Working it

Across the rich world, an extraordinary jobs boom is under way

Many popular perceptions about the modern labour market are wrong

MALAGA, SAN FRANCISCO AND TOKYO




THE SECOND volume of “My Struggle”, Karl Ove Knausgaard’s enormous, maddening, brilliant autobiographical novels, contains some depressing life advice. “If I have learned one thing,” he sighs, “it is the following: don’t believe you are anybody. Don’t bloody believe you are somebody…Do not believe that you’re anything special. Do not believe that you’re worth anything, because you aren’t.” We like to tell ourselves that we deserve our successes, Mr Knausgaard’s book suggests, yet they are largely the product of forces over which we have no control. When he wrote those words he probably was not thinking about the boasts of politicians in the OECD, a club mainly of rich countries, about their jobs markets. But he might as well have been.

“Unemployment numbers best in 51 years. Wow!” tweeted Donald Trump, America’s president, last month. Theresa May, the British prime minister, bragged in February that “employment is at a near-record high and unemployment at a near-record low.” The month before, Scott Morrison, Australia’s prime minister, crowed that “more than 730 jobs were created every day last year under our government.” Around the same time his Japanese counterpart, Shinzo Abe, let it be known that “the employment rate for young people is at a level surpassing all previous records.” Hence the swagger of politicians, who believe that they are special. But they are not. Jobs abound because of forces that largely have nothing to do with them.




And abound they do. Across the OECD a jobs bonanza is under way. In the past five years the group has added 43m jobs. The unemployment rate—the number of people looking for work as a share of the total labour force—is at its lowest in decades (see chart 1). Not every member can celebrate. Unemployment in Italy, Spain and Greece remains higher than before the financial crisis of 2008-09. America’s rate of labour-force participation is still well off its all-time high. But most can. In 2018, the employment rate among people of working age was the highest ever in Britain, Canada, Germany, Australia and 22 other OECD countries.



The boom is broad based. Unemployment among unskilled workers and the young is tumbling, as is long-term joblessness. The share of people working part-time because they cannot find jobs with longer hours remains higher than it was just before the financial crisis of 2008-09 but has fallen sharply since 2013 (see chart 2). America’s Bureau of Labour Statistics produces perhaps the widest official measure of unemployment, which includes involuntary part-timers as well as those who have dropped out of the labour force but nonetheless want to work. It is currently well below its long-run average.

A good job, too?

No one can argue about the scale of the jobs boom. But it has become a shibboleth at either end of the political spectrum that the quality of jobs on offer has nosedived. Driving Uber taxis or delivering meals are not really jobs at all, the argument goes. It is true that what Mr Trump regards as “jobs”—traditional, male-dominated occupations, such as those in manufacturing—have withered. Between 1995 and 2015 such middle-skilled jobs fell as a share of OECD employment by ten percentage points. Next month sees the publication of a book by David Blanchflower of Dartmouth College, and previously a member of the Bank of England’s monetary-policy committee, called “Not Working: Where Have All the Good Jobs Gone?”. Perhaps the growing difficulty of finding stable, well-paid employment in academia and journalism explains why the popular discourse about modern labour markets is so gloomy.

The despondency might be justified were not popular perceptions about the world of work so obviously wrong. Consider the notion that work is ever more precarious. In fact, official estimates of America’s gig economy, whereby short-term freelance work is accessed through online market places, put it only at about 1% of total employment. Temporary employment may be a little higher than it was in the 1990s, yet the rate has been falling for a decade. In France the share of new hires given long-term permanent contracts recently reached an all-time high of 50%.

The belief that people increasingly flit from job to job is also not borne out by fact. Over the past two decades the share of OECD workers who have been in their job for less than a year has hovered around 20%, with no clear trend up or down. The demise of jobs for the middlingly skilled has not proved a disaster either. Although it has meant that low-skilled jobs have risen as a share of OECD employment they have done so to a far lesser extent than high-skilled ones, which have boomed.

Until recently a missing piece of the puzzle was wage growth. Economics textbooks say that times of low unemployment go hand in hand with juicy pay rises as employers compete harder for staff. Yet for much of the post-crisis period the “Phillips curve” appeared broken, with falling unemployment in 2014-16 failing to translate into higher wages.

The relationship has started to rekindle. As unemployment has continued to fall wages are at last accelerating. A broader measure of whether work pays, where the total of all compensation is expressed as a share of national income, is rising in many rich countries, including America and Britain. Pay is still increasing more slowly than might have been expected given the tightness of the labour market. For that, blame weak productivity growth. And it is wrong to conclude that workers are ever more exploited. The incidence of “low pay”—workers who earn less than two-thirds of the median—has been falling for two decades.

Red-hot labour markets do not solve every problem. Malaga’s restaurants are buzzing and its streets are clean. You would hardly know that the Spanish city’s average unemployment rate over the past five years has been close to 30%. The one sign that there may be lots of people with not much to do is the number of gaming arcades. The rough sleepers and empty lots of San Francisco scream of a city with an unemployment problem; in fact the rate is 2.6%.

Others make deeper criticisms of the rosy jobs numbers. Shouldn’t societies aspire to work less, rather than more? People who do not need to engage in wage-labour can indulge in other, more fulfilling activities. David Graeber, an anthropologist, goes further. In “Bullshit Jobs”, a book published last year which has become akin to a holy tract for millennial socialists, he claims that a big chunk of modern employment is pointless and soul-sucking. “Huge swathes of people, in Europe and North America in particular, spend their entire working lives performing tasks they secretly believe do not really need to be performed,” he argues.

It is hard to dismiss the feeling that drudgery is the price Japan has paid for an average unemployment rate over the past half-century of just 3%, the lowest in the OECD. At the baggage-collection area of Haneda airport, a woman spends her day straightening suitcases after they are placed on the conveyor belt. At an empty bar in Tokyo’s fashion district a world-beating gin martini (the addition of a single drop of orange bitters is a revelation) is mixed by three people, who then stand around as it is drunk. Mr Graeber would surely argue that this is less a sign of social progress and more that capitalism has conspired to turn people into drones.

But societies benefit from strong labour markets. More workers means more people paying income tax and fewer receiving benefits. Studies suggest that the unemployment rate is positively correlated with rates of property crime and even with violent crime. Having a job gives people a sense of purpose which is also good for all sorts of social outcomes, including mental and physical health. And being in work makes another, better job easier to get. Capitalism has not been able to tell many good-news stories of late. This is one of them.

The reason for the strength of the OECD’s labour market is a puzzle, however. In recent years many governments have loaded employers with extra costs, even as it is becoming ever easier to replace people with robots. A study in 2013 by Carl Benedikt Frey and Michael Osborne of Oxford University concluded that 47% of jobs in America were at risk of being automated. Rules have proliferated on equal pay, anti-discrimination, health and safety, and maternity and paternity leave. Across 24 OECD countries for which there are long-run data, the value of the minimum wage has risen from 44% of full-time median earnings in 2000 to 50% today.

