It is impossible to make both precise and accurate forecasts of a country’s rate of economic growth, even a year ahead. And the same goes for other macroeconomic variables, such as the rate of unemployment or the balance of trade. The reason is that there are so many determinants of these variables, such as political decisions or events, which themselves are unpredictable. Economics examines the effects of human interactions – it is a social science, not a natural science. And human behaviour is hard to forecast.
Nevertheless, economists do make forecasts. These are best estimates, taking into account a number of determinants that can be currently measured, such as tax or interest rate changes. These determinants, or ‘leading indicators’, have been found to be related to future outcomes. For example, surveys of consumer and business confidence give a good indication of future consumer expenditure and investment – key components of GDP.
Leading indicators do not have to be directly causal. They could, instead, be a symptom of underlying changes that are themselves likely to affect the economy in the future. For example, changes in stock market prices may reflect changes in confidence or changes in liquidity. It is these changes that are likely to have a direct or indirect causal effect on future output, employment, prices, etc.
Macroeconomic models show the relationships between variables. They show how changes in one variable (e.g. increased investment) affect other variables (e.g. real GDP or productivity). So when an indicator changes, such as a rise in interest rates, economists use these models to estimate the likely effect, assuming other things remain constant (ceteris paribus). The problem is that other things don’t remain constant. The economy is buffeted around by a huge range of events that can affect the outcome of the change in the indicator or the variable(s) it reflects.
Forecasting can never therefore be 100% accurate (except by chance). Nevertheless, by carefully studying leading indicators, economists can get a good idea of the likely course of the economy.
Leading indicators of the US economy
At the start of 2019, several leading indicators are suggesting the US economy is likely to slow and might even go into recession. The following are some of the main examples.
Political events. This is the most obvious leading indicator. If decisions are made that are likely to have an adverse effect on growth, a recession may follow. For example, decisions in the UK Parliament over Brexit will directly impact on UK growth.
As far as the USA is concerned, President Trump’s decision to put tariffs on steel and aluminium imports from a range of countries, including China, the EU and Canada, led these countries to retaliate with tariffs on US imports. A tariff war has a negative effect on growth. It is a negative sum game. Of course, there may be a settlement, with countries agreeing to reduce or eliminate these new tariffs, but the danger is that the trade war may continue long enough to do serious damage to global economic growth.
But just how damaging it is likely to be is impossible to predict. That depends on future political decisions, not just those of the recent past. Will there be a global rise in protectionism or will countries pull back from such a destructive scenario? On 29 December, President Trump tweeted, ‘Just had a long and very good call with President Xi of China. Deal is moving along very well. If made, it will be very comprehensive, covering all subjects, areas and points of dispute. Big progress being made!’ China said that it was willing to work with the USA over reaching a consensus on trade.
Rises in interest rates. If these are in response to a situation of excess demand, they can be seen as a means of bringing inflation down to the target level or of closing a positive output gap, where real national income is above its potential level. They would not signify an impending recession. But many commentators have interpreted rises in interest rates in the USA as being different from this.
The Fed is keen to raise interest rates above the historic low rates that were seen as an ’emergency’ response to the financial crisis of 2007–8. It is also keen to reverse the policy of quantitative easing and has begun what might be described as ‘quantitative tightening’: not buying new bonds when existing ones that it purchased during rounds of QE mature. It refers to this interest rate and money supply policy as ‘policy normalization‘. The Fed maintains that such policy is ‘consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term’.
However, many commentators, including President Trump, have accused the Fed of going too fast in this process and of excessively dampening the economy. It has already raised the Federal Funds Rate nine times by 0.25 percentage points each time since December 2015 (click here for a PowerPoint file of the chart). What is more, announcing that the policy will continue makes such announcements themselves a leading indicator of future rises in interest rates, which are a leading indicator of subsequent effects on aggregate demand. The Fed has stated that it expects to make two more 0.25 percentage point rises during 2019.
