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Updated: 2 hours 47 min ago

Investors in aircraft should get set for turbulence

Thu, 06/22/2017 - 13:43

AIR shows are where the aerospace business shows off. At this year’s Paris show, the world’s largest, which opened at Le Bourget airport on June 19th, the military types are most ostentatious. Aeronautical party tricks include helicopters that ascend into the sky tail-first and stealth fighters that fly backwards.

But no one is keener to strut their stuff than Airbus and Boeing, the world’s two biggest makers of airliners. At the 2015 show the pair sold 752 planes worth around $107bn. But the party atmosphere at that event—with copious food and wine laid on for customers and journalists alike—has given way this year to a more sober mood, weaker sales and a bring-your-own-lunch policy. This should give pause to investors in one of the world’s fastest-growing asset classes: aircraft.

Airbus and Boeing still booked plenty of orders. But for the first time, most came from lessors, which lease them to operators, rather than from the airlines that use them. This...

The Federal Reserve risks truncating a recovery with room to run

Thu, 06/22/2017 - 13:43

WHEN it comes to inflation, the Federal Reserve sometimes resembles a child freshly emerged from an age-inappropriate horror film. To its members, runaway price increases seem to lurk in every oddly shaped shadow. On June 14th America’s central bank raised its benchmark interest rate for the third time in six months, even as inflation lingered below its 2% target, as it has for most of the past five years. Some critics reckon the Fed’s 2% inflation target is too constraining. Indeed, in recent comments on a letter from prominent economists calling for a higher target, Janet Yellen, the chairman, signalled openness to the idea. But the Fed’s problem is less its target than an unforgiving pessimism about American productivity. If its bleak view is wrong, the Fed itself is partly to blame for slow growth.

Economists generally treat productivity growth as a “real” factor, outside central-bank control. Thus, it is thought to depend on things such as technological progress, workers’ skill levels and the flexibility of the economy. But productivity growth is cyclical: it varies depending on whether an economy is booming or busting. Central banks might therefore have more influence over it than they are prepared to admit.

Economies have a growth speed limit, determined by changes in population and productivity. When unemployment is high, the economy can grow...

Klarna, a Swedish fintech unicorn, gets a full banking licence

Thu, 06/22/2017 - 13:43

BANKS moan incessantly about over- regulation. Yet their banking licences come with perks: in most places only licensed institutions can accept deposits and offer current accounts; within the EU, “passporting” means a bank licensed in one country may operate across the single market. So some European financial-technology (“fintech”) upstarts have started to seek banking licences. On June 19th, Klarna, a Swedish payments firm valued at $2.25bn, became the latest—and the largest so far—to get one.

European fintech firms have various reasons for seeking approval as a bank. Bunq, a Dutch firm and one of the first to get a licence, started out in payments, like Klarna, but expanded to deposit accounts. Some, like N26 in Germany or Atom Bank in Britain, sought to be full-service, online retail banks from the outset. Others, such as ClearBank, a new British clearing and settlement bank, want to offer services to other firms.

Of those focused on the retail market, Klarna is...

Finland tests a new form of welfare

Tue, 06/20/2017 - 11:38

Mr Jarvinen, benched too long

JUHA JARVINEN, an unemployed young father in a village near Jurva, in western Finland, brims with ideas for earning a living. He has just agreed to paint the roofs of two neighbours’ houses. His old business, making decorative window frames, went bust a few years ago. Having paid off debts, he recently registered another, to produce videos for clients.

Mr Jarvinen says that for six years he hoped to start a new business but it was impossible. The family got by on his wife’s wages as a nurse, plus unemployment and child benefits. He had a few job offers from local businesses, which are mainly in forestry, furniture and metalwork. But anything less than a permanent, well-paid post made no sense, since it would jeopardise his welfare payments. To re-enroll for benefits later would be painfully slow.

Mr Jarvinen’s luck turned in January, when he was picked at random from Finland’s unemployed (10% of the...

Inflation has not yet followed lower unemployment in America

Thu, 06/15/2017 - 14:54

THAT central banks cannot endlessly reduce unemployment without sparking inflation is economic gospel. It follows from “a substantial body of theory, informed by considerable historical evidence”, according to Janet Yellen, chair of the Federal Reserve. Her conviction explains why, on June 14th, the Fed raised interest rates by a quarter of a percentage point, to a range of 1-1.25%.

Excluding food and energy, prices are only 1.5% higher than a year ago; the Fed’s inflation target is 2%. But Ms Yellen thinks unemployment is below its so-called “natural” rate, so inflation should soon rise. Is she right? Or has the relationship between unemployment and inflation, dubbed the Phillips curve, gone missing?

It is not the first time the theory has failed. After the financial crisis unemployment soared to 10%. This surfeit of workers should have sent inflation tumbling. But prices held up well; in October 2009, when unemployment peaked, underlying inflation was 1.3%, only a little...