Hives of industry

Why are labour markets so buoyant? This is in part a cyclical phenomenon. Economic growth tends to push unemployment down. The recovery from the financial crisis is a decade old. In part because of appropriately lax monetary policy, America is about to achieve its longest-ever period of economic expansion. Meanwhile, lingering uncertainty related to the financial crisis and the rise of populism may mean that firms are keener on hiring staff than on devoting large amounts of capital to investment, which is harder to undo. The post-crisis period has also been characterised by rapid growth in the service sector, which is more labour-intensive than industry. For all these reasons it is no surprise that unemployment is relatively low.

But not this low. In October 2013 the IMF made economic forecasts for advanced economies for the following five years. On the assumption that annual GDP growth would average 2.4%, they concluded that by 2018 the rate of unemployment would be 6.9%. It turned out that the IMF was too optimistic on growth and too pessimistic on unemployment, which by 2018 had fallen to around 5%. That suggests it is not only a cyclical phenomenon. Long-term structural changes to demography, technology and policy play an equally significant role.

Take demography. The OECD is ageing. Young people on average are more likely to be registered as unemployed than their elders, in part because they are less skilled but also because older folk who lose a job may retire and thus drop out of the labour force. Several studies draw a link between more young people and higher unemployment. In the 1980s, a time of relatively high joblessness, 25% of the rich world’s working-age population was aged 15 to 24. That has since fallen to around 17.5%.

Demographic change, in other words, means that today’s unemployment rate is not directly comparable with those of the past. By one estimate, had America’s demographic structure in 2000 remained the same today, the current rate of unemployment would be around 0.5 percentage points higher. Oxford Economics, a consultancy, finds results for the euro zone that are similar.

Yet tumbling unemployment is about much more than statistical trickery. The second big factor, technological change, is genuinely strengthening labour markets. Better tech improves the “matching” of employers with potential employees. Not long ago those hiring put an advert in a local newspaper or spread the word by mouth. Now employers can shoot from the hip, posting vacancies on a slew of jobs websites. In the ten years to 2016 the cost of filling a vacancy fell by 80% in real terms. And candidates are more likely to spot a job that suits them. A study in 2011 by Peter Kuhn and Hani Mansour found that using the internet to look for a job reduced the time spent unemployed by about a quarter. OECD countries with high worklessness are often those where online job searching is less common. Only 40% of unemployed Italians do it, compared with over 95% of South Koreans.

The gig economy, even if it is relatively small-scale, also raises employment by creating work that would not otherwise exist. In the past fixing a tap would have been a DIY job; now with the tap of a screen it is possible to pay someone else to do it.

Work in progress

A series of small, incremental changes to policy over many decades is the third factor behind a jobs boom for which the current crop of politicians are so keen to take credit. Governments have offered carrots and sticks. Carrots include making it easier for women to combine work and family. In many countries rights for part-time workers have been strengthened and parental leave made more generous, with the state often bearing the cost. Mr Abe’s economic-reform package includes providing more day-care centres for children.




Such policies can have a large impact on labour-force participation, particularly for women, suggests research by Francine Blau and Lawrence Kahn, published in 2013. Female employment rates have been edging up across the OECD for decades. While in America female employment has since fallen, across the OECD as a whole the pace of growth has quickened (see chart 3).

Another carrot is education. The share of OECD workers with some form of higher education has risen from 22% in 2000 to nearly 40% today. These workers are more likely to be in employment than poorly qualified folk. Higher education usually instils a superior work ethic and such workers have more transferable skills.

Governments have wielded the stick, too. Many have reduced the power of trade unions and collective-bargaining agreements. That may have made wages more responsive to market conditions. A larger share of workers appears to be experiencing nominal wage reductions than was the case a few decades ago. Receiving a pay cut is unpleasant and embarrassing. But if bosses can trim pay during bad times, they are less likely to fire workers. Wages in Japan move down almost as easily as they do up. An unusually large share of workers’ take-home pay is made up of bonuses, which can be withheld fairly easily during times of economic trouble. In Japan’s hospitality sector in 2009, workers’ end-of-year bonuses were cut by over 40%.

In countries that have failed to update old-fashioned labour practices, the cost of doing so has been high. In Italy nearly 350 national industrial agreements cover the vast majority of firms and formal employees. They take little account of regional differences in the cost of living and productivity. That prices many workers in the poor south out of the labour market. Spain’s collective-bargaining agreements are often rigid in the face of changing conditions. In 2008-09, when a building bust pushed the economy into recession, nominal wages in construction rose by 5%. Bosses had little choice but to shed staff.

Governments have also made it difficult to live off handouts. In 2001 a single childless person earning the average wage, who then became unemployed for a year, would have received benefits worth 48% of previous earnings. By 2018 that had fallen to 41%. Would-be recipients of benefits face ever-tougher eligibility tests. Over the past two decades the number of Britons receiving jobless benefits, as a share of those out of work, has fallen from 80% to 50%. That may, in turn, have made wages more flexible. Workers will take wage cuts if necessary in order to avoid unemployment.




Reforms such as these are harsh and their implementation has often been botched. Yet they can have a big effect on jobs. In one paper Marcus Hagedorn, Iourii Manovskii and Kurt Mitman look at what happened in America in 2013, where the time for which some people could claim unemployment benefit fell from 73 weeks to 25. They estimate that the benefit cut led to the creation of some 2m jobs in 2014 about two-thirds of total employment growth that year.

No end to the grind

The strength of the labour market calls into question gloomy predictions about the future of work—that increasingly sophisticated computers will consign growing numbers of workers to a life of enforced idleness. Messrs Frey and Osborne could still be proved correct at some point in the future. Accelerating wage growth will certainly persuade more companies to automate jobs.

Yet the lesson of the past half-millennium is that technological change complements jobs rather than destroys them. Sky-high employment rates today suggest that nothing has changed. And there is plenty of evidence pointing in the direction of more improvements. The current period of economic expansion seems to have further to go. If there is a lesson from the 1960s, when unemployment in some OECD countries fell as low as 1%, it is that there remains more scope to reduce underemployment and inactivity. Mr Knausgaard finds room for some practical advice amid the detailed accounts of his struggles: “So keep your head down and work.” If everyone follows it, the rich world’s jobs market could have more surprises in store.


Brazil’s rainforest warriors ready to battle Bolsonaro

Indigenous people fear new president plans to encroach on their land

Andres Schipani

© Dado Galdieri. 'Chasing after the enemy': Tribal chief Kruwyt fears the impact of Jair Bolsonaro's plans for the rainforest


The Kayapó war cry resounded deep in the Amazon, the world’s largest rainforest. Four dozen warriors, their headdresses made of yellow and red macaw feathers, stood in the village clearing, carrying shot guns and war clubs. Warrior women, the crowns of their heads shaven, sang high-pitched war cries and waved machetes in the air.

Kruwyt, the elderly male chief in the A’Ukre village, then led them in the pry'ongrere — a battle dance for “chasing after the enemy”. Their declared enemy is none other than Brazil’s new president, Jair Bolsonaro. The rightwing former captain, who took office in January, has slammed what he sees as the excessive legal protection afforded to Brazil’s 305 ethnic groups and the “enormity” of their constitutionally-mandated land reserves.

