business survey data has also flagged a loss of momentum, with the Q4 composite PMI at its lowest level since Q3 2016. Based on past form, the PMI would be consistent with virtual stagnation in GDP in Q4, but our short‐term model points to a slightly firmer outturn of 0.3%. This would mean that 2018 as a whole saw GDP growth of 1.4%, 0.1pp higher than our forecast from three months ago, which reflects favourable historical revisions published in the Q3 national accounts release.     

Japan

Monthly data suggest that GDP growth remained solid in Q3. Industrial production increased 2.1% on the month in August, more than reversing the 0.8% decline in July. Goods export volumes also rose strongly, growing nearly 9% y/y in July‐August combined, while the latest Tankan survey showed a rise in capital spending intentions. And although the BoJ's real consumption activity index suggests that growth in household spending moderated in Q3, this followed a very robust outturn in the previous quarter.     

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

     

Europe

The Eurozone's resilience was tested again with another episode of political turmoil in Italy and financial market tensions related to the US government shutdown. But the region withstood the shock with only brief and very limited movements in financial markets. This stability suggests that the economic recovery is well established, albeit slow. We forecast 0.1% quarter‐on‐quarter in Q3 and with only a small improvement in Q4, 2013 as a whole should see Eurozone GDP contract by 0.3%.…     

The effects of financial openness and financial efficiency on Chinese macroeconomic volatilities

This paper builds an open-economy DSGE model to study the effects of financial openness and financial efficiency on the macroeconomic volatilities and estimate the model with the Bayesian method and Chinese quarterly data from 2001Q1 to 2017Q4. We further test the validity of model predictions with panel analyses of Chinese provincial data from 1987 to 2016 and various robustness tests. The results show that: first, further financial openness will lead to an increase in output volatility but U-shaped changes in consumption and investment volatilities. Second, financial efficiency improvement helps to reduce the macroeconomic volatilities but has a diminishing marginal benefit. Third, our estimates of China's degree of financial openness and financial efficiency are both at the medium level close to the thresholds. It implies that further financial openness will dramatically increase the macroeconomic volatilities but whether financial efficiency improvement can mitigate instability is uncertain.     

Bank valuation in new EU member countries

This paper studies the role of institutional reforms in affecting bank valuation in new European Union (EU) member countries. It takes advantage of the dynamic nature of institutional reforms in transition economies and explores the causal effects of those reforms on banks’ Tobin's Q over the period of 1997–2008. Using a difference-in-difference approach, the paper shows that Tobin's Q increases substantially after these countries reform their legal institutions and liberalize banking. However, it decreases after stock market reforms. After further examination of the interactive relationships between different reforms and bank valuation, it is observed that when the banking reform is well implemented, legal reform can have a stronger impact on banks’ Tobin's Q. On the other hand, banking reform and security market reform has a substitutive relationship. The analysis also suggests that foreign ownership, market power, and asset diversification significantly affect Tobin's Q. These results are robust even after simultaneously controlling for equity risk.     

Eurozone

All the signs are that Q2 will see Eurozone GDP growth exceed Q1's well above‐trend rise of 0.6%. In addition to the business surveys continuing to rise, quarterly industrial production and retail sales growth also probably accelerated in Q2, closing the previous gap between the surveys and hard data. This points to a robust rise in GDP of 0.7% to 0.8% in Q2