The IMF is back in Africa

Thu, 06/15/2017 - 14:53

The old outfit is back

ZAMBIANS have good reason to distrust the IMF. In the 1990s, under the fund’s guidance, their government cut spending, scrapped subsidies, liberalised the exchange rate and privatised over 200 state-run firms. This “structural adjustment” was painful: employment shrivelled and, by the end of the decade, income per person had shrunk by 8%. In the words of Binwell Sinyangwe, a novelist, “they were the years of money first or else no friendship”.

So it was with some trepidation that Zambia welcomed an IMF mission, which concluded on June 10th. As in the 1990s, Zambia has been hit by plummeting prices for copper, its main export. The proposed package, which is likely to be finalised over the coming months, could be worth $1.3bn, which would be the country’s biggest with the fund in two decades.

The retro feel extends across Africa, where GDP grew last year by 1.4%, the slowest rate this century. Ghana agreed on a three-...

What history says about inequality and technology

Thu, 06/15/2017 - 14:53

ONE factor behind the rise of income inequality in America over the past four decades is that the labour market has increasingly favoured the well-educated. Real wages for college graduates have risen by over a third since 1963, whereas wages for those without high-school diplomas have dropped. As more of the economy becomes automated, doomsayers worry that the gap between the haves and the have-nots will only grow. History shows, however, that this need not be so.

The recent rise in earnings for skilled workers is a rare historical phenomenon. Compiling records from churches, monasteries, colleges, guilds and governments, Gregory Clark, an economist at the University of California, Davis, has put together a comprehensive dataset of English wages that stretches back to the 13th century. Mr Clark notes that in the past the skilled-wage premium, defined as the difference in wages between craftsmen, such as carpenters and masons, and unskilled labourers has been fairly stable, save for two...

How Chinese overcapacity hits American workers

Thu, 06/15/2017 - 14:53

The fear of being crushed

ALUMINIUM smelting is sweaty work. Inside the Hawesville plant of Century, an American aluminium producer, it can get so hot that the workers lie outside in the blazing summer sun to cool off. Dennis Harbath, the plant manager, oversees operations. He is worried about the workers. “They have mental fatigue,” he says.

The source of the stress is a number scrawled on a wall in white chalk. That is the dollar price of a tonne of aluminium, set on the London Metal Exchange (LME). The workers keep track of it on their smartphones. Their wives ask about it, too. “It’s hard to stay on the LME rollercoaster when trying to support a family,” says one.

A few years ago, they weren’t particularly aware of the price, says Andy Meserve, the local union president. That changed after 2015, when the price plunged to below $1,500 per tonne, prompting Century to shut down 60% of the plant’s capacity and lay off hundreds of workers....

The Treasury publishes proposals to cut red tape

Thu, 06/15/2017 - 14:53

TEN days after he became America’s 45th president in January, Donald Trump vowed to “do a big number on Dodd-Frank”, the elephantine law that recast financial regulation after the crisis of 2007-08. Soon after, he asked his treasury secretary, Steven Mnuchin, to measure all America’s rules (not just Dodd-Frank) against seven broad principles, including the prevention of bail-outs by the taxpayer and making regulation more efficient.

On June 12th Mr Mnuchin gave the first part of his answer, in a 147-page report on banks. Later instalments will cover capital markets, insurance and asset management, and non-bank institutions and financial technology. Banks of all sizes will be cheered by its proposals to ease regulation, make “stress tests” of their resilience less onerous and tame the Consumer Financial Protection Bureau (CFPB), a watchdog born of the Dodd-Frank act. To allay the confusion caused by America’s many regulators, Mr Mnuchin wants to give co-ordinating power to the...

The EU wants to supervise London clearing-houses after Brexit

Thu, 06/15/2017 - 14:53

THE Brexit devils will be in the details. That much is clear from the European Commission’s latest plans for euro-denominated clearing, a crucial bit of financial plumbing. Clearing-houses sit in the middle of a securities or derivatives transaction, and make sure that deals are honoured even if one side defaults. Clearing has become a much bigger business in the wake of the financial crisis, after which the G20 group of large economies mandated that over-the-counter derivatives should be cleared: 62% of a notional $544trn global market is now settled in this way.

London houses have an outsize role, clearing 97% of dollar interest-rate swaps and 75% of those in euros. Britain’s largest clearing-house, LCH, owned by the London Stock Exchange, alone clears over 50% of interest-rate swaps across all currencies. This has long had EU regulators worried about systemic-risk implications, and led them to consider their post-Brexit options. On June 13th the commission proposed a law that would set up a new system of direct supervision for clearing-houses that handle transactions in euros or other EU currencies, but are located outside the EU, as those in London will be.