“We are ready to go to war against any mis-step from President Bolsonaro,” Kruwyt told the group, their bodies patterned with black fruit dye, a sign of war. “He wants to reduce our land, he wants to end our traditions, and we are warriors defending our rainforest, our river, our culture,” he said.


Rainforest under threat: Activists say the presence of indigenous people helps guard against deforestation


Fearful about the future: The Kayapó men in A'Ukre village are anxious about Mr Bolsonaro's development plans


The 3.2m hectares of Kayapó land in the Xingú river basin, in the heart of Brazil, form part of one of the largest mosaics of contiguous indigenous lands in the country. Over the past several hundred years, the Kayapó have fought Portuguese colonisers, their tribal neighbours as well as Brazilian loggers and gold diggers. Now they are standing up to a government that is keen to open indigenous lands to commercial activity.

The struggle of indigenous peoples to maintain their way of life, famously documented by French anthropologist Claude Lévi-Strauss, is not new. But now Mr Bolsonaro has made access to this land a central part of his development policy, triggering an outcry at home and abroad. This week, the American Museum of Natural History scrapped an event to honour the president, citing concern about the Amazon rainforest.

In recent weeks, Mr Bolsonaro has slammed what he called “an industry of demarcation of indigenous lands” which “makes any development project in the Amazon unviable”. The president, who prides himself on his relationship with US leader Donald Trump, added he would like to explore the rainforest for riches “in partnership” with the US. Shortly after taking office, he stripped Brazil’s indigenous agency of its authority in demarcating indigenous lands, transferring it to the agriculture ministry, which critics say is dominated by agribusiness interests.

Federal prosecutors warn that the measure is illegal, as the Brazilian constitution guarantees ethnic groups’ rights to their ancestral lands. “Today, we are seeing the biggest attack on our rights in Brazilian history,” said Joênia Wapichana, a lawyer and indigenous lawmaker. “To subvert indigenous policy to agricultural interests is absurd,” she said. Mr Bolsonaro’s critics accuse him of pandering to the conservative farming constituency that brought him to power. Brazil is one of the world’s largest soya producers and environmentalists see the crop as a driver of deforestation.

Map showing Amazonian rainforest under threat as Bolsonaro seeks access to indigenous areas


The heart of the matter, indigenous chiefs, anthropologists, and environmentalists say, is access to land. Indeed, 12.5 per cent of Brazil’s vast territory — an area the size of Venezuela — is home to more than half a million indigenous people, mainly in the Amazon rainforest, according to the national statistics institute (IGBE). Overall, indigenous people make up less than 1 per cent of Brazil’s 210m population. “This is our land, we were here before the kubên,” said Pat-i, A’Ukre’s young chief-in-waiting, referring to white people. “If we let them in they will destroy the rainforest and everything in it under the excuse we need ‘their’ development,” he added.

Such development has not helped other Kayapó villages, he said, referring to nearby settlements that have fallen into the hands of illegal gold miners and been wrecked by deforestation, drinking, and prostitution. There are frequent conflicts with miners, loggers and ranchers, said the Indigenous Missionary Council, an advocacy group.

Opening indigenous lands for development will ease such tensions by improving living standards, the government believes. “Are the Indians of Brazil all fine? They live in a poverty that is indigent. A country like ours, where the Indians have some 13 per cent of the national territory, and leave them in the poverty that they live? There’s something wrong,” agriculture minister Tereza Cristina Corrêa said.


Life in the Amazon: One of the villagers bathes after a ceremony in A'Ukre. While villagers say they would like access to healthcare, many say they have everything they need


Making a living: A Kayapó warrior cuts leaves for a tribal meeting. Villagers hunt wild boars for food and harvest Brazil nuts for sale


The roughly 350 people in A’Ukre hunt wild boars for food and harvest Brazil nuts for sale. They have electricity from generators and clean water from a well. While there is a school in the village, literacy rates are lower in indigenous communities than in other parts of Brazil, IGBE said, and child mortality rates are higher, a 2017 study shows. The Kayapó would like access to better healthcare, but otherwise, said Pat-i “I don't think we are poor. In the cities, the white man lives with money. Here we don’t, we farm, we hunt, we fish, we dance. With all of that, we are rich.” Nearby, children swim in the river draped in yellow butterflies.

“This is their land, they owe nothing to anybody,” added Glenn Shepard, an anthropologist and ethnobotanist with the Museum Emílio Goeldi in Belém, who studies the Kayapó. Crucially, he said, “without them holding the fort, deforestation would advance rapidly”.

Indigenous lands act as “gigantic barriers to the encroachment of deforestation,” said IPAM, a research institute. Environmentalists warn that any attempt by the government to reduce the size of conservation reserves, ease environmental licensing and weaken indigenous rights, would pose further threats to the Amazon. Already in the first two months of 2019, 8,500 hectares of rainforest was cut down in the Xingu river basin. This represents a 54 per cent spike from the same period last year, said Instituto Socioambiental, an advocacy and research group, amid pressure from farmers and land grabbers.


Next generation: Children watch videos on a smartphone in A'Ukre village. Villagers rely on a generator for electricity


Defiant: The female tribal chief Ngreikamôrô has vowed to defend the rainforest


For the Kayapó, the fate of the rainforest is inextricably linked with their own survival. “The jungle is the source of life,” said Panhba, a young female warrior. “If they cut down the trees now, there won't be air or nuts or fruits or animals left for my children and grandchildren.”

Amid the cries of howler monkeys in the forest canopy, Ngreikamôrô, the A’Ukre’s female chief, put it more forcefully. If the president opens up indigenous lands, and does not stop “speaking ill” of indigenous people, she said she will go to Brasília to meet him and there she will put her machete flat against his cheek. “I will do that to defend our river, to defend our rainforest,” she said. Then “I will cut his mouth off”.


Photographs by Dado Galdieri for the FT

Mayday for American Protectionism

The Merchant Marine Act of 1920 – which stipulates that only American ships can transport goods between US ports – has long been a protectionist drag on the US economy. Rather than celebrating the law's centenary next year, policymakers should throw it overboard.

Anne O. Krueger

krueger14_Omar Martinezpicture alliance via Getty Images_cars

WASHINGTON, DC – When you try something for 99 years and the situation keeps getting worse, it is time to try something else. The United States Congress passed the Merchant Marine Act of 1920 (also known as the Jones Act) in order to protect America’s shipping industry and strengthen national security. But the law has almost destroyed the industry, and imposed huge costs on America’s businesses, consumers, and the environment. It needs to be sunk.

The Jones Act requires all cargo shipped between American ports to be carried on US-flagged vessels that are assembled entirely in America, and that have some of their major components manufactured in the US. These ships must be at least 75% owned and crewed by Americans. And if an US-flagged ship needs to be repaired overseas, the US charges a 50% tax on the price.

Shipping goods between two ports in the same country is called “cabotage.” The World Economic Forum has called the Jones Act the world’s most restrictive cabotage law, and the OECD ranks the US behind only China and Indonesia in the restrictiveness of its maritime-services regulations.

