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The gloom hanging over the world economy is confined to manufacturing

Thu, 04/04/2019 - 14:45

PESSIMISM ABOUT the world economy has grown throughout 2019. Disappointing data, tumbling bond yields, the trade war between China and America and political crisis in Britain have all played a part. The only bright spot has been mostly buoyant stockmarkets. On April 9th the IMF will probably report a downgrade to its forecast for global growth this year, which in January stood at 3.5%. But there has so far been only a deceleration, not a downturn, because economic weakness has been contained mostly to manufacturing, rather than afflicting the service sector (see chart). And a manufacturing rebound might soon lift the global mood.

Manufacturing’s woes can be blamed primarily on falling global trade growth. That is down partly to the trade war, and partly to Chinese policymakers’ attempts to reduce leverage, which slowed domestic growth late last year, curtailing demand for imports. The pain has been felt most in Europe, which is more exposed than America to emerging markets. It has been particularly acute in Germany. On April 1st a survey of German manufacturers, a preview of which buffeted bond markets in March, turned out even worse than expected. Industrial production has slowed even more sharply in Germany than in Italy, which is in recession, note economists at Goldman Sachs, a bank. Yet Germany’s service sector appears to be...

2019 Marjorie Deane finance internship

Thu, 04/04/2019 - 14:45

Finance internship: The Economist invites applications for the 2019 Marjorie Deane internship. Paid for by the Marjorie Deane Financial Journalism Foundation, the award is designed to provide work experience for a promising journalist or would-be journalist, who will spend three months at the London office of The Economist writing about finance and economics. Applicants are asked to write a covering letter and an original article of no more than 500 words suitable for publication in the Finance and Economics section. Applications should be sent to by May 3rd. For more information, see

Rising inequality could explain tepid support for redistribution

Thu, 04/04/2019 - 14:45

THE PUBLICATION six years ago of Thomas Piketty’s “Capital in the Twenty-First Century”—an 800-page tome that has since sold over 2.5m copies—helped reveal the huge increase in inequality in the West since the 1970s. So why has support for welfare spending to counteract it remained so stable over that period? In theory, support for redistribution should increase with the gap between rich and poor, as the envy of the have-nots is stoked. But polls in America and Britain suggest virtually no growth in support for redistribution since 1980.

A new paper* due to be presented on April 7th at the Economic History Society’s annual conference suggests an interesting answer. Rather than the gap between rich and poor being the main influence on attitudes to welfare, the degree of inequality within the upper classes might matter more.

Jonathan Chapman of NYU Abu Dhabi looks at the relationship between inequality and how the poor law, a locally administered welfare system, operated in Victorian England. He compared the generosity and harshness of the conditions of poor-law relief in different areas with the gap between rich and poor, as measured by income from wages, and inequality within the rich, as measured by families’ number of live-in servants. He found that areas of high wage inequality had less harsh rules for claiming poor...

What self-help lending says about Ethiopian banking

Thu, 04/04/2019 - 14:45

IN 1980, IN his early 20s, Mengistu Maregne began selling soft drinks from a stall in Merkato, Ethiopia’s largest market. To finance the fledgling business he joined an ekub, a rotating savings-and-credit association (ROSCA) that pools contributions from members each week and disburses the pot to the winner of a lottery, with each member winning once over the scheme’s term. Being first to draw the lump sum of 4,000 birr ($140), he put the money away and joined another. Within a year he had bought a home; soon after he bought a shoe shop. “Ekub changed my life,” he says.

Though ROSCAs are found across the developing world they are often assumed to serve the poor. But Ethiopia’s are used across the income scale. They encourage members to save, and enable some to raise business capital or buy pricey items such as cars. Some have hundreds of members, with officers who vet applicants and analyse risks.

ROSCAs are entrenched in Ethiopian culture. But their ubiquity is also an indication of the shortcomings of Ethiopian finance. Though the formal banking sector has grown fivefold in just over a decade, it is still much smaller than in neighbouring countries. Bank assets per person are less than a third the level in Kenya. Ethiopian banks also underperform African peers in business lending. Just 12.9% of Ethiopian firms had...

Islami Bank Bangladesh has declined since a boardroom coup in 2017

Thu, 04/04/2019 - 14:45

“IT’S LIKE the Midas effect in reverse,” says Badiul Majumdar of SHUJAN, an anti-corruption pressure group. “Everything the government touches turns not to gold, but rather from gold to dust.” He is talking about Islami Bank Bangladesh, which was rocked in 2017 when the government sent military-intelligence operatives to force out senior executives and board members, and replaced them with figures more to its liking. Fears that the boardroom coup would drag down a comparatively well-managed institution in a sector marred by political meddling and cronyism now appear to have been justified.

