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The onset of a downturn is as much a matter of mood as of money

Tue, 08/20/2019 - 20:33

IN RECENT WEEKS the human and silicon brains at Google have registered an alarming rise in searches related to “recession”. It is easily explained. As markets gyrate, talk in the press (including this very column) turns to the risk of a slump. Even so, the stories must leave some Googlers baffled. In July, after all, the American economy added 164,000 jobs and retail sales kept climbing. President Donald Trump, too, is bemused. He has taken to warning darkly that conspirators are attacking his presidency by frightening the economy into an unnecessary downturn. The claim of conspiracy is absurd, but the threat of recession is not. Recessions can indeed appear as if out of the blue.

Today’s confusion owes something to the world’s odd recent economic history. The last global slump occurred amid an epic financial crisis. The one before that began nearly two decades ago, accompanied, again, by a stockmarket crash. (Between August 2000 and September 2001 the S&P 500 index fell by more than 30% and the NASDAQ by more than 60%. Now, by contrast, those indices are pretty much where they were a year ago.) Most people working today cannot remember a recession not linked to financial chaos. But downturns can occur without market meltdowns. Indeed, many economists think recessions need not occur at all.


Countries most exposed to climate change face higher costs of capital

Thu, 08/15/2019 - 15:08

IN EAST AFRICA millions of people are suffering from a prolonged drought. Deadly typhoons are wreaking havoc in Vietnam. Honduran coffee-farmers are seeing their crops wither in the heat. Poor countries have less capacity than rich ones to adapt to changing weather patterns, and tend to be closer to the equator, where weather patterns are becoming most volatile. As the world heats up, they will suffer most.

By 2030 poor countries will need to spend $140bn-300bn each year on adaptive measures, such as coastal defences, if they want to avoid the harm caused by climate change. That estimate, from the UN Environment Programme, assumes that global temperatures will be only 2°C above pre-industrial levels by the end of the century, which seems unlikely. Adding to the costs, research suggests that these countries face higher interest rates than similar countries less exposed to climate risks. This raises the prospect of a vicious cycle, in which the most vulnerable countries pay more to borrow, making adaptation harder and them even more exposed.

The research focuses on the V20, a group founded by 20 vulnerable countries whose membership has since grown to 48. The members are mostly poor, together accounting for less than 5% of global GDP. They include low-lying atolls, such as the Marshall Islands, and economies dominated by...

The trade war is leading some firms to crimp investment

Thu, 08/15/2019 - 15:08

“THERE’S TARIFFS on games and tariffs on toys—try explaining tariffs to your little boy. Santa’s workshop is struggling, you’ll find yourself saying. I think the reindeer are backed up with their sleighing.” Wendy Lazar, who runs a company called I Heart Guts, submitted this peeved poem to the United States Trade Representative (USTR) in June. As an importer of children’s toys from China, she was complaining about how the trade war could squeeze her firm.

She is not alone. In boardrooms across America, business people are scrambling to assess the impact of the latest escalation in the commercial confrontation between the two superpowers. For most firms the easy bit is calculating the immediate financial impact of more tariffs on demand, prices and costs. That can be done in a spreadsheet. Far harder is working out how to rejig your strategy and long-term investment plans to adapt to a new world of enduring trade tensions. Fund managers and Wall Street traders have begun to reach their own conclusion—that investment may slump, possibly triggering a recession. Hence the violent moves in markets since the first week of August, with a rush towards safe bonds and a sell-off in equities (see article).

That sell-off picked up pace on August 1st when...

Microfinance is driving many Sri Lankan borrowers to despair

Thu, 08/15/2019 - 15:08

IN PARTS OF Sri Lanka’s north and east, some women keep track of their microloans by the day of the week the collectors come. Others identify the lenders by the colours of their collectors’ shirts. Monday loan, Tuesday loan, blue shirt, yellow shirt: small, unsecured loans promoted by the government after the decades-long civil war ended in 2009 have enmeshed many women in hopeless debt. A central-bank official says his employees have talked desperate borrowers out of killing themselves. At least 170 committed suicide last year.

