4/29/2016

3 Pronged Approach to Enhancing Global Growth

The IMF thinks that global growth is on the verge of stalling and wants to act before it’s too late. They blame politicians who are not using fiscal policy in addition to the central bank propping up the economy through low rates and quantitative easing. Global growth should be a three-pronged approach. Monetary policy, fiscal and structural reforms.

On the fiscal side, (lowering tax and increasing government spending), governments are constrained because of huge debt burdens. They cannot spend money on infrastructure without raising taxes. Politicians who want to get re elected are unwilling to raise taxes.

On the structural reforms side - relatively cheap changes to government policy that remove the barriers to the production and consumption of goods and services, which boost demand and hence economic growth. But that is easier said than done. Some reforms – making it easier to hire and fire workers or cutting unemployment benefits – may make economic sense but be politically unpalatable.

Escalating Tensions Between the U.S and Saudi Arabia

Congress wants to pass a bill that allows 9/11 victims to sue Saudi government members that may of had a role in 9/11. There was evidence that Saudi officials living in the United States at the time had a hand in the terror plot. If the bills get passed Saudi Arabia will sell off hundreds of billions of dollars’ worth ($750B) of American assets. Saudi officials have warned senators of diplomatic and economic fallout from the legislation. The alliance with Saudi Arabia has frayed in recent years as the White House has tried to thaw ties with Iran — Saudi Arabia’s bitter enemy.

But the threat is another sign of the escalating tensions between Saudi Arabia and the United States. Saudi’s selling of American assets could destabilize the American dollar — the currency to which the Saudi riyal is pegged.

China's $25 Billion Inoculation

To bolster China’s lukewarm economy, their central bank pumped in about $25 billion into its financial system in open market operations via medium-term lending facility, which is a tool, introduced in 2014 to help commercial and policy banks maintain liquidity by allowing them to borrow from the central bank by using securities as collateral. To promote growth, interest rates were unchanged at 2.75 percent and 2.85 percent and they cut banks' reserve requirement ratio (RRR) multiple times since 2014.

Hammering Out a Deal With Greece

Greece is seeking to broker a compromise agreement between its European creditors and the International Monetary Fund, which has asked that Greece legislate a series of so-called contingency measures that would be automatically triggered if the country were to fall short of various targets in its 86 billion Euro bailout. However, Greece announced to the IMF that some of their contingency measures were not legally possible in Greece and that all parties should respect their democratic limits. A formal review of the bailout program has been stalled for several months as negotiations between Athens and its creditors attempt to hammer-out a deal on key reforms to the country's pension and tax systems.

Labor Reform Protests in France

There has been a nationwide labor reform protest and strike in Paris, France. A strike by air traffic controllers canceled 20 percent of all flights at Orly Airport. Riot police had to use tear gas to intervene protests in cities such as Nantes. So why are the French protesting so hard? The labor reform proposal would allow companies to organize alternative working times without industry-wide deals. A 35-hour workweek will still be the foundation, but workers would also be able to put in a 48-hour week or 12-hour shifts. The head of the large CGT union attacked the proposed law, saying it would allow employers to "short-circuit" national regulation of basic worker rights by giving bosses greater freedom to set terms of pay, rest and overtime rates. New the policy would be a less regulated approach to business. These proposed policies are supposed to remedy and aid France’s 10% unemployment rate.

Brexit Opinion

Eight high profile economists claim that Britain would do better outside the EU. They believe that in an arrangement where the U.K. has access to EU markets under the World Trade Organization’s terms (WTO), gross domestic product could increase 4 percent over 10 years as regulatory burdens are removed, trade is liberated, and Britain gains control over immigration. The budget and current account deficits would be smaller and the British people would enjoy cheaper goods.

The EU is a customs union that protects certain industries, notably agriculture and manufacturing, forcing higher prices upon EU consumers. Leaving the walled garden of the EU, and trading on a free-trade basis under WTO, prices will decrease, provide a boost to GDP and free the U.K. from having to comply with such EU policies such as the free movement of people (immigration).

U.S GDP Report

The U.S. economy grew at its weakest quarterly pace (.5% GDP) in two years between the months of January and March. Consumers and businesses alike are showing a new caution with their spending. Businesses cut back on investments with a severity not seen since the financial crisis. Relatively tepid growth indicates investor apprehension which is strange as global chaos diminishes, job numbers are growing, recovery of the stock market from early this year, wages are beginning to rise, and cheaper gasoline providing an extra influx of cash to consumers. Meanwhile, a dollar that has weakened slightly in recent months has helped to boost profits for America’s corporate giants — from airlines to tech companies. But those firms are holding off on investing in the basic goods they need, including computers, machinery and offices. Companies are likely trimming back in response to sluggish global demand. A few could also be pushing investments overseas, spurred by the United States' high corporate taxes. Investments in oil also plunged due to lower demand, high supply and low prices.

Declining consumer spending (which makes up 2/3 of the U.S economy) could be shaped by close-to-home factors: Rents are rising. And there’s incentive to plow more into savings, because retirement funds aren’t growing on their own with interest rates so low.

PetroChina and the Oil Industry

PetroChina Co. posted its first-ever quarterly loss as falling prices for global crude and domestic gas wiped out earnings. PetroChina’s oil and gas output is expected to fall for the first time in 17 years in 2016 as it shuts high-cost fields that have “no hope” of making profits at current prices. But while the crash in prices hurt the exploration and production division of the company, cheaper oil was a boon for the company’s refining operations. Refiners have the luxury of low crude feedstock prices and high demand for their products. Low prices means they can refine more oil, so, apart from the initial hit on inventory, future profit opportunities are strong. People also tend to buy more gas when oil is low, so there's more demand for the refineries. But gains in refining and chemical weren’t enough to offset weaker oil prices, which dragged exploration and production into losses. Ample gas supply this year may encourage a gas price cut in the second half of the year, which is likely to be the biggest headwind for PetroChina.

Bank of Japan Deciding Against Stimulus Expansion

Bank of Japan shocked the world when they announced they would not to expand their stimulus program. This sent the yen to appreciate against the dollar and euro to its highest point in 6 years. The Nikkei 225 plummets 3.6% as a result (stronger yen = decline in exports). Japan defended the decision to keep policy unchanged, saying that a steady improvement in the economy allows the BOJ to spend some time studying the effect of its past easing steps. In a separate move, the BOJ created a 300 billion yen loan program offering funds at zero interest to banks in areas hit by this month's earthquake in southern Japan.