Established in 1983 as Bangladesh’s first bank run on Islamic principles, Islami thrived by handling a large share of remittances from emigrant workers and by lending to the booming garment industry. Its troubles stem from its links with Jamaat-e-Islami, Bangladesh’s largest Islamist party, which allied with Pakistan during the war of succession of 1971. One of the first acts of the current prime minister, Sheikh Hasina Wajed, after taking office in 2009 was to set up a court to try war crimes. Leading figures from the Jamaat were sentenced to imprisonment or hanging.

If anything, it is surprising it took Sheikh Hasina and her Awami League eight years to go after Islami—especially given allegations, including from America’s government...

How to fix Europe’s lenders

Thu, 04/04/2019 - 14:45

IT’S NOT all bad. In 2008 Lloyds, a large British bank, took over HBOS, a rival that was being sucked beneath the rising waters of the global financial crisis. HBOS nearly dragged Lloyds under with it; £20.3bn (then about $30bn) of public money was needed to keep the combined group afloat. But these days Lloyds is doing all right.

Under António Horta-Osório, its chief executive since 2011, Lloyds has ditched almost all its foreign operations, narrowed its product range and (like many other banks) poured money into digitisation. The state sold its last shares in 2017. Last year the bank’s return on tangible equity (ROTE), a measure of profitability, was a decent 11.7%. This year Mr Horta-Osório is aiming for 14-15%, Brexit notwithstanding.

Some other European banks also have good stories to tell. The Netherlands’ ING is also a refurbished state-aid case. Its online German bank, ING-DiBa, claims to return over 20%. Spain’s Santander, the euro area’s biggest bank by market capitalisation, sailed through its homeland’s financial storm without a single loss-making quarter. On April 3rd it set out plans to lift its ROTE from 11.7% last year to 13-15% by cutting costs and exploiting digitisation. Nordic banks make bonny returns—although both Danske Bank and Swedbank, beset by money-laundering scandals, have sacked their chief...

Trade talks will probably end with tariffs still in place

Thu, 04/04/2019 - 14:45

LESS THAN a week after the White House described trade talks in Beijing as “candid and constructive”, American and Chinese negotiators met again on April 3rd in Washington, DC. There is talk of a summit between the two countries’ presidents. But amid the upbeat noises are a few discordant notes. Without a deadline, the discussions could drag on, or even stall. Although the contours of a deal seem clear, the final items are always the trickiest. And even if a deal is struck, it may not be a good one.

The two sides have already agreed on provisions relating to currency manipulation, and are hashing out how much more American goods the Chinese will commit to buying. Rules on technology transfer and American companies’ access to the Chinese market are still being discussed. Also on the table will be American demands that China relaxes its attitude to trade in data, which it sees as a threat to national security.

Some in the Trump administration see the negotiations as an opportunity to demand reforms that would also benefit China, such as a more stringent intellectual-property regime or trimmed subsidies. The main objective of the Chinese delegation, led by Liu He, a vice-premier, is simpler: the lifting of the tariffs imposed since last July, which currently cover just over 44% of Chinese exports to America, or goods worth...

How betting on oil prices greases the industry’s wheels

Wed, 04/03/2019 - 14:37

OF ALL THE lines of all the characters in all the scenes in “Casablanca”, the ones that resonate most are spoken not by Humphrey Bogart, the leading man, but by Claude Rains, who plays Louis Renault, a cynical police captain. Needing a pretext to shut down Rick’s, the nightclub owned by Bogart’s character, he declares that he is “shocked, shocked to find that gambling is going on in here”.

Renault’s line captures the fake distaste for gambling that lives on in polite circles. It finds expression even in impolite circles, such as finance. Take the market for oil futures. Only the gauche would describe it as anything other than a system for transferring risk. Oil producers sell futures to insure themselves against a price rout that would threaten solvency. Investors earn a risk premium by buying them.

There is something to this characterisation. Producers are indeed short futures much of the time. But often, they are long. Perhaps the real reason for a thriving futures market is that people both inside and outside of the oil business enjoy a punt on the price of crude. If so, that is all to the good. The prices that wash out of these wagers are an invaluable guide to decision-making about production, storage and investment.

The benefits hinge on the relationship between spot prices, futures prices and...

The IMF adds to a chorus of concern about competition

Wed, 04/03/2019 - 14:08

PHYSICISTS’ QUEST for a “theory of everything” is well-known. The equivalent in economics is the hunt for common causes for the rich-world macroeconomic trends of the past decade or so: a shrinking share of the economic pie for workers, disappointing investment and lacklustre productivity growth. These must be reconciled with low interest rates, pockets of technological advance and juicy returns for investors willing to take risks.

