The Economist

Subscribe to The Economist feed The Economist
Finance and economics
Updated: 17 min 28 sec ago

Monetary policy in Africa has become more orthodox

Tue, 01/22/2019 - 17:01

FOR MORE than a month protesters in Sudan have defied tear-gas and bullets to demand the resignation of Omar al-Bashir, the president. The unrest began with demonstrations against soaring food prices; inflation is above 70%. There is turbulence, too, in Zimbabwe, where the central bank’s “bond notes”, a kind of local dollar, are reviving memories of hyperinflation. Protests broke out on January 14th after the government raised fuel prices. The crackdown was lethal and swift.

Such crises grab headlines. But they obscure a big shift. In Africa, as in advanced economies, inflation has fallen over the long term. In the 1980s a fifth of countries south of the Sahara endured average annual inflation of at least 20%. This decade only the two Sudans have (the rate in Zimbabwe is tricky to measure). Runaway prices are now the exception, not the rule.

African countries took different routes to orthodoxy. Inflation is rarely a problem for the 15 in west and central Africa with currencies pegged to the euro. They have imported central-bank credibility from Europe. Elsewhere, monetary policy was reformed in the 1990s under the guidance of the IMF. Governments gave more independence to central banks. Some let exchange rates float. And they stopped printing so...

Andrea Orcel’s move from UBS to Santander falls through

Thu, 01/17/2019 - 15:52

IN ONE LUDICROUSLY well-paid profession, January is a month for big-money moves. Stars grin for the cameras, are lauded by their new bosses and gush about their future teammates. Sometimes deals collapse at the last minute—occasionally, embarrassingly, in public. So much for football, where such pratfalls are merely part of the show. But not, surely, at Spanish banking’s equivalent of Real Madrid?

On January 15th Santander, Spain’s biggest bank (and the euro area’s, by market capitalisation) declared that Andrea Orcel would not, after all, be its next chief executive. Until September Mr Orcel was head of the investment bank at Switzerland’s UBS. He had been due to succeed José Antonio Álvarez in April, after “gardening leave”.

Santander now says Mr Orcel is too expensive. Mr Álvarez, instead of becoming chairman of its domestic arm, will stay. Compensating Mr Orcel for deferred pay, in not-yet-vested...

As China’s debt soars, the market for buying bad loans revs up

Thu, 01/17/2019 - 15:52

FOR MANY investors, debt in China is something to fear, a shadow over the world economy. But for a different breed, it looks more like a terrain of untapped profits. This dichotomy has been sharpened by a run of weak data in recent days. Worries about a sharp slowdown in China have rattled global markets. But for the opportunists, it is a time of plenty—a chance to snag assets from banks at a discount.

Both camps start from the same point. They see that debt in China has soared over the past decade and conclude that lending must be tamed. Yet there are clear economic downsides to doing so. Barely any progress has been made on reining in credit, but economic growth is already suffering. In the past few weeks business orders have declined, imports have fallen unexpectedly and weak price data have raised the spectre of deflation.

This, though, is where the small but hardy group of investors diverges from the...

Europe’s safest funds lose a tool to cope with negative interest rates

Thu, 01/17/2019 - 15:52

JANUARY 21ST should have been a momentous day for the European Union’s money markets. A package of reforms five years in the making, designed to make the bloc’s safest funds even safer, was due to kick in. Blue-chip firms like BlackRock and Morgan Stanley, anxious to meet the deadline, planned to switch their funds to compliant structures a week early. Yet on January 11th regulators announced a surprise delay. Money-market managers, which together oversee €1.3trn ($1trn), now have until March to put their houses in order. The delay stems from a row between national regulators over whether managers should ditch the “share-cancellation mechanism”(SCM), a tool that helps them deal with negative interest rates.

Money-market funds invest in very short-term safe assets, like government bonds and top-notch corporate debt, to provide clients with a liquid alternative to cash. They play a key role for pension funds and large companies,...

The big beasts of American banking rumble on

Thu, 01/17/2019 - 15:52

AMERICA’S BANKS ended 2018 as stockmarket pariahs. For a year or more after Donald Trump was elected president, their shares had been borne aloft by looser regulation, tax cuts and rising interest rates. But investors began to fret that those forces were fading, the long economic expansion would soon end and banks’ profitability was therefore at its peak. In the last four months of last year some lenders’ stocks dropped by 20%-plus, far more than the S&P 500’s 13.6%. The result was “recession prices without a recession”, according to Mike Mayo, an analyst at Wells Fargo.