Surveys of consumer and business confidence. These are some of the most significant leading indicators as consumer confidence affects consumer spending and business confidence affects investment. According to the Duke CFO Global Business Outlook, an influential survey of Chief Financial Officers, ‘Nearly half (48.6 per cent) of US CFOs believe that the US will be in recession by the end of 2019, and 82 per cent believe that a recession will have begun by the end of 2020’. Such surveys can become self-fulfilling, as a reported decline in confidence can itself undermine confidence as both firms and consumers ‘catch’ the mood of pessimism.
Stock market volatility. When stock markets exhibit large falls and rises, this is often a symptom of uncertainty; and uncertainty can undermine investment. Stock market volatility can thus be a leading indicator of an impending recession. One indicator of such volatility is the VIX index. This is a measure of ’30-day expected volatility of the US stock market, derived from real-time, mid-quote prices of S&P 500® Index (SPXSM) call and put options. On a global basis, it is one of the most recognized measures of volatility – widely reported by financial media and closely followed by a variety of market participants as a daily market indicator.’ The higher the index, the greater the volatility. Since 2004, it has averaged 18.4; from 17 to 28 December 2018, it averaged 28.8. From 13 to 24 December, the DOW Jones Industrial Average share index fell by 11.4 per cent, only to rise by 6.2 per cent by 27 December. On 26 December, the S&P 500 index rallied 5 per cent, its best gain since March 2009.
Not all cases of market volatility, however, signify an impending recession, but high levels of volatility are one more sign of investor nervousness.
Oil prices. When oil prices fall, this can be explained by changes on the demand and/or supply side of the oil market. Oil prices have fallen significantly over the past two months. Until October 2018, oil prices had been rising, with Brent Crude reaching $86 per barrel by early October. By the end of the year the price had fallen to just over $50 per barrel – a fall of 41 per cent. (Click here for a PowerPoint file of the chart.) Part of the explanation is a rise in supply, with shale oil production increasing and also increased output from Russia and Saudi Arabia, despite a commitment by the two countries to reduce supply. But the main reason is a fall in demand. This reflects both a fall in current demand and in anticipated future demand, with fears of oversupply causing oil companies to run down stocks.
Falling oil prices resulting from falling demand are thus an indicator of lack of confidence in the growth of future demand – a leading indicator of a slowing economy.
The yield curve. This depicts the yields on government debt with different lengths to maturity at a given point in time. Generally, the curve slopes upwards, showing higher rates of return on bonds with longer to maturity. This is illustrated by the blue line in the chart. (Click here for a PowerPoint file of the chart.) This is as you would expect, with people requiring a higher rate of return on long-term lending, where there is normally greater uncertainty. But, as the Bloomberg article, ‘Don’t take your eyes off the yield curve‘ states:
Occasionally, the curve flips, with yields on short-term debt exceeding those on longer bonds. That’s normally a sign investors believe economic growth will slow and interest rates will eventually fall. Research by the Federal Reserve Bank of San Francisco has shown that an inversion has preceded every US recession for the past 60 years.
The US economy is 37 quarters into what may prove to be its longest expansion on record. Analysts surveyed by Bloomberg expect gross domestic product growth to come in at 2.9 percent this year, up from 2.2 percent last year. Wages are rising as unfilled vacancies hover near all-time highs.
With times this good, the biggest betting game on Wall Street is when they’ll go bad. Barclays Plc, Goldman Sachs Group Inc., and other banks are predicting inversion will happen sometime in 2019. The conventional wisdom: Afterward it’s only a matter of time – anywhere from 6 to 24 months – before a recession starts.
As you can see from the chart, the yield curve on 24 December 2018 was still slightly upward sloping (expect between 6-month and 1-year bonds) – but possibly ready to ‘flip’.