Jones Act requirements have long been a protectionist drag on the US economy and are increasingly detrimental to national security – as Colin Grabow, Inu Manak, and Daniel Ikenson of the Cato Institute pointed out in an important paper last year. (This commentary draws heavily on their work.)

Consider national security. Since 2000, the number of American ships of at least 1,000 tons that comply with the Jones Act has fallen from 193 to 99. When the US military sent materiel to the Persian Gulf in 2002-03, American commercial ships took only 6.3% of the total, and foreign-flagged vessels a further 16%. (The US military transported the rest.)

Shipbuilding and shipping operations in the US have also become inordinately expensive.

American-built coastal-size container ships are estimated to cost between $190 million and $250 million each, compared to about $30 million for foreign-made equivalents. And because Jones-compliant ships are so expensive, their owners do not replace them. A ship’s economically useful life is generally considered to be about 20 years, but more than 65% of the Jones fleet is over 30 years old, making it inefficient and even dangerous. And whereas America built less than one million gross tons of ships between 2014 and 2016, South Korea and China produced a combined 140 million tons.

According to some estimates, the daily operating costs of US-flagged ships are almost three times higher than those of foreign vessels. Crewing costs on American ships are reported to be about five times greater. And whereas transporting crude oil from the Gulf Coast to the US Northeast on a Jones-compliant ship costs $5 to $6 per barrel, it costs only $2 per barrel to carry crude from the Gulf Coast to Eastern Canada on a foreign-flagged vessel.

Because of the high cost of US coastal and Great Lakes shipping, the volume of American goods carried on these routes has fallen by about half since 1960. Over the same period, US railroad cargo has increased by 50%, and intercity truck freight by over 200%. Today, only 2% of US domestic freight is carried by water, compared to 40% in Europe.

If the Jones Act were repealed, many goods could be transported within the US more cheaply by water than on land. Tellingly, US waterborne freight to and from Canada and Mexico, which is not subject to the Act, has increased by 300% since 1960.

By pushing companies to use land-based transport, the Jones Act increases costs for US firms, raises prices for consumers, and causes more congestion on the country’s highways. Moreover, truck, rail, and air transport produce up to 145 times more carbon dioxide emissions than cargo ships do.

The law’s negative effects do not end there. Puerto Rico, which has no overland route to the rest of the US, pays a particularly heavy price, because only a handful of Jones-compliant ships regularly serve the island. Whereas the neighboring Dominican Republic buys oil from the US, shipments of imported supplies from Venezuela and other countries cost Puerto Rico less (even though US-sourced oil itself is cheaper). And when Hurricane Maria devastated the island in 2017, US President Donald Trump authorized only a ten-day waiver of the Jones Act – not long enough for some foreign-owned ships to bring much-needed aid.

Subjecting Puerto Rico and other US territories and states to higher shipping charges serves no useful purpose and discriminates against fellow Americans. And with foreign ships and crews entering US ports every day, it makes no sense to argue that commercial sailors should be American for national-security reasons. Environmentalists, too, ought to be outraged, given the costly and unnecessary damage resulting from increased CO2 emissions.

Having destroyed US merchant shipping over the past 99 years, the Jones Act needs to be repealed. Ships plying US waters should be obtained wherever they are cheapest. And without protectionist laws, America’s shipbuilding industry might well start rationalizing and become more competitive.

The longer the Jones Act remains on the books, the more expensive US commercial shipping will become and the further it will decline. Rather than celebrating the centenary of a damaging protectionist law, policymakers should throw it overboard.


Anne O. Krueger, a former World Bank chief economist and former first deputy managing director of the International Monetary Fund, is Senior Research Professor of International Economics at the School of Advanced International Studies, Johns Hopkins University, and Senior Fellow at the Center for International Development, Stanford University.

Charging ahead

Big carmakers are placing vast bets on electric vehicles

From GM and Geely to Mitsubishi and Mercedes, giants of the industry are making battery-powered plans




IN 1900 ONE in three cars on American roads ran on volts. Then oil began gushing out of Texas. Cheaper than batteries, and easier to top up, petrol fuelled the rise of mass-produced automobiles. Cost and worries about limited range have kept electric vehicles (EVs) in a niche ever since. Tesla, which has made battery power sexy again in the past decade, produced just 250,000 units last year, a fraction of what Volkswagen or Toyota churn out annually. For every one of the 2m or so pure EVs and plug-in hybrids, which combine batteries and internal-combustion engines (ICEs), sold in 2018, the world’s carmakers shifted 50 petrol or diesel cars.

EV sales are, however, accelerating as quickly as electric motors themselves. Some industry-watchers reckon that they will account for nearly 15% of the global total by 2025. By then, one in five new cars in China will run on batteries, according to Bloomberg New Energy Finance, a consultancy. The chief reason such optimistic forecasts no longer look outlandish is the entry into the electric race of the car industry’s juggernauts. A survey by Reuters in January put the industry’s total planned EV-related spending worldwide (including on batteries) at around $300bn over the next five to ten years. From GM and Geely to Mercedes and Nissan, big carmakers all want to turn out millions of such cars—and turn a profit doing so. Their strategies range from cautious to headstrong.
Making a profitable, mass-produced EV has proved elusive. A battery powertrain can be three times the price of an ICE. But a combination of better technology and greater scale may soon allow EVs to compete on price with petrol vehicles, and enable motorists to drive long distances without the fear of running out of juice.

They had better, carmakers are hoping. Worries about climate change and air pollution are prompting authorities around the world to consider phasing out new petrol and diesel engines in the coming decade. In the absence of federal regulations under America’s climate-sceptical president, Donald Trump, some progressive cities and states there are tightening local rules.

Fiat Chrysler (whose chairman, John Elkann, sits on the board of The Economist’s parent company) has just agreed to pay Tesla hundreds of millions of euros to count the Californian marque as part of its fleet, and thus avoid steep fines for exceeding average CO2-emissions standards for carmakers due to come into force in the European Union next year. In China, where half the world’s EVs are already sold, the government sees the electrification of transport as a way to combat choking urban smog—and to overtake the West technologically.

Western premium brands appear best positioned to take an early lead. While batteries remain pricey, fancy marques can offset the cost with the higher prices that their vehicles command. Jaguar and Audi have already broken Tesla’s monopoly at the lucrative top end of the market. Daimler, which owns Mercedes, has committed €10bn ($11.3bn) to its EQ range and wants 20% of its cars to be fully electric by 2025.

Daimler and BMW, which has been bruised by losses on its poorly selling i3 electric hatchback, are hedging their bets by backing platforms—the basic architecture of a car—that are able to accommodate petrol and diesel engines as well as electric motors. This should help them contain costs, by avoiding duplication, but involves compromises over battery size and layout. Sacrificing range and interior space in this way may dent brands built on luxury and technological prowess, says Patrick Hummel of UBS, a bank.

Many mass-market firms are likewise proceeding cautiously. Their thinner margins leave less room to absorb the cost of batteries. Renault of France and South Korea’s Hyundai are nevertheless toying with the idea of a dedicated electric-only platform. PSA Group has said it plans to electrify more Peugeots, Citroëns and Opels. Fiat Chrysler has made similar noises, though the Tesla tie-up suggests its near-term plans are less ambitious. Toyota’s early bet on hydrogen fuel cells, which lag behind batteries on the road to widespread adoption, had long been a distraction. The Japanese giant has now acknowledged that buyers want battery power. It is planning ten models by the early 2020s.