Nalani Wickremesinghe, from Baduraliya in the south, has taken loans from 11 companies, only two of which are registered with the central bank. The first was to pay for her husband’s medical treatment. Then he fell at his workplace and is still bedridden. She has borrowed 500,000-600,000 rupees ($2,800-3,400) in total—but has no idea of the interest rate. She has already pawned, and lost, her gold jewellery. Struggling to feed her family, she has little option but to borrow again.

In Nachchikuda, a coastal village, Sri Sundara Gowri sits in her front yard—not far from the satellite dish she bought on hire-purchase—and relates how she had five loans, three of which have been at last paid off. The first, of 25,000 rupees, was taken ten years ago after she returned from prolonged displacement to...

The woes of bond insurers

Thu, 08/15/2019 - 15:08

ON AUGUST 8TH two subsidiaries of MBIA, an American insurer, sued nine Wall Street firms, alleging misconduct in underwriting bonds issued by Puerto Rico and “wrapped”, or guaranteed, by MBIA. Lawsuits accusing banks of peddling iffy securities are not rare these days. However, this one is a reminder that “monoline” bond insurers, which briefly played a starring role in the financial crisis of 2008, are, though hardly full of life, still kicking.

Monoline insurers (so called because they focus solely on providing financial guarantees) charge a premium to cover interest and principal payments should bonds default. The industry sprang up in the 1970s, first focusing on municipal debt and later branching out into structured products like mortgage securities. That expansion backfired spectacularly when American house prices crashed. For a few weeks in 2008 the previously obscure monolines—the biggest of which were MBIA and New York-based Ambac—became front-page news as fears spread that they might be unable to pay claims on hundreds of billions of dollars of securitised debt.

Rating agencies responded by downgrading monolines’ own debt. That did for some of them, given that the business was largely about lending the insurer’s AAA rating to the bonds. Ambac filed for bankruptcy and was placed in rehabilitation. MBIA avoided...

Malaysia charges 17 Goldman Sachs executives

Thu, 08/15/2019 - 15:08

THE SURPRISE stung. On August 9th Malaysia’s attorney-general filed criminal charges against 17 current and former executives at Goldman Sachs, an investment bank. The move marks an escalation in Malaysia’s efforts to deal with a scandal uncovered at 1MDB, a state investment vehicle set up more than a decade ago by Najib Razak, then Malaysia’s prime minister. As much as $4.5bn of public money vanished from the fund between 2009 and 2015, according to America’s Department of Justice (DOJ). The cash was funnelled through shell companies around the world and frittered away on yachts, artworks, diamonds and other fripperies. Investigations have spanned America, Luxembourg, Malaysia, Singapore, Switzerland and the United Arab Emirates.

The 17 executives occupied senior positions at three subsidiaries of Goldman between May 2012 and March 2013. Five still work at the bank: among them is Richard Gnodde, the chief executive of its London-based subsidiary. During that time Goldman underwrote three bond offerings that raised $6.5bn for 1MDB, of which, according to the DOJ, $2.7bn later disappeared. Even so, the bank earned a whopping $600m in fees—a figure that Malaysia’s authorities claim was above the market rate. In 2013 one of the bank’s former executives, who has been charged, was paid a bonus exceeding that of its chief executive at the...

Six charts that explain the state of markets

Thu, 08/15/2019 - 15:08

IN THE AUTUMN of 2008, strange and novel things happened in financial markets, such as the emergence of negative yields on Treasury bills. In times of fear, the safest assets are at a premium.

What was once strange is now ordinary. Negative yields are a familiar feature of European bond markets. But such is the anxiety about the world economy that they are spreading. In Germany, interest rates are negative all the way from cash to 30-year bonds (chart 1). In America yields are still positive. But the curve is inverted: interest rates on ten-year bonds are below those on three-month bills (chart 2). The last seven recessions in America have been preceded by an inverted yield curve.