However, despite the power of an ‘inverted’ yield in predicting previous recessions, it may be less reliable now. The Fed, as we saw above, has already signalled that it expects to increase short-term rates in 2019, probably at least twice. That alone could make the yield curve flatter or even downward sloping. Nevertheless, it is still generally thought that a downward sloping yield curve would signal belief in a likely slowdown, if not outright recession.
So, is the USA heading for recession?
The trouble with indicators is that they suggest what is likely – not what will definitely happen. Governments and central banks are powerful agents. If they believed that a recession was likely, then fiscal and monetary policy could be adjusted. For example, the Fed could halt its interest rate rises and quantitative tightening, or even reverse them. Also, worries about protectionism may subside if the USA strikes new trade deals with various countries, as it did with Canada and Mexico in USMCA.
- A jarring new survey shows CEOs think a recession could strike as soon as year-end 2019
Business Insider, Joe Ciolli (17/12/18)
- 4 Recession Indicators to Watch Now
Barron’s, Campbell Harvey (20/12/18)
- 9 Reasons the US Will Have a Recession Next Year
24/7 Wall St, Douglas A. McIntyre (26/12/18)
- The global economy is living dangerously – but don’t expect superpowers to follow the 2008 script
Independent, Ben Chu (3/1/19)
- Could a recession be just around the corner?
The Conversation, Amitrajeet A Batabyal (6/12/18)
- The US is on the edge of the economic precipice – Trump may push it over
The Guardian, Robert Reich (23/12/18)
- US prepares to hit the wall as reckless Trump undoes years of hard work
The Guardian, (Business Leader) (23/12/18)
- The first signs of the next recession
New Statesman, Helen Thompson (23/11/18)
- Is a Recession Coming? CFOs Predict 2019 Recession, Majority Expect Pre-2020 Market Crash
Newsweek, Benjamin Fearnow (12/12/18)
- Trade slowdown coming at worst time for world economy, markets
Reuters, Jamie McGeever (19/12/18)
- How to spot the next recession
The Week, Jeff Spross (27/11/18)
- What Is a Recession, and Why Are People Talking About the Next One?
New York Times, Niraj Chokshi (17/12/180
- For the American Economy, Storm Clouds on the Horizon
New York Times, Binyamin Appelbaum (28/11/18)
- Don’t Take Your Eyes Off the Yield Curve
Bloomberg Businessweek, Liz McCormick and Jeanna Smialek (16/11/18)
- What to expect from 2019’s ‘post-peak’ economy
CNN, Larry Hatheway (19/12/18)
- Worried about the next recession? Here’s what to watch instead of the yield curve
Quartz, Gwynn Guilford (17/12/18)
- Leading Economic Indicators and How to Use Them
The Balance, Kimberly Amadeo (10/9/18)
Surveys and Data
- Define the term ‘recession’.
- Are periods of above-trend expansion necessarily followed by a recession?
- Give some examples of leading indicators other than those given above and discuss their likely reliability in predicting a recession.
- Find out what has been happening to confidence levels in the EU over the past 12 months. Does this provide evidence of an impending recession in the EU?
- For what reasons may there be lags between a change in an indicator and a change in the variables for which it is an indicator?
- Why has the shape of the yield curve previously been a good predictor of the future course of the economy? Is it likely to be at present?
- What is the relationship between interest rates, government bond prices (‘Treasuries’ in the USA) and the yield on such bonds?
One of the key questions about Brexit is its effect on UK trade and cross-border investment. Once outside the customs union, will the freedom to negotiate trade deals lead to an increase in UK exports and GDP, as many who support Brexit claim; or will the increased frictions in trade with the EU, and the need to negotiate new trade deals with those non-EU countries which already have trade deals with the EU, lead to a fall in exports and in GDP?
Also, how will trade restrictions or new trade deals affect capital flows? Will there be an increase in inward investment or a flight of investment to the EU or elsewhere? Will many companies relocate away from the UK – or to it?
