BFTB: A maiden post, on 2017’s macro surprises…
Date:27Dec2017
My next-door neighbor on this website and long-time friend and collaborator Atilla warned me, rightly so, about my absence here since October (and how it reflects poorly on the seriousness and quality of our website 😀)… So I took this opportunity to start a new series, what I will call the “Bookmarks for the Bemused” (BFTB) — one of the bemused being this very author. The idea would be to provide some useful hyperlinks/bookmarks on current macro developments, which I find interesting — and hope that some of our visitors will, too…
I decided to start the first BFTB with the biggest macro surprises of 2017, which are issues that will be closely monitored in 2018, as they constitute the key risk points for 2018 as well. I guess two of these stand out in particular – a stronger than expected European/EZ economy and the absence of inflation in advanced countries (I mean not in Turkey, for sure – I will do a quick post on that shortly).
So what are experts saying on Europe? On inflation? And by the way on China, too, which is always on investor radars? (Here is a Bloomberg video from a market veteran on the latter two of these risks.) Regarding Europe, this Economist Espresso blog from about a month ago, sums up the euphoria around European recovery well. But does this all mean that we are out of the woods? Those that focus on the “structurals” do not think so – their advice is more like use this opportunity to work on the deeper integration issues. Here are two examples (from this year) in this connection, one by Philip Legrain (doing a Project Syndicate Survey) and another by Moghadam (agreeing with Macron on the need to get a Finance Minister for the EZ).
On the case of the missing inflation or the so-called “Phillips Curve (PC)”, this post by the think-tank Bruegel does a nice job of putting some of the debates together. This somewhat earlier NYT column by N. Irwin turns the question upside down observing, given weak inflation and productivity growth, that wage growth is in fact outpacing the two combined – so that wage growth may even be considered “high” under the circumstances. This PIMCO blog from earlier this year argues PC makes up a bad model for forecasting inflation in the U.S., while also making the point that NAIRU is a slippery concept – which, incidentally, is not disagreed with by Ed. Phelps, who is one of the “inventors” of the concept.
And finally, let us finish with a few links on China – for the record. There seems to be an agreement among experts that one of — if not “the” biggest economic challenge for China going forward is “deleveraging” while keeping growth at an acceptable level – nowadays in the vicinity of 6.5%, it looks like. The country’s debt (public, household and corporates or SOEs, rather) is around 300% of GDP. (Click here for the IMF numbers and a blog on the institution’s latest assessment of the financial sector.) China could live with this debt a while longer, but it has to start deleveraging sooner or later for sure, because there is no example of this sort of debt levels proving sustainable. Here are two somewhat opposite views on the deleveraging prospects – one by Pettis (most-likely-this-will-not-end-well view) and another by Yongding (no-reason-to-panic-because-China-is-different view).
Well, that’s it for now – there are surely a lot of other issues to browse through and get some links together, like the Trump tax plan and the Bitcoin euphoria – or whether it is a bubble or not (I think it is), but that’s for another time…