The leading economic theory of everything is that competition has weakened as markets have become more concentrated. Unlike firms in competitive markets, monopolies limit production in order to keep prices and profits high. They can therefore be expected to restrain their investment, too. They might still be innovative—with monopoly profits up for grabs, why not be?—but market power usually makes economies less productive overall. And monopolies have many opportunities to take bites out of labour’s share of the pie. Their high profits typically flow to investors, not workers. Their high prices eat into the purchasing power of wages. Their bargaining clout may even allow them to suppress pay directly.

On April 3rd the IMF provided the latest evidence for parts of this theory. In a new study the fund’s economists examined the markups over marginal cost—one proxy for market...

Simple interactions can have unpredictable consequences

Tue, 04/02/2019 - 15:22

CONSIDER THE task economists have set themselves. The global economy is the outcome of near-constant interaction between billions of unique individuals. To attempt to model even a small corner with a few equations is bold, even foolhardy. That economists have made as much progress as they have is impressive.

Might a radically different approach do better? In February the Boston Review, a quarterly magazine, convened a forum to discuss prospects for an “economics after neoliberalism”. “What we call ‘the economy’”, read one of the entries, “is in fact a highly complex, multi-level system. It must be studied as such.” The authors represent “complexity economics”. Though still a niche within the field, its potential impact is profound.

Most economics is centred on equilibrium: an economy’s natural resting state. Solving a set of equations that describes a market, conceived of as populated by predictably self-interested individuals who face various constraints, yields that equilibrium—the prices that balance supply and demand, say, and the level of welfare generated. A researcher can subject such a toy economy to an external shock, such as a new technology or a change in tax policy, and watch it return to a new equilibrium. But no matter how much these models are perturbed, they cannot generate...

A money-laundering scandal costs Swedbank’s boss her job

Thu, 03/28/2019 - 17:59

“NORDIC NOIR” crime fiction portrays the dark underbelly of societies which appear on the surface to be staid, comfortable and law-abiding. The region’s financial systems, too, have a surprisingly seedy side. The long-held notion that Scandinavian banks are among the world’s least susceptible to financial crime has been shattered in recent months, as big banks in Denmark, Finland and Sweden have become embroiled in money-laundering scandals and seen their share prices duly hammered.

On March 28th the board of Swedbank fired its chief executive, Birgitte Bonnesen, over concerns that the Baltic branches of Sweden’s oldest lender may have handled billions of dollars of iffy money from Russia and other former Soviet states. Ms Bonnesen is the second head of a Scandinavian bank to have recently been defenestrated. In September Thomas Borgen was forced out of Danske Bank, Denmark’s largest lender, after it acknowledged that more than $200bn, much of it suspicious and originating in Russia...

How emerging-market local-currency bonds might fit in your portfolio

Thu, 03/28/2019 - 15:42

IN THE FIRST episode of “Cheers”, a 1980s television comedy, Diane Chambers, a graduate student, intends to elope with Sumner Sloan, a literature professor. In stark contrast to the genial barflies at Cheers, a Boston watering-hole, Sloan is well-educated and middle-class—but also, it turns out, vain and deceitful. He’s goofy, says Sam Malone, the bartender whose on-off romance with Diane is the show’s dramatic axis. “He’s everything you’re not,” she retorts.

And so is Diane. That she and Sam are dissimilar in personality and social background is one reason why “Cheers” is so funny. The yoking of opposites is a dependable ploy in situation comedies. It is also a useful trick in investing. The injunction not to put all your eggs in one basket can be found in any finance textbook. But there is more to diversification than that. The ideal diversifier is not just something other than what you own, but something that contrasts with it.

Suppose your investments are tilted heavily towards the S&P 500 index of America’s leading shares, a principal character in global capital markets. Where can you find a Diane Chambers to balance your Sam Malone? Emerging-market government bonds in the issuer’s own currency may be the contrast you are seeking. They are not stocks, they are not denominated in dollars and they are not widely...

How to solve southern Italy’s unemployment problem

Thu, 03/28/2019 - 15:42

ON A CLEAR day, from Messina in northern Sicily you can see Calabria on mainland Italy’s southern tip. The strait between them is the supposed location of Scylla and Charybdis, the mythical sea monster and whirlpool between which Homer’s Odysseus had to choose on his voyage home. Italians on either side of the strait face another hazard today—unemployment. In 2017 about a fifth of the workforce in the south, and over half of young people, were out of work.