Now it seems things aren’t quite so bad after all. Prices have perked up (see chart). The fourth-quarter earnings season, which started on January 14th, has brought reassurance, rather than renewed worry, at least for the very biggest. Of the leading banks that had published their numbers when The Economist went to press on...

New data suggest the euro-zone economy is slowing

Thu, 01/17/2019 - 15:52

EVEN AS the European Central Bank (ECB) halts stimulus, it looks as if the economy needs revving up again. In December the bank said it would stop expanding its €2.6trn ($3trn) bond-buying scheme. But on the same day it trimmed its forecasts of economic growth and warned that “the balance of risks is moving to the downside”. Its warnings have now materialised. Several measures of economic activity in the euro zone have disappointed in recent weeks. The much-touted “euroboom” that began in 2017 has run its course.

The slowdown was first thought to be temporary. At the start of 2018 sluggish growth in Germany, the bloc’s largest economy, was blamed on one-off factors ranging from an outbreak of flu to labour disputes and the timing of national holidays. Weak third-quarter data was chalked up to bottlenecks in the car industry, which had to meet new emissions standards for diesel engines. In the fourth quarter the...

The view from a long-standing stockmarket bear

Thu, 01/17/2019 - 15:52

IN UNCERTAIN TIMES Albert Edwards is someone you can rely on. For more than two decades, latterly as global strategist at Société Générale, he has been a steadfast prophet of gloom. As he stood to address the 400 or so investors gathered at his annual conference (or “bear-fest”) in London this week, he made a typically confident forecast. “We work at a French bank,” he said. “So we’ll be sure to get you away by five o’clock.”

That was the only cheerful prediction of the day. His colleague Andrew Lapthorne and guest presenter Gerard Minack (formerly of Morgan Stanley and a kindred spirit) struck similar notes. The core message has not changed much, but neither has Mr Edwards’ popularity. With unfailing regularity he is ranked number one in his category in surveys of global investors. He admits to getting it wrong a lot. But his talent for imagining the worst is valuable. If you have a vague anxiety, Albert will give it...

Canada’s vast pension fund is gaining even more financial clout

Thu, 01/17/2019 - 15:52

TWICE A WEEK the Canada Pension Plan Investment Board (CPPIB), which manages pensions for 20m of Canada’s citizens, holds meetings to approve or reject investments above C$500m ($375m). Agenda items are plentiful. Since 2017 the board has sanctioned investments in, among other things, toll roads in Mexico and Australia; rental housing in China; shale assets in Ohio; solar and wind assets in India and America; and big chunks of Endeavor, a Beverly Hills talent agency, and Ant Financial, a Chinese financial giant.

The Canada Pension Plan (CPP) is a state-run earnings-related pensions scheme, but its investment board is run as an independent entity. The fund’s portfolio size has more than tripled over the past decade, and is going to become only more gigantic. At the end of last year its portfolio was C$454bn. Investment income, plus an expansion in the scope of the plan this month, which raises contributions in return for higher...

Economists reconsider how much governments can borrow

Wed, 01/16/2019 - 17:41

IN THE LAST three months of 2018 America’s federal government borrowed $317bn, or about 6% of quarterly GDP. The deficit was 1.5 percentage points higher than in the same quarter the year earlier, despite the fact that the unemployment rate fell below 4% in the intervening period. In cash terms America borrowed in a single quarter as much as it did in all of 2006, towards the peak of the previous economic cycle.

Such figures might once have sent the country’s deficit scolds into conniptions. But scolds are in short supply, at least within the halls of Congress. Republicans were the architects of President Donald Trump’s budget-busting tax plan. Some Democrats are less content than ever to tie their hands with the fiscal rules that Republicans routinely flout. Early this year progressive Democrats urged Nancy Pelosi, the speaker of the House of Representatives, to abandon “PAYGO” rules, which require that new spending be paid for with matching tax...

The slow-burning effects of Europe’s new data rules

Thu, 01/10/2019 - 15:51

FEW EXPECTED an overnight sensation. Still, January 13th 2018 was supposed to mark a big step towards exposing the European Union’s banking systems to digital competition. The EU’s revised payment services directive (PSD2) came into effect; so did a British variant, Open Banking, the fruit of an investigation by the national competition watchdog. A year on, there is little sign of a stampede to switch banks. Yet progress is quietly being made.

In essence, the new rules seek to ensure that digital technology sharpens competition, by loosening banks’ grip on customers’ financial data, but without compromising security. They allow third parties, whether tech firms or other banks, to gather information from several accounts—with customers’ permission—in one place, so that people can manage their finances better. They also make it easier for third-party firms to pay online merchants directly from customers’ accounts.