Nervous investors are reaching for the safety of the dollar. The yen and Swiss franc, habitual sanctuaries, are among the few currencies that have risen against it (chart 3). The price of gold, another haven, is at a six-year high. That of copper, a barometer of global industry, is...

The chilling economic effects of Brexit uncertainty are intensifying

Thu, 08/15/2019 - 15:08

SINCE BRITAIN voted to leave the European Union (EU) in June 2016, Leavers have been gloating. Despite the Remain camp’s dire predictions, the economy seemed to trundle on well enough. But the crowing is dying down. Figures released on August 9th showed that Britain’s GDP shrank in the second quarter. And a growing body of research suggests that Brexit-related uncertainty is doing subtle but serious economic damage.

A paper published early this year by Meredith Crowley, Oliver Exton and Lu Han of the University of Cambridge reckons that uncertainty over trade policy has dented export prospects. Had the vote not taken place, 5% more firms would have exported new products to the EU in 2016 alone.

After the referendum economists from the Bank of England, the University of Nottingham and Stanford University set up the “Decision-maker panel”, a survey that regularly polls executives across the country’s industries and regions. In a new paper the researchers examine the responses of 5,900 firms, representing 14% of private-sector jobs, to gauge the effect of Brexit uncertainty on business.


What comes after Bretton Woods II?

Tue, 08/13/2019 - 18:31

“THERE IS NO longer any need for the United States to compete with one hand tied behind her back,” Richard Nixon, then America’s president, told his countrymen in August 1971. With that speech, he heralded the end of the post-war economic order, suspending the convertibility of the dollar into gold and putting up tariffs on imports. The survival of today’s order, which emerged from the chaos that followed, now also looks in doubt. In other circumstances, its demise might not have been mourned. But with each passing August day, the prospects for a happy shift from one global monetary regime to another look ever grimmer.

International trade is complicated by the fact that most countries have their own currencies, which move in idiosyncratic ways and can be held down to boost competitiveness. Governments’ efforts to manage currencies are constrained by certain trade-offs. Pegging them to an external anchor to stabilise their value means either ceding control of domestic economic policy or restricting access to foreign capital flows. Systems of monetary order, which resolve these trade-offs in one way as opposed to another, work until they do not. The context for America’s economic showdown with China is a system that worked once but no longer does.

Such things happen. The first great age of globalisation, which began...

Core elements of the global banking industry are moving to India

Thu, 08/08/2019 - 14:45

FINANCIAL CENTRES, like delicate plants, thrive in the right conditions. Those include a vibrant private sector, banks that direct capital based on the prospect for profit, analysts with direct access to companies and investors, openness to foreign people and institutions, and business-friendly, consistent laws. For good measure, throw in the cultural amenities that attract the sorts of employees who could choose to live anywhere.

India is not such a place. Its laws are many and perplexing; its domestic markets, inefficient and politicised. Though saving is unrewarding, capital is still costly for entrepreneurs. International firms are mostly limited to cross-border activities. It often scores badly on quality of life.

So it is hardly surprising that although tiny Hong Kong and Singapore are globally renowned centres of finance, Mumbai, India’s financial capital, features low on most rankings. But the country is nonetheless becoming an essential hub for international banks. India is often their second-largest place of employment after their home country, and becoming ever more important for their innovation efforts.

India has long received other countries’ outsourced jobs. Some of those are unsophisticated, such as answering phones or processing forms. Many, however, rely on Indian universities’ remarkable...

The Fed says it will build a real-time interbank payments system

Thu, 08/08/2019 - 14:45

IN SEVERAL countries—Britain, say, or Sweden—bank transfers are more or less instant. The moment your wages leave your employer’s bank account, they arrive in your own, giving you the wherewithal to pay the bills and feed the family. But America is far behind. Transfers can take days to clear, landing many Americans—chiefly those who can least afford additional expense—with hefty overdraft fees or pushing them towards payday lenders charging high interest rates. In an age when millennials can split a drinks tab on their smartphones before leaving the bar, this almost beggars belief.