Giovanni, a 25-year-old resident of Messina, has been jobless for seven months. None of his internships, including in nursing and shipbuilding, has yet led to a permanent job. Part of the problem is too few openings in the region, says Aldo Cammara of Education InProgress, an NGO that helps youngsters learn computer skills.

An economic downturn is making matters worse: Italy fell into recession in the second half of 2018. But longer-standing structural factors help explain why jobs are scarce in the south even as bosses up north complain of labour shortages. A recent paper blames centralised wage-bargaining, and computes the gains from switching to a Germany-style localised model.

Both Italy and Germany have big regional inequalities. Economic divergence during the cold war means that the average west German district is still 23% more productive than the...

Why is inflation in America so low?

Thu, 03/28/2019 - 15:42

ALMOST TEN years into the recovery from the financial crisis, American monetary-policymakers are still finding that inflation is strangely quiescent. Every time price pressures seem to build, they then dissipate. The latest peak was in July 2018. Inflation as measured by the personal consumption expenditure (PCE) index, which the Federal Reserve tries to pin at 2%, was at 2.4%, and, in a rare heated moment—by the standards of the past decade—consumer-price inflation hit 2.9%. But since then, even as unemployment has stayed low, both measures have sagged to below 2% once again.

The absence of stronger inflationary pressure has been a little bruising for the Fed. It has long predicted that upward price pressures would result from the economy—and in particular, the labour market—pushing against its natural limits. In preparation for that event, it has raised interest rates nine times since December 2015. Along the way it has explained dips in inflation as temporary. But self-doubt has grown all the while. Weakness in inflation is one reason that rate rises are on hold today, with Jerome Powell, the Fed’s chair, emphasising the need for patience.

Inflation is notoriously noisy, and therefore tricky to forecast. Energy prices, which are volatile, are responsible for much of the fall since last July. Core PCE inflation, which...

The Inter-American Development Bank cancels its big bash in China

Thu, 03/28/2019 - 15:42

FAMOUS FOR its hotpot and pandas, Chengdu, in China’s inland Sichuan province, is not an obvious venue for a conference about Latin America. But it was looking forward to hosting this year’s meeting of the Inter-American Development Bank (IDB), which provides aid, advice and cheap loans to 26 developing countries in Latin America.

The meeting was intended to mark ten years since China joined the bank in 2009, acquiring 0.004% of its shares. South Korea had similarly played host in 2005 to mark its tenth anniversary. At last year’s gathering in Argentina, the bank’s choice of Chengdu was celebrated by a Chinese dance troupe—and someone in a panda suit.

Now the suit must go back in the closet. The bank has said it will hold its meeting elsewhere, because China has refused a visa to Ricardo Hausmann (pictured), an economist at Harvard University who was recently approved as Venezuela’s representative at the bank. Mr Hausmann was nominated by Juan Guaidó, the leader of Venezuela’s legislature, who has been recognised as the country’s president by many of the IDB’s members (a notable exception is Mexico).

China, however, still recognises the presidency of Nicolás Maduro, the political heir to Hugo Chávez, who began a second term in January after rigging last year’s election. China was happy to hold the meeting without...

How Argentina and Japan continue to confound macroeconomists

Thu, 03/28/2019 - 15:42

MANY PEOPLE make fun of macroeconomics. But any theory that must explain both Argentina and Japan deserves sympathy. Why, in particular, is inflation so stubbornly high in one and low in the other? In Argentina, consumer prices were 50% higher in February than a year earlier, the fastest increase since 1991. In Japan over the same period, inflation was less than 0.2%, equalling the lowest rate since 2016.

The inertia in both countries is puzzling. Inflation has stayed low in Japan despite a drum-tight labour market (unemployment has remained at 2.5% or below for over a year) and high in Argentina despite a fast-shrinking economy: its GDP contracted by more than 6% year-on-year in the fourth quarter of 2018.

The two countries, of course, have long mystified economists. In 1950 Argentina’s GDP per person was three times that of Japan, according to the Maddison Project database. The Eva Perón charitable foundation, run by the president’s wife, shipped 100 tonnes of relief supplies to the war-battered Japanese. Thousands of Japanese migrated in the opposite direction, creating a population of 23,000 Nipo-Argentinos by the end of the 1960s.

But the two countries’ economic paths went on to cross decisively. Japan’s GDP per person eclipsed Argentina’s around 1970 and is now about twice as high, measured at purchasing-...