How economics is trying to fix its gender problem

Thu, 01/10/2019 - 15:51

FEMALE ECONOMISTS are rare. So every year, after the meeting of the American Economic Association (AEA), a group flock together. On January 6th, before the junior women seeking mentoring arrived, their seniors were asked to keep the tone positive, and to save discussion of their worst experiences of sexism for later, in the bar. What followed included inspiration (when submitting papers, aim high) and tips on how to get published, get tenure and work out who is likely to help your career.

The scheme is just one of a growing number aimed at raising the share of women among academic economists. Others were on display at the AEA conference, including some that drew on economists’ own intellectual toolkit. Donna Ginther of the University of Kansas, for example, presented results showing that participation in the mentoring workshop extends a woman’s network of collaborators, and that she thus publishes more. Another study cited at the...

The World Bank’s president resigns abruptly

Thu, 01/10/2019 - 15:51

BARACK OBAMA’S nomination of Jim Yong Kim as president of the World Bank was unexpected in Washington, DC, where the trained physician was little known. His imminent departure also comes as a surprise. Mr Kim said on January 7th that he would step down next month, three years before his second term ends, to take up a position at Global Infrastructure Partners (GIP), a private-equity firm in New York.

In fact Mr Kim probably decided to leave months ago. He would have felt he had secured his legacy after a triumph last year, when he persuaded shareholders to agree to a paid-in capital increase of $13bn, expanding the bank’s lending capacity from $60bn to $100bn by 2030. Once he had begun talking to his next employer, he could not stay long without creating a potential conflict of interest—GIP also invests in infrastructure in poor countries. He will not be missed by everyone. A reorganisation he oversaw was loathed by staffers, and...

For emerging markets, a more fearful Fed is a less frightful one

Thu, 01/10/2019 - 15:51

SPARE A THOUGHT for emerging markets. When America’s economy falters, they often share the pain, because America is an indispensable market for their goods. But when America’s economy prospers, they can also suffer, because the Federal Reserve will raise interest rates, lessening demand for emerging-market assets.

This catch-22 was vividly illustrated in 2018. America’s economy expanded robustly. But this boost to global demand was overshadowed by the Fed’s response to it: four rate increases that wreaked havoc on overvalued currencies and overstretched economies in the emerging world. An index of emerging-market equities compiled by MSCI fell by almost 17% over the year.

Emerging markets were therefore relieved by reassurances offered by Jerome Powell, the Fed’s chairman, on January 4th. He emphasised that American inflation remained “muted”, that the Fed will be “patient”, and that it will listen “sensitively” to...

Wall Street firms take aim at America’s stock-exchange oligopoly

Thu, 01/10/2019 - 15:51

Time for some old-fashioned customer service

ON JANUARY 7TH nine of America’s largest brokers and banks said they planned to launch a new equities exchange, dubbed the Members Exchange (MEMX). Though it has yet to gain approval from the Securities and Exchange Commission (SEC), the share prices of Intercontinental Exchange (ICE), Nasdaq and CBOE, the parent groups of America’s largest exchanges, fell by 2-3%. But MEMX is merely their latest reason to fret.

For more than a century stock exchanges were utilities: not-for-profit, self-regulated and owned by their broker members. Starting in the 1990s most became companies, often listed on their own exchanges. The New York Stock Exchange (NYSE) became publicly traded in 2006. Around the same time the SEC created the National Market System—rules designed to foster competition. Chief among these was Rule 611, the “order-protection rule”, which requires...

The fate of the dollar will shape financial markets in 2019

Wed, 01/09/2019 - 15:50

OVER THE holidays those who like their Christmas films free of seasonal cheer may have fixed on “The Lion in Winter”, with Peter O’Toole as Henry II and Katharine Hepburn as Eleanor, his estranged wife. Henry decides that none of his sons by Eleanor is a suitable heir and condemns them to death. Locked in a cellar as his father approaches, Richard resolves not to cower. “As if the way one falls down mattered,” mocks one of his brothers. “When the fall is all that is,” replies Richard, “it matters”.

Back at work, investors might usefully apply this aphorism to the fate of the dollar. In a volatile period for financial markets, it rose by 7% against a broad basket of currencies in 2018 and by 4% against a narrower group of rich-country currencies (see chart). One of the more robust principles of foreign-exchange trading is that what goes up must eventually come down. The dollar is over-valued on benchmarks, such as...