Under this proposal, the European Securities and Markets Authority (ESMA), a regulator, would have direct oversight over non-EU clearing-houses deemed systemically important. Such oversight...

Getting the most out of business taxes

Thu, 06/15/2017 - 14:53

ONE of the hottest debates in economic policy at the moment is how to ensure companies are paying the optimal amount of tax. On the right, politicians think that a lower corporate-tax rate will lead to more business investment and thus faster economic growth. Hence the initial stockmarket enthusiasm after President Donald Trump was elected on a platform that included cuts in business taxes. On the left, the belief is that business is not paying its “fair share” of tax and that it can be further squeezed to pay for spending commitments. Hence the promise of the Labour Party in Britain’s recent election campaign to push the corporate-tax rate up to 26% (from 19%).

How do these theories translate into practice? To find out the effect on business investment, The Economist took the corporate-tax rates in OECD countries and divided them into quartiles from highest (1st) to lowest. Then we calculated the five-year average in each quartile for gross...

The perils of nationalisation

Thu, 06/15/2017 - 14:53

WHEN Jeremy Corbyn unveiled his Labour manifesto ahead of the recent British election, opponents gawked at pledges to renationalise the postal and rail systems. Such enthusiasm for state ownership smacks of a philosophy long since abandoned by leaders on both left and right. Despite Labour’s decent electoral performance, nationalisation is not everywhere on the march; on June 5th Donald Trump made public his desire to privatise air-traffic control. But the rise of Mr Corbyn and Bernie Sanders hints at a weakening of the rich-world consensus that the less of the economy owned by government, the better. That is a pity. Expanded state ownership is a poor way to cure economic ailments.

For much of the 20th century, economists were open to a bit of dirigisme. Maurice Allais, an (admittedly French) economist who won the Nobel prize in 1988, recommended that the government run a few firms in each industry, the better to observe the relative merits of public and...

Death pools can bring financial security for the long-lived

Thu, 06/15/2017 - 14:53

Thinking inside the box

WHEN members of a private club in Manhattan suddenly start dropping dead at an alarming rate, Matt Scudder, a private detective, suspects more might be at play than bad luck to explain the bizarre series of suicides and violent accidents. If this sounds like the back-flap of a murder mystery, your deduction skills are as sharp as Mr Scudder’s. In Lawrence Block’s “A Long Line of Dead Men,” the cunning detective eventually uncovers the motive for the killing spree: the club of 31 men were all part of a tontine.

These ancient financial instruments are built on members paying money into a pool, which is invested and then pays out dividends once they reach a pre-agreed age. Those who live longest will see their income increase as others die; the last one standing receives the most. They are essentially a form of insurance against an unexpectedly long life.

Although most people will know them from the works of Agatha...

Bangladesh worries about falling remittances

Thu, 06/08/2017 - 14:46

IT IS a mystery. Last year Bangladesh’s army of migrant workers abroad increased by a record 750,000, to reach 8m-odd. They travel to earn money for their families. Yet the statistics suggest they are sending less money home. In the fiscal year that ends this month, recorded remittances will have fallen for the second consecutive year, this time by more than 10%, to $12bn (see chart). To explain the puzzle, look to the places they work, to technology and to the growing popularity of a fiddle used by Bangladeshi importers.

The abrupt cancellation last November by the Indian government of most banknotes by value was one factor: monthly inflows crashed, as the millions of Bangladeshis working in India were strapped for cash. In the Gulf, the source of 60% of Bangladesh’s remittances, the economy has been relatively sluggish.

But even without these shocks, remittances were falling—and fewer were being counted. Bangladesh is not unique in suffering such a downturn: for the first...

A state bail-out of Monte dei Paschi draws near

Thu, 06/08/2017 - 14:46

Not the world’s oldest customer

HELP is at hand for the world’s oldest bank. On June 1st the European Commission said it had agreed in principle to a bail-out by the Italian government of Monte dei Paschi di Siena, founded in 1472. For years Monte dei Paschi, Italy’s fourth-biggest bank by assets, has lurched from crisis to crisis. Last July it flunked a test by European supervisors of its capital strength. In December a private-sector restructuring scheme came to naught and the state decided to step in.

The details, including the size of the bail-out, have yet to be hammered out. In December the European Central Bank (ECB) estimated that Monte dei Paschi would need €8.8bn ($9.2bn) in capital to withstand the “adverse scenario” in last summer’s test. The Bank of Italy reckoned that the state’s share would be €6.6bn.

That included €2bn to compensate retail investors in the bank’s junior bonds, many of them ordinary customers. European state-...