Although there has been a cost up to now from the Brexit vote, in terms of a depreciation in sterling and a fall in inward investment (see the first article below), the future effects have been hard to predict as the terms on which the UK will leave the EU have been unclear. However, with a draft withdrawal agreement between the EU and the UK government having been reached, the costs and benefits are becoming clearer. But there is still uncertainty about just what the effects on trade and investment will be.
- First, the 585-page draft withdrawal agreement is not a trade deal. It contains details of UK payments to the EU, commitments on the rights of EU and UK citizens and confirmation of the transition period – initially until 31 December 2020, but possibly extended with mutual agreement. During the transition agreement, the UK would remain a member of the customs union and single market and remain subject to rulings of the European Court of Justice. The withdrawal agreement also provides for a continuation of the customs union beyond the transition period, if no long-term trade agreement is in place. This is to prevent he need for a hard border between Ireland and Northern Ireland.
- Second, there is merely a 26-page ‘political declaration‘ about future trade relations. Negotiations on the details of these can only begin once the UK has left the EU, scheduled for 29 March 2019. So it’s still unclear about just how free trade in both goods and services will be between the UK and the EU and how freely capital and labour will move between them. But with the UK outside the single market, there will be some limitations on trade and factor movements – some frictions.
- Third, it is not clear whether the UK Parliament will agree to the withdrawal agreement. Currently, it seems as if a majority of MPs is in favour of rejecting it. If this happens, will the UK leave without an agreement, with trade based on WTO terms? Or will the EU be prepared to renegotiate it – something it currently says it will not do? Or will the issue be put back to the electorate in the form of a People’s vote (see also), which might contain the option of seeking to remain in the EU?
So, without knowing just what the UK’s future trade relations will be with (a) the EU, (b) non-EU countries which have negotiated trade deals with the EU, (c) other countries without trade deals with the EU, it is impossible to quantify the costs and benefits from the effects on trade and investment. However, the consensus among economists is still that there will be a net cost in terms of lost trade and inward investment.
Such as view is backed by a government analysis of various Brexit scenarios, released in time for the House of Commons vote on 11 December. This concludes that the UK will be worse off under all Brexit alternatives compared with staying in the EU. The main brake on growth will be frictions in trade from tariff and non-tariff barriers.
This analysis was supported by a Bank of England paper which modelled various scenarios based on assumptions about different types of Brexit deal. While recognising the inherent uncertainty in some of the empirical relationships, it still concluded that Brexit would be likely to have a net negative effect. The size of this negative effect would depend on the closeness of the new relationship between the UK and EU, the degree of preparedness across firms and critical infrastructure, and how other policies respond.
- Identify the main economic advantages and disadvantages for the UK from leaving the EU?
- How does the law of comparative advantage relate to the question of the relative trade gains from leaving and remaining in the EU?
- What is the difference between the following models of relationship with the EU: the Switzerland model; the Norway model; the Turkey model; the Canada (plus or plus, plus) model; trading on WTO terms?
- Why is the consensus among economists that there will be a net economic cost from leaving the EU, no matter on what terms?
- Is the UK likely to achieve more favourable trade deals with non-EU countries as an independent country or as a member of the EU benefiting from EU-negotiated trade deals with such countries?
The IMF has just published its six-monthly World Economic Outlook. This provides an assessment of trends in the global economy and gives forecasts for a range of macroeconomic indicators by country, by groups of countries and for the whole world.
This latest report is upbeat for the short term. Global economic growth is expected to be around 3.9% this year and next. This represents 2.3% this year and 2.5% next for advanced countries and 4.8% this year and 4.9% next for emerging and developing countries. For large advanced countries such rates are above potential economic growth rates of around 1.6% and thus represent a rise in the positive output gap or fall in the negative one.
But while the near future for economic growth seems positive, the IMF is less optimistic beyond that for advanced countries, where growth rates are forecast to decline to 2.2% in 2019, 1.7% in 2020 and 1.5% by 2023. Emerging and developing countries, however, are expected to see growth rates of around 5% being maintained.