The most daring by a long way is VW. The German group’s heft—it produces 10m cars a year—affords it economies of scale only Toyota could hope to match. The €30bn VW plans to spend on developing EVs over the next five years, plus €50bn to fit them with batteries, leaves all other carmakers in the dust. In March Herbert Diess, its chief executive, promised 70 new electric models by 2028, rather than 50 as previously pledged, and 22m EVS delivered over the next ten years. The company is contemplating a huge investment in a “gigafactory” to supply its own batteries rather than depending on outside suppliers.

VW is already developing a dedicated platform and converting entire factories to EV production. The first, at Zwickau in Germany, will eventually turn out 330,000 cars a year for the VW brand as well as Audi and SEAT. Its medium-sized ID hatchback, to be shipped next year, will cost around €30,000, similar to an equivalent diesel-powered Golf, and travel 400-600km (250-370 miles) on a single charge. On April 14th in Shanghai Mr Diess unveiled a sport-utility vehicle to compete with Tesla’s snazzy Model X in China from 2021. Once the range of EVs reaches full production in 2022, VW believes, such models will start breaking even. By 2025, when it hopes one-quarter of its output will be electric, they should be as profitable as petrol cars.

As Mike Manley, boss of Fiat Chrysler, observers, it is no longer a question of whether carmakers can supply a fleet of EVs but whether people will pay for them. If governments withdraw generous subsidies which EV-owners have enjoyed, charging infrastructure fails to materialise or electric cars’ pitiful resale value does not increase, motorists may be reluctant to switch to battery power. Poor sales, combined with the large upfront investments, would hit carmakers’ margins, which for mass-market brands are already about as exciting as a Soviet-era Trabant in mud brown. The financial consequences could be “ugly”, warns Bernstein, an equity-research firm.

Electric field

At the same time, the big carmakers can expect more competition from rivals unburdened by complex ICE supply chains and large workforces. vw has 40,000 suppliers worldwide and directly employs 660,000 people. Lower capital intensity, and the relative simplicity of EVs, which use many fewer parts than petrol vehicles and are easier to assemble, is drawing in upstarts. They include Dyson, a British maker of vacuum cleaners, and a series of Chinese Tesla-wannabes, such as NIO and Byton. Bigger Chinese carmakers, such as Geely and JAC, have also developed expertise in EVs. With domestic sales stalling, they are beginning to eye export markets.

Other technological bumps are meanwhile starting to test the industry’s chassis. Self-driving cars and ride-sharing are forcing companies to rethink their established business model. Investing in EVs now leaves them with less to spend on adapting to everything else. They may be hoping that the electric race will serve as a practice lap for wider oncoming disruption.

'It's Very Simple': Fata Morgana (Redux)

by: The Heisenberg

Summary
 
- This post is equal parts critique (of the over-democratization of markets), recap (of the bond rally and its reversal) and in-depth analysis (of the mechanics behind recent action).

- The late-March rally in bonds is poorly understood. It was, at least in part, another example of a "false optic".

- Misinterpretation helped fuel last month's "growth scare" narrative.

- And in a testament to how untrustworthy narratives can be, last month's "growth scare" story gave way to this month's "cyclical reflation" tale in the blink of an eye.

 
Most people familiar with my musings are aware that I harbor grave reservations about the over-democratization of markets.
 
Plain vanilla index funds that offer investors low-cost, broad-based exposure to benchmark equity indexes are obviously a great thing and balanced funds which pair that exposure with a simple allocation to bonds are even better. They should be the building blocks of any portfolio.
 
That assessment is more truism than opinion, which is why I long ago ceased responding to anyone who challenged my critiques of democratized markets by extolling the virtues of S&P 500 index funds.
 
It's never been clear to me, though, why we need a plethora of ETFs that allow retail investors to trade in and out of markets in the blink of an eye and it's even less clear to me why we need ETFs that encourage non-professional investors to day trade things like high yield credit, leveraged loans and emerging market assets.
 
Before anyone tunes out, let me quickly steer this discussion off the rumble strips and back onto the highway. This isn't a post about liquidity mismatches in credit ETFs or about why I think the epochal active-to-passive shift is pernicious (those two topics are near and dear to me, but they tend to elicit eye-rolls from some readers).
 
Rather, this is a post designed to make a simple point about the extent to which the over-democratization of markets sets the stage for widespread misinterpretation which can then translate into manifestly false narratives and, ultimately, undesirable outcomes.
I made a similar point in one of the few posts I've written for this platform in 2019 called "Fata Morgana". There, I described how, in Q4, investors suffered from a kind of parallax effect - a confused perspective. In late November, hedging dynamics and the unwind of someone's long WTI/short Nat Gas spread trade accelerated crude's collapse, leading some to believe that oil, which was already plunging, was signaling something particularly dire about the global economy. Shortly thereafter, misunderstandings with regard to the Fed's efforts to normalize policy and misplaced angst about inversions, sparked a panic. Stocks dove, spreads widened and the volatility-liquidity-flows feedback loop kicked in. At the same time, incessant media coverage, tweets from the president and an extremely engaged investor base (from a public interest perspective) perpetuated the spiral.
 
Some of that, I would argue, stems directly from too much engagement by non-professional investors and (far) too much media coverage which, even when largely accurate and done responsibly, risks lapsing into hyperbole or otherwise pouring gas on the proverbial fire.
 
Before I bring you the latest example of a market Fata Morgana, allow me to use a (very) recent example to make a point about the over-democratization of markets. On Thursday, the iShares MSCI Turkey ETF (TUR) had its seventh-worst day of 2019, falling more than 2%. To be clear, it's not unusual for that product to fall more than 2% in a single session - there were dozens of such days last year when Turkish assets were besieged by a combination of external and idiosyncratic factors which, by August, conspired to push the lira to the edge of crisis. Additionally, it should be noted that Turkish stocks have had a rough go of it lately. Local elections held late last month stoked uncertainty and, ultimately, the Borsa Istanbul wiped out most of its YTD gains.
 
That latter bit (about the municipal vote) strikes at the heart of the issue. Clearly, some large investors who use TUR to gain exposure to Turkish equities know what they're doing and as such, are well apprised of local dynamics. But I don't think it would be a stretch to suggest that most "average" (and I don't mean that in a pejorative way) investors who own TUR are largely in the dark about what moves Turkish assets on any given day. And that's to say nothing of the vagaries of Turkish politics, which themselves are inextricably bound up with the fate of the country's markets.
For instance, Thursday's decline in Turkish equities was, for the most part, the result of questions about the country's foreign reserves. Without getting too far into the weeds on this, the Financial Times decided to take a look at the central bank's swaps book and this is what they found:
 
(Heisenberg)
 
 
Why is that a problem? Well, the central bank's borrowings from banks (i.e., those swaps) never rose above $500 million - with an "m" - from January through the end of March. You'll note that the numbers in the chart are in billions - with a "b". The implication is that Turkey is now working pretty hard to inflate its reserves.
 
