by Damon de Laszlo, ERC Chairman
Last week in the States visiting New Jersey, and then driving some 1,700 miles across Minnesota and Wisconsin, was an amazing reminder of the size and sparse population of northern USA compared with Europe. Again, the road infrastructure is superb compared with Europe, and particularly the UK, and it was clear that the US trucking industry is good.
Visiting various businesses was a fascinating reminder that the US is a special place, companies are growing, industrial building is cheap, easy and quick to implement. Regardless of the statistics, there seems to be a mood of optimism and steady investment along with a general disgust of politicians and disinterest in global “crises”. To quote Reagan, “Government is not the solution, it’s the problem” seems to be the prevailing mood.
On the economic front, there are some interesting insights; under Obamacare insurance premiums are levied on the basis of full-time employees, which is defined as a 30 hr. week. This seems to have had the effect that where people were employed on a casual basis, their week has been capped at 29 hrs. so avoiding the Obamacare costs and encouraging an enormous growth in the Gig economy. This could explain why America’s statistical now higher than average employment rate is not yet affecting wages, as there is considerable slack in the system and the opportunity for people to take two jobs. However, wages are likely to start rising as this effect wears off.
On the inflation front, the Amazon effect has been to drive down prices over the last two years for the supply of on-line goods with the knock-on effect on, so to speak, off-line retail prices.
Changes are afoot in central bank announcements. The US Federal reserve has now gone further than hinting at the reduction in its quantitative easing from next month, which will tentatively start the reduction in its some $4.5 tn. balance sheet. They have also indicated continuing incremental increases in interest rates. The effect of the reversal of the Fed’s quantitative easing policy will, of itself, cause interest rates to rise
The ECB is also indicating that it is about to reduce its €60 bn. monthly stimulus spending. This is also likely to increase interest rates. The effect of the central banks loose monetary policies has been causing asset price inflation which is mostly ignored as it is not part of the central bank’s inflationary remit. Also the lax monetary policy has encouraged the growth in both private and corporate debt and hugely reduced the pain for governments’ failure to balance their books. There is a danger as liquidity becomes tighter and private debt more difficult that retail sales and GDP will be negatively impacted. Encouraging private individuals to borrow to meet current expenditure is popular with government as well as financial institutions but it is not sustainable. On the other hand, borrowing to buy a house can be argued to at least be neutral in the long run as, after the debt is repaid, the borrower is left with a real asset. The same can be said in the corporate area where there is a major long term difference between borrowing to buy back stock or take-over a company, and borrowing for investment in building the business. Of course, the same goes for government. The UK in particular has for many years failed to build infrastructure, which is a huge headwind for economic growth.
Leaving aside a possible “taper tantrum” in the financial institutions debt market, the general economy across the northern hemisphere seems to be good. US and Europe are showing signs of steady growth and China is managing a more normalised enviable growth rate for what is now the second largest economy in the world. China’s growth is helping the whole of Asia on a path to steady economic prosperity. The southern hemisphere is more problematic, with Latin America and Africa suffering from failed governments. Nevertheless, for the time being, in most areas government failure is having a slightly less disastrous impact than in some earlier periods.
It’s difficult not to worry about Europe and Brexit where, on the one side twenty-seven governments, particularly when they are led by recalcitrant Brussels bureaucracy, are unlikely to be able to unanimously agree on anything and a British government which is floundering in the face of political in-fighting and an incoherent opposition. There is hope, however, that after the German elections Mrs Merkel will be in a position, as she has been before, to wade in to the menagerie in Brussels on the side of commercial interests, which should produce some forward movement in many of the exceedingly complex detailed legislative and regulatory issues that need to be straightened out over the next two or three years.
Damon de Laszlo
21st September 2017