Banco Popular fails and is bought by Santander

Thu, 06/08/2017 - 14:46

EVEN a bank failure can be presented as a triumph. This week Banco Popular, a big Spanish lender, endured a run. Depositors were said to be withdrawing €2bn ($2.2bn) a day. The bank lost half its stockmarket value in four days, as a self-imposed deadline to find a saviour loomed. On June 6th, it was declared by the Single Resolution Board (SRB), an independent agency of the European Central Bank formed in 2015 and charged with winding down banks, to be “failing or likely to fail”. The next morning, Santander, Spain’s biggest bank, announced its purchase for the symbolic sum of €1 ($1.10). It is to raise €7bn in capital to help absorb Popular’s property-related losses.

Spain’s government, the European Commission and Santander all cheered the outcome as a model European response to a bank crisis. Shareholders and junior bondholders in Popular have been wiped out. Spanish ministers pointed out that taxpayers would not have to pay for a rescue of the sort arranged for Bankia, a giant savings bank nearing collapse, when Spain needed a banking bail-out in 2012. Ana Botín, Santander’s boss, declared the deal good for Spain, for Europe, for Popular’s 4.4m customers and for her shareholders. Santander’s market leadership in Spain and Portugal will be strengthened.

The cheerleaders do have a point. Compared with previous banking disasters, this one has been...

Why government-bond yields have been falling again

Thu, 06/08/2017 - 14:46

EVERY year it seems that analysts and investors play a ritual game. They begin by asserting that government bonds are terrible value and that, accordingly, this must be the year when yields will rise (and prices fall). And then they get mugged by reality.

The same pattern seems to be playing out in 2017. Back in December, a poll of fund managers by Bank of America Merrill Lynch (BAML) found that pessimists on global bonds outnumbered optimists by 58 percentage points. Investors believed in a “reflation trade”, with tax cuts from Donald Trump’s administration leading to faster American growth, to which the Federal Reserve would respond with higher interest rates.

For a while, such forecasts seemed to be on the money. The yield on the ten-year Treasury bond picked up to 2.63% by March 13th (see chart). But since then the trend has changed. The Treasury-bond yield recorded a low for the year of 2.13% on June 6th. In Britain the yield on the ten-year gilt dipped below 1% on June...

To err is human; so is the failure to admit it

Thu, 06/08/2017 - 14:46

A NEWSPAPER cannot publish for 174 years without some mistakes. This one has made its share. We thought Britain was safe in the European exchange-rate mechanism just weeks before it crashed out; we opined, in 1997, that Indonesia was well placed to avoid financial crisis; we noted in 1999 that oil, at $10 per barrel, might well reach $5, almost perfectly timing the bottom of the market; and in 2003 we supported the invasion of Iraq. For individuals, like publications, errors are painful—particularly now, when the digital evidence of failure is both accessible and indelible. But they are also inevitable. The trick, then, is to err well: to recognise mistakes and learn from them. Worryingly, humanity may be getting worse at owning up to its goofs.

Few enjoy the feeling of being caught out in an error. But real trouble starts when the desire to avoid a reckoning leads to a refusal to grapple with contrary evidence. Economists often assume that people are rational. Faced with a new fact...

In praise of America’s third-party debt collectors

Thu, 06/08/2017 - 14:46

Not in the rule book

FEW cheer the rising levels of America’s household debt, which reached a record $12.7trn at the end of the first quarter. Nearly 5% of the total, or $615bn, was in some stage of delinquency. One group, however, can barely hide its glee: third-party debt-collection firms, which try to recover mostly consumer loans on behalf of creditors without the resources to chase down bad borrowers themselves.

Business is expanding “at a robust rate”, says Keith Kettelkamp, the boss of Remex, a debt collector based in New Jersey whose clients include banks, utilities and musical-instrument sellers. Across the country more than 6,000 collection firms contact debtors more than 1bn times a year. One in eight Americans has an account with a third-party collector. The average amount outstanding is just over $1,300.

Third-party collectors have, it is fair to say, a dubious reputation: they are the target of more complaints from consumers...

Four BRICs don’t quite make a wall

Thu, 06/08/2017 - 14:46

EMERGING markets have been through a lot over the past four years. The “taper tantrum” in 2013 (prompted by fears of a change in American monetary policy); the oil-price drop in 2014; China’s botched devaluation of its currency in 2015; and India’s botched “demonetisation” of much of its own currency in late 2016 (removing high-value banknotes from circulation). But 2017 has started more brightly. Indeed, for the first time in two and a half years, the world’s four biggest emerging economies (Brazil, Russia, India and China, known as the BRICs) are all growing at the same time.

Russia’s GDP bottomed out at the end of 2015 (using seasonally adjusted figures) after the longest recession since the 1990s. It has expanded at a gathering pace for the past three quarters. Higher oil prices have helped, though Russia cannot profit fully from the improved market by ramping up sales without violating the production limits that caused the market’s recovery.

During the collapse...