Again, the point isn't to get mired in this particular discussion (if you want to, there's more here), but you should also note that one of the worst days in years for TUR came on March 22 (yellow arrow below) when traders couldn't explain a sudden decline in the country's reserve pile.
 
(Heisenberg)
 
That selloff coincided with a dastardly day for the currency which, in turn, led to a vicious crackdown the following week, when President Erdogan essentially trapped investors in the lira in a bid to keep the currency stable ahead of the above-mentioned local elections. On March 27, the overnight rate surged above 1,000%.
 
(Heisenberg)
 
Ok, so, who cares? Well, anyone who owns TUR, presumably, and that's a problem because it's not entirely clear to me why anyone save emerging market fund managers and seasoned FX traders should have to worry about any of the above. In fact, it is wholly unrealistic to expect "average" investors to sort through what I just outlined, which raises the following simple question: Do we really need a product that allows anybody and everybody to day trade Turkish equities? If such a product (i.e., an ETF from a top-tier sponsor like iShares) is in fact desirable, then shouldn't it be the purview of institutional investors and, perhaps, active EM fund managers who can use it to hedge?
 
While I don't know the answers to those questions definitively, what I do know is that, anecdotally anyway, it stands to reason that the more democratized the market gets, and the more of these vehicles there are, the easier it is more investors who have no business actively trading certain assets to do just that. The result, I would argue, is a less efficient market as uninformed investors attempt to decipher things they shouldn't have to decode.
 
It's relatively easy to make that case when it comes to something like Turkish stocks. Given the myriad idiosyncratic factors involved, suggesting it's preferable to leave the decision making to active EM fund managers (or, if you like, to say investors wanting passive exposure should opt for a broader-based EM ETF so as to mitigate the perils associated with any one country) is not a particularly contentious thing to say.
 
What is contentious, though, is to suggest that most investors probably shouldn't be in the business of trading macro themes with ETFs at all, even when the themes relate to subjects most engaged investors claim to know something about and even when the ETFs and the underlying assets are extraordinarily liquid.
 
Enter another Fata Morgana.
 
Late last month, developed market bond yields dove following the March Fed meeting when, against all odds, Jerome Powell and co. managed to deliver yet another "dovish surprise". I say "against all odds" because, generally speaking, the view on the street was that the Fed couldn't possibly get any more dovish without actually cutting rates.

Two days after the Fed meeting (so, on Friday, March 22) data showed Germany's manufacturing slump deepened in March. The new orders subindex (on the March PMI) fell to 40.1, the lowest since 2009. 10-year German yields pushed below zero for the first time since 2016. The mood, as I put it that morning, was "doom and gloom".
 
Two days previous, Jerome Powell managed to do what Mario Draghi couldn't earlier in the month:
 
Deliver a dovish surprise without accidentally "confirming" the market's worst fears about the outlook for growth. One of my favorite analyst quotes of 2019 comes from BofAML's US credit strategist Hans Mikkelsen who, following the March Fed meeting, wrote the following:
Just when you thought the Fed could not possibly deliver another dovish surprise, they did. Of course communicating dovishness is always tricky as there is a delicate balance between the benefit of stimulus and the underlying driver, which is economic weakness.
Mikkelsen probably didn't mean to say anything particularly novel there, and indeed he didn't. The beauty of that passage lies not in profundity, but rather in how concisely Mikkelsen communicates what is perhaps the key quandary of monetary policy in the post-crisis world. There is a fine line between assuaging market fears about the outlook for the economy by indicating policy will be accommodative, and accidentally spooking markets further in the course of justifying a dovish lean.
 
In a rare misstep, Draghi went too far in March, when the ECB delivered a cut to the euro-area growth outlook dramatic enough to override the good vibes that would have "naturally" accompanied a renewed commitment to accommodation.
 
Powell, on the other hand, largely succeeded. The March Fed meeting was overtly dovish, but risk assets were not truly spooked. Or at least not until 48 hours later, when the above-mentioned "doom and gloom" narrative took hold. In response to a friend's question about whether the March 22 selloff was an opportunity to buy the proverbial dip, I wrote something called "As Bonds Find ‘Best Friends’, Stocks Grapple With Inversion Freakout", in which I detailed the series of events that helped spark the second-worst day for US stocks of the year after the US 3M-10Y curve inverted.
 
Here are some quick excerpts:

JGB yields had to play catch up (or, actually, “catch down” is better) to the dovish Fed after a holiday and the Japan CPI miss threw gas on the fire. Then came the grievous German manufacturing data and it didn’t help that France’s composite PMI sank back into contraction territory. Ultimately, the die was cast by the time the US session got going. 
The data from overseas underscored growth concerns and, more importantly, appeared to lend credence to the idea that the Fed’s dovish surprise might have been predicated on the FOMC “knowing something” everyone else doesn’t know.
 
At that point, the "growth scare" narrative became somewhat entrenched. Predictably, the media and every armchair macro watcher on the planet, rushed to breathlessly opine on i) the US curve inversion, ii) what a return to sub-zero bund yields in Germany was "saying" about the world's fourth-largest economy and iii) what might happen in the event forthcoming activity data out of China were to disappoint.
 
To be clear, some of that breathless commentary was justified. Growth worries were proliferating and for good reason. 2019 has been a year defined by ominous signs and warnings about the global economy and, after all, there's a reason why central banks felt the need to pivot so sharply.
 
The problem, though, is that most casual observers were oblivious to the fact that what was going on in US rates wasn't entirely attributable to a "growth scare". Previously moribund rates volatility suddenly woke up during the week of March 25, and by Wednesday of that week, things were getting really interesting to the detriment of risk asset sentiment.
 
"Global rates [are] again foaming at the mouth with another leg of panicky grab, while conversely [we] see risk assets spooked by the instability seen in the rates-trade", Nomura's Charlie McElligott wrote early on the morning of March 27, adding that the following color:

UST- / swap spread- / front-end- / front-end flattener- 'stop-ins' again 'going off' overnight, with likely exacerbation culprits again being negative convexity types from MBS and systematic short vol strategies. 
That may sound like gibberish to most investors, and indeed, that's the point. What the vast majority of casual market observers were interpreting as a "growth scare", was at least partially the product of convexity flows and hedging following the March Fed.
 
As noted above, rates volatility suddenly jumped after grinding to record lows earlier in the year.
 
(Heisenberg)
 
 
"This spike in rates vol. is making headlines all over the place today", I remarked, in an e-mail to a friend on March 26. "I guess you've seen that - Bloomberg is running headlines like 'calm goes the way of the dodo'."
 
"It is very simple", this person responded, adding the following:
Clients were short gamma when rates weren’t moving. The street was long gamma, of course. Since last week, rates have moved a lot, so some of those strangles yield enhancers sold are at the money—they became shorter gamma and started covering. In the meantime, the street became less long, so vol. had to go up.