For most countries, current favorable growth rates will not last. Policymakers should seize this opportunity to bolster growth, make it more durable, and equip their governments better to counter the next downturn.
By comparison with other countries, the UK’s growth prospects look poor. The IMF forecasts that its growth rate will slow from 1.8% in 2017 to 1.6% in 2018 and 1.5% in 2019, eventually rising to around 1.6% by 2023. The short-term figures are lower than in the USA, France and Germany and reflect ‘the anticipated higher barriers to trade and lower foreign direct investment following Brexit’.
The report sounds some alarm bells for the global economy.
The first is a possible growth in trade barriers as a trade war looms between the USA and China and as Russia faces growing trade sanctions. As Christine Lagarde, managing director of the IMF told an audience in Hong Kong:
Governments need to steer clear of protectionism in all its forms. …Remember: the multilateral trade system has transformed our world over the past generation. It helped reduce by half the proportion of the global population living in extreme poverty. It has reduced the cost of living, and has created millions of new jobs with higher wages. …But that system of rules and shared responsibility is now in danger of being torn apart. This would be an inexcusable, collective policy failure. So let us redouble our efforts to reduce trade barriers and resolve disagreements without using exceptional measures.
The second danger is a growth in world government and private debt levels, which at 225% of global GDP are now higher than before the financial crisis of 2007–9. With Trump’s policies of tax cuts and increased government expenditure, the resulting rise in US government debt levels could see some fiscal tightening ahead, which could act as a brake on the world economy. As Maurice Obstfeld , Economic Counsellor and Director of the Research Department, said at the Press Conference launching the latest World Economic Outlook:
Debts throughout the world are very high, and a lot of debts are denominated in dollars. And if dollar funding costs rise, this could be a strain on countries’ sovereign financial institutions.
In China, there has been a massive rise in corporate debt, which may become unsustainable if the Chinese economy slows. Other countries too have seen a surge in private-sector debt. If optimism is replaced by pessimism, there could be a ‘Minsky moment’, where people start to claw down on debt and banks become less generous in lending. This could lead to another crisis and a global recession. A trigger could be rising interest rates, with people finding it hard to service their debts and so cut down on spending.
The third danger is the slow growth in labour productivity combined with aging populations in developed countries. This acts as a brake on growth. The rise in AI and robotics (see the post Rage against the machine) could help to increase potential growth rates, but this could cost jobs in the short term and the benefits could be very unevenly distributed.
This brings us to a final issue and this is the long-term trend to greater inequality, especially in developed economies. Growth has been skewed to the top end of the income distribution. As the April 2017 WEO reported, “technological advances have contributed the most to the recent rise in inequality, but increased financial globalization – and foreign direct investment in particular – has also played a role.”
And the policy of quantitative easing has also tended to benefit the rich, as its main effect has been to push up asset prices, such as share and house prices. Although this has indirectly stimulated the economy, it has mainly benefited asset owners, many of whom have seen their wealth soar. People further down the income scale have seen little or no growth in their real incomes since the financial crisis.
- Clouds gather over global economy, casting long shadow on Europe
Politico, Pierre Briançon (18/4/18)
- IMF warns rising trade tensions threaten to derail global growth
Reuters, David Lawder (17/4/18)
- IMF outlook contains cause for celebration but a horrendous hangover is looming
The Guardian, Greg Jericho (18/4/18)
- World trade system in danger of being torn apart, warns IMF
The Guardian, Larry Elliott (17/4/18)
- IMF Warns of Rising Threats to Global Financial System
Bloomberg, Andrew Mayeda (18/4/18)
- IMF issues warning on global debt
BBC News, Andrew Walker (18/4/18)
- The IMF has a simple message: the global recovery will peter out
The Guardian, Larry Elliott (17/4/18)
- Global growth is built, alas, on shaky foundations
The Irish Times, Martin Wolf (18/4/18)
- Government debt
The Economist (19/4/18)
- This Is How Much Money the World Owes
- For what reasons may the IMF forecasts turn out to be incorrect?