The Federal Reserve wants to speed things up. On August 5th it said that it would build a faster-payments system, as central banks have in other countries. But not, alas, instantly. FedNow, its proposed service, will not start before 2023. Covering all of America’s 10,000 banks and other depository institutions will take even longer.

In fact, America already has a real-time payments system. The Clearing House (TCH), which is owned by 25 big banks, has been running one since 2017. Between them, says Steve Ledford of TCH, the 16 banks that have so far joined the system hold just over half of the accounts from which payments can be made. TCH is pushing for near ubiquity next year.

So why does the Fed want its own? First, it is not...

As yields turn negative, investors are having to pay for safety

Thu, 08/08/2019 - 14:45

PENGUINS ON A melting icecap must choose between budging up tighter and taking the plunge. Institutional investors such as pension funds and insurers now face a similar unappealing choice, with ever-fewer safe assets that do not lose them money. According to an index calculated by Bloomberg, a quarter of the bonds issued by governments and companies worldwide are now trading at negative yields. Creditors holding $15trn-worth of securities will make a loss if they hold them to maturity (see chart).

Yields on many European government bonds turned negative in the mid-2010s as central banks engaged in quantitative easing—colossal bond-purchase programmes. By 2015, 40% of the continent’s sovereign bonds offered negative yields. But as economies perked up, central banks changed course. By November 2018 many European bonds were back above sea level.

Now many have gone negative once again. France’s ten-year bonds have been flirting with negative yields for two months; they went below zero three weeks ago and stayed there. Ireland followed on August 5th. Fiscally conservative countries like Austria and the Netherlands are well past that point. Spain and Portugal may soon follow, says Iain Stealey of JPMorgan Chase’s asset management division. Germany’s entire yield curve is already submerged.

As the trade war between...

The surprising departure of HSBC’s chief executive

Thu, 08/08/2019 - 14:45

MARK TUCKER and John Flint always seemed an unlikely double act at the top of HSBC, Britain’s biggest bank. Mr Tucker’s first profession was football—he was on the books of Wolverhampton Wanderers, now a Premier League club—and you imagine he was robust in the tackle. He never made the first team, but instead became a star in the insurance business. He captained Britain’s Prudential and AIA, a big Asian life insurer, before transferring to HSBC, as chairman, in 2017.

The wiry Mr Flint, by contrast, completes triathlons and was an HSBC lifer, joining from university in 1989. He climbed the ranks in HSBC’s time-honoured way, running the retail and wealth-management division before becoming chief executive in February 2018.

On August 5th, to general surprise, HSBC declared that Mr Flint was standing down after just 18 months. Noel Quinn, the head of commercial banking, will take interim charge. The bank’s tradition has been to appoint its chief executives from within—Mr Flint’s predecessor, Stuart Gulliver, ran the bank for the last seven of his 38 years on the staff—but it will look externally as well as internally for a permanent replacement.

At first blush, Mr Flint’s ousting looks harsh. On the same day as it announced his departure, HSBC reported that its net income in the first half of 2019 had risen by 18.1...

The trade war escalates, and the fog of war descends

Thu, 08/08/2019 - 08:48

CARL VON CLAUSEWITZ, the Prussian military theorist, never wrote about currency wars. But some policymakers see them in his terms: as the continuation of trade politics by other means. That, at least, is how the Trump administration views China’s decision on August 5th to let its currency weaken past seven yuan to the dollar for the first time since 2008. Though arbitrary, that threshold has assumed huge symbolic importance among traders, economic officials and fund managers (see Buttonwood). They were left stunned.