The next day, Bloomberg ran a feature story called "Here's Why U.S. Bond Yields Plunged So Much Over the Past Week". It contained the following layman's explanation:
Treasuries rallied after the Fed signaled it was done raising interest rates for the moment, driving yields on 10-year notes down to levels last seen in 2017. That forced two sets of traders -- those who had bought mortgage bonds and those who had bet markets would remain calm -- to turn to derivatives markets to tweak their portfolios or stanch their losses. They snapped up positions in interest-rate swaps, pushing Treasury yields down even more.
 
On March 29, Deutsche Bank's Aleksandar Kocic delivered a characteristically trenchant take on the whole episode, complete with a "seesaw" analogy to illustrate the difference between the way things used to be (when MBS hedging was the dominant market mode) and the way things are now (what he calls the "insurance mode", defined by periods of placidity shattered by episodic vol. spikes). For those interested, I did a lengthy post on that at the time, called "The Gamma See-Saw: Deutsche’s Kocic Explains This Week’s Biggest Market Story".
All of that served to exaggerate moves in US rates and those exaggerated moves were misunderstood and generally misinterpreted by most market participants who assumed that the ferocity of the rally in bonds late last month was solely a function of growth worries. That misinterpretation led many to fearfully point to what's colloquially known as "the jaws" or, more simply, the yawning gap that developed on a simple chart of the S&P (which continued to grind higher) and 10-year yields (which hit their lowest levels since December of 2017 late last month). Here's what the "jaws" looked like on March 30:
 
 
(Heisenberg)
 
 
"It really depends from which direction the jaws close – through higher rates or via lower equity prices", one client told Goldman a few weeks back.
 
So, many investors went into April believing the bond market was "saying" something more than it was actually "saying" about growth. Had you not appreciated the role played by convexity flows and hedging dynamics, you might well have gone into the first week of April not realizing that with positions mostly squared and two critical data points on deck (March PMIs from China and US payrolls), the stage was set for a pretty violent snapback in, for instance, the iShares 20+ Year Treasury Bond ETF (TLT) which had its worst single session decline since "long way from neutral" on April 1. Have a look at this chart:
 
(Heisenberg)
 
 
In that yellow-shaded box is the bond rally that played out following the March Fed. On April 1, China reported better-than-expected PMI data, eliciting a huge sigh of relief from those concerned about global growth. With the impact of hedging flows on US rates in the rearview, things reversed in dramatic fashion, leading directly to the selloff in TLT denoted with the yellow arrow and caption in the visual above. A subsequent beat on ISM in the US lent further credence to the idea that the March growth scare was perhaps overdone. On April 3, Nomura's McElligott summed up the situation as follows:
Currently this is simply about the re-pricing of growth expectations which, to me, is partially due to the potentially ‘false optic’ created by the enormity of the convexity hedging impact on Rates over the past two weeks into the rally having caused an ‘overshoot’ of the growth-scare narrative.
 
There you go - another "false optic". Another confused perspective. More financial parallax.
 
Another Fata Morgana.
 
In the three-ish weeks since, the market was pleasantly surprised by, in order, a solid March jobs report in the US (helping to erase the memory of February's debacle), a better-than-expected read on exports out of China, across-the-board beats on Chinese credit growth and, on Wednesday, a blowout set of numbers from Beijing which showed GDP stabilizing in Q1, while retail sales and industrial production surprised markedly to the upside.
 
The end result: "The jaws" have closed in the "right" direction, with 10-year yields rising some 16bps in April (top pane in the visual). Meanwhile, German bund yields are back in positive territory despite still-dour manufacturing data and Berlin slashing its official outlook for growth to just 0.5% in 2019 (the yellow circle in the bottom panel shows that in March, German bund yields converged with yields on 10-year JGBs, underscoring the "Japanification" story in Europe).
 
(Heisenberg)
 
 
So, what did we learn from all of this? Some readers will invariably say "nothing", but that would be wholly disingenuous. For one thing, anyone who made it through this piece now knows more than they did previously about at least something, whether it's what's going on in Turkey or what accelerated last month's much ballyhooed bond rally.
 
More importantly, what the above underscores is that in today's markets, over-engagement by average investors (and "average" isn't meant as a comment on ability, but rather to denote anyone for whom investing isn't a profession) and the deafening cacophony of the financial media/blogosphere makes it all too easy for misleading narratives to take the reins. Once that happens, narratives are notoriously stubborn when it comes to ceding control of the carriage, irrespective of evidence. Ask any casual observer of markets what was behind the late-March bond rally and they'll tell you it was a "growth scare". As explained above, they'd be only partially correct.

A more nuanced argument could well be that because growth concerns prompted the Fed to deliver another dovish surprise and because that dovishness was behind the initial moves which kicked off all the manic hedging activity, "growth scare" was in fact the proximate cause of the bond rally. I'd concede that.
 
But, in general, my contention is that we'd all be better off if we didn't have a setup where every mom and pop investor on the planet is free to day trade macro themes with ETFs based on a never-ending stream of real-time, broad-strokes commentary pushed out at warp speed by journalists and bloggers all parroting the same theme du jour in a kind of "publish first, ask questions later" fashion. The late November collapse in oil prices (mentioned above) was easily explainable by reference to producer hedges and some soured spread trades. The 2s5s and 3s5s inversions in December begged for nuance, but all anyone cared about was cramming "inversion" into headlines. The ferocity of the late-March bond rally was in part down to convexity flows following the Fed, but it was far easier to churn out dozens of "growth scare" stories first and then call the street's rates desks five days later to see if there was more to the story.
 
As should be clear from the excerpted conversation I had with a friend on the street last month, there are often "quite simple" explanations for large moves and the people manning the desks are more than happy to elaborate if anyone cares to ask. But that takes effort on the part of the media (to write) and on the part of market participants (to understand). It's far easier to cram a given move into a cookie-cutter narrative.
 
These narratives have a tendency to become self-fulfilling as we saw in December. Once things get moving in one direction, systematic strategies get roped in, headline-scanning algos are triggered and before long, the nuance becomes irrelevant. Fortunately, the string of upbeat data surprises mentioned above served to short-circuit the "growth scare" story and now, were trading squarely on a "nascent cyclical reflation" theme.

Going forward, that theme will live and die by the prevalence (or not) of more "green shoots".
 
With central banks now firmly committed to a dovish policy stance, good data can arguably be interpreted as just that - good data. The "good news is bad news because it suggests further stimulus and accommodation isn't necessary" story popped up again vis-à-vis the recent run of positive data out of China, but as far as developed market central banks go, the bar for putting rate hikes and/or normalization back on the table is impossibly high.
 
In other words, barring a series of "rogue" inflation prints, DM policymakers will be sitting on their hands for the foreseeable future, so we needn't fear good news on the worry it will tempt central banks to lean hawkish again.
 
That should be a volatility suppressant and, assuming the data hangs in there, we may soon be able to drop the "nascent" adjective from the "nascent reflation" headlines.

The Eternally Optimistic IMF

The International Monetary Fund believes that ringing alarm bells on global economic growth is not its job, especially with many observers spotting signs of improvement in the past few weeks. But with economic conditions set to worsen before they improve, complacency is likely to have a high cost.