- Why are emerging and developing countries likely to experience faster rates of economic growth than advanced countries?
- What are meant by a ‘positive output gap’ and a ‘negative output gap’? What are the consequences of each for various macroeconomic indicators?
- Explain what is meant by a ‘Minsky moment’. When are such moments likely to occur? Explain why or why not such a moment is likely to occur in the next two or three years?
- For every debt owed, someone is owed that debt. So does it matter if global public and/or private debts rise? Explain.
- What have been the positive and negative effects of the policy of quantitative easing?
- What are the arguments for and against using tariffs and other forms of trade restrictions as a means of boosting a country’s domestic economy?
Senior Bank of England officials appeared before the House of Commons’ Treasury Select Committee on 21 February to report on the state of the economy and the future path for inflation and interest rates. One topic considered was the role of depreciation.
The pound has depreciated since the referendum on EU membership in June 2016. The exchange rate index today is some 9% below that before the referendum and 15% below the peak a year before the referendum.
It had fallen as much as 14% by October 2016 below the level before the referendum and 20% below its peak, pushed down partly by the cut in Bank Rate from 0.5% to 0.25% following the referendum. In November 2017, the Bank’s Monetary Policy Committee raised Bank Rate back to 0.5%. Two or three more rises of 25 basis points are expected over the next couple of years. This has helped to strengthen sterling somewhat. (Click here for a PowerPoint of the chart below.)
But has the depreciation been advantageous or disadvantageous to the economy? Here the Governor (Mark Carney) and the Chief Economist (Andy Haldane) appeared to differ. Andy Haldane said:
A combination of the weaker pound and a stronger global economy has worked its magic. That has meant that net trade has been a significant contributor, and we expect those effects to continue over the next two or three years. … Depreciations work, and that’s how they work.
By contrast, Mark Carney said:
Depreciations don’t work. They have an economic effect, but they’re not a good economic strategy. They may be an outcome of various things … but it’s how you make yourself poorer.
Are these statements contradictory or are they simply emphasising different effects of depreciation?
Both Andy Haldane and Mark Carney would accept that a depreciation makes imports more expensive and thus reduces real incomes (at least in the short run). They would also accept that a depreciation makes exports priced in pounds cheaper in foreign currency terms and thus can boost the demand for exports.
There is disagreement over two things, however. The first is the effect on people’s real incomes in the long run. Will any fall in real incomes from higher-priced imports in the short run be offset in the long run by higher economic growth?
This relates to a second area of disagreement. This is whether a depreciation can act as a significant driver for exports over the longer term. The increased incentive on the demand side (from consumers abroad to buy UK exports) could be offset by a disincentive for exporters to become more efficient and/or to compete in terms of quality. In other words, although it can give exporters a price advantage, the crucial question is the extent to which they take advantage of this, or merely take higher profits.
The disagreements thus relate primarily to the incentive effects over the longer term.
Bank of England governor says Brexit has made us poorer – as it happened The Guardian, Graeme Wearden (21/2/18)
Brexit will knock 5% off wage growth, says Mark Carney The Guardian, Phillip Inman (21/2/18)
Treasury Committee: Wednesday 21 February 2018 Parliamentlive.tv (21/2/18) (see from 16:08:00)
Bank of England documents
Treasury Select Committee hearing on the February 2018 Inflation Report Bank of England (21/2/18)
Inflation Report – February 2018 Bank of England (8/2/18)
Interest & exchange rates data Bank of England
- How does a depreciation affect the demand for and supply of imports and exports?
- What determines the size of the effect on inflation of a depreciation?