Flaws in Bitcoin make a lasting revival unlikely

Wed, 03/27/2019 - 18:15

“BE MORE BRENDA,” said the ads for CoinCorner, a cryptocurrency exchange. They appeared on London’s Underground last summer, featuring a cheery pensioner who had, apparently, bought Bitcoins in just ten minutes. It was bad advice. Six months earlier a single Bitcoin cost just under $20,000. By the time the ads appeared, its value had fallen to $7,000. These days, it is just $4,025 (see chart).

While the price was soaring, big financial institutions such as Barclays and Goldman Sachs flirted with opening cryptocurrency-trading desks. Brokerages sent excited emails to their clients. The Chicago Board Options Exchange (CBOE), one of the world’s leading derivatives exchanges, launched a Bitcoin futures contract. Hundreds of copycat cryptocurrencies also soared, some far outperforming Bitcoin itself. Ripple rose by 36,000% during 2017.

The bust has been correspondingly brutal. Those who bought near the top were left with one of the world’s worst-performing assets. Cryptocurrency startups fired employees; banks shelved their products. On March 14th the CBOE said it would soon stop offering Bitcoin futures. Bitmain, a cryptocurrency miner, appears to have pulled a planned IPO. (Miners maintain a cryptocurrency’s blockchain—a distributed transaction database—using huge numbers of specialised computers, and are...

Slower growth in ageing economies is not inevitable

Tue, 03/26/2019 - 17:09

FOR THE first time in history, the Earth has more people over the age of 65 than under the age of five. In another two decades the ratio will be two-to-one, according to a recent analysis by Torsten Sløk of Deutsche Bank. The trend has economists worried about everything from soaring pension costs to “secular stagnation”—the chronically weak growth that comes from having too few investment opportunities to absorb available savings. The world’s greying is inevitable. But its negative effects on growth are not. If older societies grow more slowly, that may be because they prefer familiarity to dynamism.

Ageing slows growth in several ways. One is that there are fewer new workers to boost output. Workforces in some 40 countries are already shrinking because of demographic change. As the number of elderly people increases, governments may neglect growth-boosting public investment in education and infrastructure in favour of spending on pensions and health care. People in work, required to support ever more pensioners, must pay higher taxes. But the biggest hit to growth comes from weakening productivity. A study published in 2016, for example, examined economic performance across American states. It found that a rise of 10% in the share of a state’s population that is over 60 cuts the growth rate of output per person by roughly half...

A dispiriting survey of women’s lot in university economics

Thu, 03/21/2019 - 15:41

“WHY IS THIS an interesting question?” Éva Nagypál, then a junior economist presenting research at her first academic conference, had barely finished her opening sentence. She still remembers the interruption many years on. Later she came to learn that such rudeness was quite normal, and that economists were capable of worse. As a young woman, she also experienced some “inappropriate” behaviour, but brushed it off. “I could handle it,” she says. Being told she was “technically good, but not very creative” was harder to stomach. She left academic economics in 2009.

Economists have tended to be wary of reading too much into anecdotes like Ms Nagypál’s. A single data point does not prove that women are picked on or pushed away. Even Ms Nagypál’s departure from academia was complicated. She liked her colleagues at Northwestern University, but felt drawn to more collaborative, policy-relevant research. The pull of her family was also a factor.

But harder evidence of something amiss is building. Granted, more women are attaining senior positions in university economics. But women make up only around 30% of PhD students, and are likelier than men to drop away as they climb the career ladder. Among a group of 43 leading American universities, the female share of PhD students has been essentially flat for two decades (see chart...

Why book value has lost its meaning

Thu, 03/21/2019 - 15:41

BABY-BOOMERS may recall, perhaps wistfully, how the golden-arched sign outside every McDonald’s restaurant would proclaim how many customers had been served by the chain. As they became adults, the number kept on climbing: 5bn in 1969; 30bn in 1979; 80bn in 1990. Jerry Seinfeld, a wry chronicler of the trivial, was moved to ask: “Why is McDonald’s still counting?” Do we really need to know about every last burger? Just put up a sign that says, “We’re doing very well.”

The counting stopped. The signs said simply: “Billions and billions served”. If this seems unhelpfully vague, that is how the counting business sometimes is. Many of America’s biggest companies, including McDonald’s, report a negative book value, a gauge of a firm’s net assets. Many more have a book value that is small relative to their market value: their shares look dear on a price-to-book basis. Much of this is down to the complexity of valuing a firm’s assets in the digital age. But the result is that price-to-book is a bad guide to a stock’s true value.

Stockpickers make a distinction between the price of a share and what it is truly worth. Price is a creature of fickle sentiment, of greed and fear. Value, in contrast, depends on a firm’s capabilities. There are various shorthand measures for this, but true “value” investors put the greatest store by...