Ashoka Mody

mody24_MANDEL NGANAFPGetty Images_imf

PRINCETON – In April 2018, the International Monetary Fund projected that the world economy would grow robustly, at just above 3.9% that year and into 2019. The global upswing, the Fund said, had become “broader and stronger.” That view quickly proved too rosy. In 2018, the world economy grew only by 3.6%. And in its just released update, the IMF recognizes that the ongoing slowdown will push global growth down to only 3.3% in 2019.

As always, the Fund blames the lower-than-forecast growth on temporary factors, the latest culprits being US-China trade tensions and Brexit-related uncertainties. So, the message is that growth will rebound to 3.6% next year. As Deutsche Bank points out, IMF forecasts imply that fewer countries will be in recession in 2020 than at any time in recent decades.

But the forces causing deceleration are still in place. Global growth this year will be closer to 3%, with rising financial tensions in Europe.





The IMF keeps getting forecasts wrong because it misses the big picture. The economically advanced countries – which still produce about three-fifths of global output – have been experiencing a long-term slowdown since about 1970. The reason, Northwestern University’s Robert Gordon says, is that despite the promise of modern technologies, ever-slower productivity growth has dragged down the growth potential of these rich economies.

As a result, China has come to play a dominant role in determining the pace of global growth. Besides its large size, the Chinese economy has extensive trade links that transmit its growth to the rest of the world. When China grows, it sucks in imports from other countries, giving the global economy a big boost. Rapid Chinese growth revved up the world economy between 2004 and 2006, in 2009-10, and in 2017.

But China’s once-heady growth rates have necessarily fallen as the country has become richer. By historical standards, an economy as rich as China today should be growing at 3-5% a year, rather than the 6% or more that the Chinese authorities are trying to achieve through fiscal and credit stimulus.

Pushing too hard for extra growth has increased China’s financial vulnerabilities to worrying levels. By standard measures of credit growth and asset-price inflation, the country should have had a financial crisis by now. The Chinese authorities have therefore played yin and yang, stimulating growth to prevent a rapid slowdown, but reining in the stimulus to contain financial risks.

The latest cycle has been no different. In 2017, Chinese policy stimulus spread through the world, leading to the celebration of a “synchronous upsurge.” The most significant beneficiary was Europe, which depends heavily on trade. European Central Bank president Mario Draghi patted himself on his back for deft “monetary policy measures,” which he said had supported “broad-based” momentum.

When China withdrew its stimulus in early 2018, the IMF, the ECB and other forecasters blissfully continued to project high growth rates, even as the global economy slowed rapidly. Soon enough, Europe swooned, sending Italy into a technical recession and Germany to the threshold of one. (Oddly, the United Kingdom’s economy, for all its Brexit-related troubles, is doing marginally better than both.)





In the past few months, China’s leaders, concerned about their economy’s slowdown, began a new round of stimulus. Although data are not yet available, world trade growth appears to have risen slightly since then. European growth rates have ticked up, although only enough to alleviate immediate recessionary risks.

For the world economy, the continuing problem is the short-lived nature of Chinese stimulus. The OECD has already warned that the latest stimulus will drive up the worryingly high volume of corporate debt, and that over-indebted local governments will borrow more to finance wasteful infrastructure. Faced with the choice of financial crisis or slower growth, the Chinese authorities – and the rest of the world – will once again prefer slower growth. Thus, China’s deceleration will resume in the coming months, dampening world growth yet again. For now, no other country is in a position to take China’s place.

Darkening the global outlook further, the US economy is coming off the “sugar high” of fiscal stimulus and corporate cash repatriation from overseas. In addition, Germany’s slowdown in 2018 and early 2019 may not only reflect its sensitivity to slower world trade growth. Its economy may be finally descending from its high pedestal as its vaunted diesel-engine-based car industry struggles to meet pollution standards and growing competition from electric cars.

The real risk, however, lies in Italy. Running down the checklist of crisis indicators, all of Italy’s are flashing red. The economy has zero – possibly negative – productivity growth, which makes it impossible to generate internal momentum to pull out of recession. The ECB has no room to help. Italy’s debt-to-GDP ratio is above 130%, and the European Union’s absurd budget rules, in any event, make fiscal stimulus nearly impossible. Tremors along the Italian fault line will spread quickly to France, which has only slightly better indicators and also little scope for an effective policy response to a serious downturn.

The IMF, always reluctant to ring alarm bells on the global economy, is especially unwilling to counter the recent upbeat sentiment. But with economic conditions set to worsen, complacency is likely to have a high cost.


Ashoka Mody is Visiting Professor of International Economic Policy at the Woodrow Wilson School of Public and International Affairs at Princeton University. He is a former mission chief for Germany and Ireland at the International Monetary Fund. He is the author of EuroTragedy: A Drama in Nine Acts.


Trump, Tariffs and China Spell Trouble for American Steel

The vanishing levies on Canada and Mexico could be just the beginning of the industry’s problems

By Nathaniel Taplin





It was all just a fleeting, pleasant dream.

U.S. steelmakers woke last week to the brutal reality of evaporating tariffs on Canadian and Mexican steel. But an even greater problem is waiting in the wings: China may soon be tempted to ship more of its unwanted steel to foreign shores.

President Trump said Friday that the 25% tariffs he imposed on Canada and Mexico in mid-2018 would be lifted and that both countries would drop retaliatory levies. That removes a major hurdle to congressional approval for Mr. Trump’s revamped Nafta, the U.S.-Mexico-Canada Agreement.

U.S. steel companies will certainly take a hit, given that the tariffs boosted U.S. prices significantly above the global average for most of 2018, at the expense of steel-consuming industries like oil and autos. Even with the 25% tariff, imports of Canadian and Mexican hot-rolled coil steel are roughly 5% cheaper, according to Moody’s.


           Bad news is coming down the pipe for U.S. steelmakers. Photo: staff/Reuters


Meanwhile, Chinese steelmakers are raising output nearly as fast as property investment, the main source of steel demand, is growing. If that trend continues and Chinese mills send their excess production abroad as they did in 2014, it could sink global steel markets.

The big global steel rally that began in 2016 was made in China. The country’s stimulus pushed property investment sharply higher, while Chinese President Xi Jinping’s signature campaign to reduce excess factory capacity and pollution, launched in 2017, gave steel output a hard knock. Close to 10% annual growth in real-estate investment, paired with falling steel output, sent China’s monthly net steel product exports sliding about 60% between late 2015—when they ran to nearly 10 million metric tons—and late 2017.



Unfortunately, nothing lasts forever. Weakening economic growth in 2018 led to weaker controls on production. Property investment is still growing at about a 10% clip, but now steel output is too. Margins have narrowed, and net exports have begun to creep higher.

One cause for optimism is that regulators appear to be aware of the problem. China’s two biggest steel cities will extend seasonal winter production restrictions into June, Reuters has reported.

This is helpful, but it also puts the global steel market once again at the mercy of Chinese officials. April industrial growth was bad. If May doesn’t show a significant bump, or the Chinese job market keeps worsening, pollution restrictions might be watered down again.

Beijing doesn’t want domestic steel prices to collapse. Given the strained state of trade relations with Washington, sending more steel abroad look tempting. The U.S. steel industry needs to prepare for a bad day.