America’s Treasury quickly branded China a “currency manipulator”, a charge it has not levelled against any country for 25 years. China, in the Americans’ view, was cheapening its currency to gain an unfair edge in retaliation for President Donald Trump’s surprise announcement four days earlier that he would impose new tariffs of 10% on roughly $300bn of Chinese goods.

This marked the end of investors’ hopes for a peaceful summer. At the end of July the Federal Reserve had cut interest rates to guard against a slowdown in America’s respectable growth rate, and trade tensions had “returned to a simmer”, as Jerome Powell, the Fed’s chair, noted with satisfaction. But after the yuan’s move America’s stockmarket suffered its worst day...

How yuan-dollar became the world’s most closely watched asset price

Thu, 08/08/2019 - 08:48

A PRINCIPLE FOLLOWED by traders who speculate on short-term movements in market prices is “cut your losses early”. This doctrine finds expression in the stop-loss—an order to sell a security, such as a company share, automatically when it hits a predetermined price. People being people, stop-loss orders tend to cluster at salient levels, such as whole or round numbers. They might instruct a broker to sell the pound at $1.20, say, or sell Apple at $200.

The round-number fetish is a strange one. But when a situation is uncertain (and financial markets are always uncertain) arbitrary numbers or thresholds are often charged with great meaning. And few have had the significance of seven yuan per dollar. So when the yuan broke through seven on August 5th, it prompted a violent sell-off in stocks and a rally in bonds. That was followed by a formal charge by the US Treasury that China was manipulating its currency.

On the face of it, that looks like an overreaction. If things were fine when the yuan was at 6.99, why did all hell break loose when it reached 7.01? Odder still is the idea that a currency that has only fairly limited use outside China is suddenly a prime mover in global capital markets. Yet China’s heft in the world economy has made it so. The yuan-dollar exchange rate is now the world’s most watched asset price....

Prices for many goods do not move the way economists think they should

Tue, 08/06/2019 - 16:43

TWO YEARS ago British chocoholics felt the pinch from the decision to leave the European Union. As sterling tumbled, global firms selling to the British market faced the same production costs as before, but got less money for each sweet sold. Rather than raise the price per chocolate, some chose to shrink the chocolate per price. The famous peaks on a bar of Toblerone grew conspicuously less numerous (though Mondelez, the bar’s maker, said Brexit was not the cause). Other products suffered the same “shrinkflation”: toilet rolls and toothpaste tubes became smaller. The threat of Brexit made the phenomenon more visible, but it is surprisingly common. Statisticians and policymakers need to take note.

Every first-year economics student quickly becomes familiar with charts of supply and demand, which place price on one axis and quantity on the other. Given a drop in demand, the charts show, firms can either sell fewer items at the prevailing price or cut prices to prop up sales. But online retailing, which makes it easier to collect fine-grained price data, reveals how poorly textbook models reflect real-world market dynamics. The prices of consumer goods, it turns out, behave oddly.

A forthcoming paper by Diego Aparicio and Roberto Rigobon of the Massachusetts Institute of Technology helps make the point. Firms that...

Portugal tries to lure emigrants back

Thu, 08/01/2019 - 14:46

FED UP WITH politics in America, Madonna left in 2017 and set up home in Lisbon. As Portugal’s population shrinks its government might hope that others will follow the pop star. It already has a “golden visa” scheme—which gives investors the right of residence—and offers highly skilled migrants tax breaks. A new scheme, launched on July 22nd, tries to lure back emigrants, even if they are neither highly paid nor highly skilled.

The Regressar (Return) programme is aimed at former residents who have lived outside Portugal for at least three years and are considering moving back. Returners are promised 50% off their income tax bills for five years. Those who take up jobs in Portugal receive help with the costs of relocation, such as travel, moving possessions and re-registering professional qualifications, up to a maximum of around €6,500 ($7,200). Those searching for jobs while still abroad can sign on with the Portuguese employment office.

As the economy was struck first by the global financial crisis and then by a sovereign-debt crisis, unemployment soared, to 17% in 2013. But since then the rate has dropped below 7%, and companies now complain that both skilled and unskilled workers are in short supply. A shrinking population makes matters worse. Since 2010 it has fallen by 300,000, or 3%. More...