The outlook is dim for Americans without college degrees

Tue, 01/08/2019 - 17:15

AMERICA’S AGEING economic boom can still produce pleasant surprises. Companies added an astonishing 312,000 new jobs in December, the Bureau of Labour Statistics reported on January 4th, and raised pay at the fastest clip in years. For the third of working-age Americans without any college education, such spells of rapid income growth have been exceedingly rare, not only since the financial crisis but in the past half-century. But however long this expansion lasts, their economic prospects still look grim.

The misfortunes of the left-behind were a recurring topic at this year’s meeting, in Atlanta, of the American Economic Association, one of the biggest annual convocations of economists. David Autor of the Massachusetts Institute of Technology offered the most pointed characterisation, drawing on forthcoming research co-written with Juliette Fournier, also of MIT. The earnings of workers without a college education have scarcely risen in 50 years, after adjusting for inflation; for men they have fallen. This stagnation coincided with tectonic changes in American employment. The share of jobs that require either a lot of training, or very little, has grown since 1970. Much of the production and office work that requires moderate training, which once employed vast numbers of workers without college degrees, has disappeared,...

Amateur buyers of fine Burgundy fear a speculative bubble

Thu, 01/03/2019 - 16:31

EVERY YEAR Berry Bros & Rudd, Britain’s oldest wine merchant, issues a pocket-sized price list. Reading old copies makes amateurs of quality quaff want to time-travel. In 1909 a case of 12 bottles of Domaine de la Romanée-Conti 1891, Burgundy’s most famous Grand Cru, cost 180 shillings (about £1,000, or $1,300, in today’s money). In its historic London store, which opened in 1698, a single 18-year-old bottle of similar quality now sells for £25,000.

Fine wine is expensive to store, and its rarity and high transaction costs make it—oddly enough—an illiquid asset. Even so, its appreciation with age and perceived ability to diversify portfolios have made it popular with investors over the past two decades. The value of wine exchanged yearly between consumers, connoisseurs and collectors—the secondary market—has quadrupled to $4bn since 2000, says Justin Gibbs of Liv-ex, a wine-trading platform. He reckons that just...

The EU’s unbundling directive is reinforcing the power of scale

Thu, 01/03/2019 - 16:31

ANEW YEAR often begins with a headache. For asset managers and brokers, last year’s pain was intensified by the European Union’s revised Markets in Financial Instruments Directive (MiFID 2), which came into force on January 3rd 2018. Among other things MiFID 2 obliged fund managers (the “buy side”, in industry argot) to pay brokers (the “sell side”) separately for investment research, rather than receive it bundled with trading services.

Twelve months on, predictions that the directive would squeeze research spending and brokers’ revenues, and hasten market concentration, look broadly correct. In a report in November, consultants from McKinsey noted that sell-siders’ commissions from equity trading in Europe had fallen by 30% in a year. Recent signs of consolidation include the purchase by AllianceBernstein, a fund manager and research firm, of Autonomous Research, an independent analysis firm, and numerous takeover...

Investors’ appetite for transport infrastructure remains undiminished

Thu, 01/03/2019 - 16:31

STARTING ON December 19th, as Gatwick airport prepared to disclose a change of ownership, suspected drone sightings forced it to close its runway for a total of 36 hours. Passengers were delayed; so was the announcement. Only a week later could Britain’s second-busiest hub reveal it had been sold to Vinci, a French transport group, in a deal valuing it at £8.3bn ($10.5bn). The previous owners, including Global Infrastructure Partners (GIP), an American fund manager, will keep 49.99%.

The acquisition cements Vinci’s position as the world’s largest private airport-operator, with Gatwick the biggest of the 46 it runs. It is also a reminder of how fast the industry has been privatised: over 50% of European airports have some private participation, up from 22% in 2010. Nearly half of winning bidders since 2008 have been financial investors, according to Mergermarket, a research group. Returns have been juicy. GIP bought Gatwick for £1...

What the market turmoil means for 2019

Thu, 01/03/2019 - 10:18

AFTER A ROTTEN October and limp November, the S&P 500 tumbled in value by 15% between November 30th and December 24th. Despite an astonishing bounce of 5% the day after Christmas, the index finished the year 6% below where it started (see chart). The first trading day of 2019 extended the market wobble, with stocks closing down in Asia and gyrating in Europe. After markets closed in America, Apple warned that a sharp slowdown in China’s economy, and weak sales in other emerging markets, meant revenues in the fourth quarter would undershoot expectations by up to 10%. Coming a day after news that China’s manufacturing sector contracted in December, that spooked investors globally. S&P 500 futures dipped before Wall Street re-opened on January 3rd.