- What is the significance of the price elasticity of demand for and supply of sterling in determining the size of depreciation resulting from a change in confidence or a change in interest rates?
- How does productivity growth impact on the effectiveness of a depreciation in leading to higher economic growth?
- In what ways might a depreciation affect productivity growth?
On 8 February, the Bank of England issued a statement that was seen by many as a warning for earlier and speedier than previously anticipated increases in the UK base rate. Mark Carney, the governor of the Bank of England, referred in his statement to ‘recent forecasts’ which make it more likely that ‘monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November report’.
A similar picture emerges on the other side of the Atlantic. With labour markets continuing to deliver spectacularly high rates of employment (the highest in the last 17 years), there are also now signs that wages are on an upward trajectory. According to a recent report from the US Bureau of Labor Statistics, US wage growth has been stronger than expected, with average hourly earnings rising by 2.9 percent – the strongest growth since 2009.
These statements have coincided with a week of sharp corrections and turbulence in the world’s largest capital markets, as investors become increasingly conscious of the threat of rising inflation – and the possibility of tighter monetary policy.
The Dow Jones plunged from an all-time high of 26,186 points on 1 February to 23,860 a week later – losing more than 10 per cent of its value in just five trading sessions (suffering a 4.62 percentag fall on 5 February alone – the worst one-day point fall since 2011). European and Asian markets followed suit, with the FTSE-100, DAX and NIKKEI all suffering heavy losses in excess of 5 per cent over the same period.
But why should higher inflationary expectations fuel a sell-off in global capital markets? After all, what firm wouldn’t like to sell its commodities at a higher price? Well, that’s not entirely true. Investors know that further increases in inflation are likely to be met by central banks hiking interest rates. This is because central banks are unlikely to be willing or able to allow inflation rates to rise much above their target levels.
The Bank of England, for instance, sets itself an inflation target of 2%. The actual ongoing rate of inflation reported in the latest quarterly Inflation Report is 3% (50 per cent higher than the target rate).
Any increase in interest rates is likely to have a direct impact on both the demand and the supply side of the economy.
Consumers (the demand side) would see their cost of borrowing increase. This could put pressure on households that have accumulated large amounts of debt since the beginning of the recession and could result in lower consumer spending.
Firms (the supply side) are just as likely to suffer higher borrowing costs, but also higher operational costs due to rising wages – both of which could put pressure on profit margins.
It now seems more likely that we are coming towards the end of the post-2008 era – a period that saw the cost of money being driven down to unprecedentedly low rates as the world’s largest economies dealt with the aftermath of the Great Recession.
For some, this is not all bad news – as it takes us a step closer towards a more historically ‘normal’ equilibrium. It remains to be seen how smooth such a transition will be and to what extent the high-leveraged world economy will manage to keep its current pace, despite the increasingly hawkish stance in monetary policy by the world’s biggest central banks.
Dow plunges 1,175 – worst point decline in history CNN Money, Matt Egan (5/2/18)
Global Markets Shed $5.2 Trillion During the Dow’s Stock Market Correction Fortune, Lucinda Shen (9/2/18)
Bank of England warns of larger rises in interest rates Financial Times, Chris Giles and Gemma Tetlow (8/2/18)
Stocks are now in a correction — here’s what that means Business Insider, Andy Kiersz (8/2/18)
US economy adds 200,000 jobs in January and wages rise at fastest pace since recession Business Insider, Akin Oyedele (2/2/18)
- Using supply and demand diagrams, explain the likely effect of an increase in interest rates to equilibrium prices and output. Is it good news for investors and how do you expect them to react to such hikes? What other factors are likely to influence the direction of the effect?
- Do you believe that the current ultra-low interest rates could stay with us for much longer? Explain your reasoning.
- What is likely to happen to the exchange rate of the pound against the US dollar, if the Bank of England increases interest rates first?
- Why do stock markets often ‘overshoot’ in responding to expected changes in interest rates or other economic variables