Emerging-market dreams of rich-world incomes meet reality

Thu, 08/01/2019 - 14:46

FOR A RICH economy, a growth rate beginning with a five would be cause for ecstasy. For India, it is a huge disappointment. Its most recent quarterly growth figure translates into an annualised rate of only 5.8%, the fourth consecutive quarterly slowdown. That is slower than China (a 6.2% annualised rate in the second quarter of 2019, down from 6.4% in the first) and substantially slower than India believes itself capable of. Recent data suggest the swoon has since deepened (and an analysis published in June by a former adviser to the Indian government also suggests that the China-like growth rates posted in the recent past may reflect dodgy statistics). India is hardly doomed; if it might reasonably have expected to do better, experience elsewhere shows it could very easily have done worse. But the slowdown is yet another sign that the emerging-market narratives to which the world has grown accustomed are in need of serious revision.

During most of the 20th century advanced economies outgrew poorer ones. But around the turn of the millennium a dramatic shift occurred. In terms of real GDP per person, adjusted for purchasing-power parity, just 24% of the countries now classified as emerging markets by the IMF grew faster than America did across the 1980s as a whole. In the decade starting in 2000, by contrast, 76% did so. Then the...

The LME is Europe’s only surviving “open outcry” venue

Thu, 08/01/2019 - 14:46

HER CLIENT’S huge order would cause prices to surge if the market got wind of it. She knew she needed to be crafty. “So I shouted as loud as I could, ‘I’ll sell at £795’.” The price sank. “By now I was pointing at everyone who had bid, but because they thought I was a heavy seller they backed off, only taking 25 tonnes at a time.” At the bell, the price fell to £780. That triggered automatic sell orders. At the next session she was able to buy back her stock—plus a few thousand tonnes for her client—on the cheap.

Every trader on the London Metal Exchange probably has a tale to tell of wrong-footed rivals. This story, told in “Ring of Truth”, a memoir by Geraldine Bridgewater, the LME’s first female trader, is from four decades ago. Little has changed. Traders still sit in a circle (the Ring) and yell orders for copper at each other, just as they have for more than a century. The LME is the only “open outcry” trading venue left in Europe. Its rituals seem as quaint as Morris dancing or the Trooping of the Colour.

Yet somehow the LME retains its relevance. It is now owned by Hong Kong Exchanges and Clearing (HKEX). Ms Bridgewater’s big trade was for the People’s Republic of China, a client she had shrewdly cultivated. China has since become the LME’s biggest source of custom. There is a rival exchange in Shanghai; China...

The currency-trading scandal continues to dog the banks

Thu, 08/01/2019 - 14:46

THE LAUGHING stopped long ago. Between 2007 and 2013, in online chatrooms called “Three Way Banana Split”, “Essex Express ’n the Jimmy” and other rib-ticklers, currency traders yapped about all sorts of things—including market tactics. The banter has cost their employers dear. Banks have been fined over $10bn for market-rigging by American and European regulators, including €1.1bn ($1.2bn) by the European Commission in May. An American class action cost 15 banks $2.3bn. But a lawyer’s work is never done. On July 29th Scott+Scott, an American law firm, filed a collective-action case at the Competition Appeal Tribunal (CAT), an antitrust forum in London.

Cases like this are still a novelty in Britain, despite a theoretically helpful change in competition law in 2015. Collective claims may now be brought to the CAT on an “opt-out” basis, in which members of a specified class are included in the claim unless they choose not to be. If a monopolist rips off its customers, it may do lot of harm in total, but the damage to each may be small. Given the cost of going to court, many may not bother suing. But the easier a collective-action case is to bring, the likelier they are to gain redress.

The expense of bringing a case to the CAT—and the risk of defeat—are borne by a newish breed of firms specialising in financing litigation...