Newell Palmer: Monthly Economic Notes-January 2017

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Economic Overview

The International Monetary Fund has warned that the deep uncertainty over Donald Trump’s economic policies exposes the global economy to big risks if US interest rates and the US dollar rise sharply, but it also offers potential growth benefits. The performance of the world economy and financial markets may hinge on whether the incoming US president embarks on a risky short-term spending spree that triggers negative global spill overs or implements sensible long-term reforms that deliver sustainable higher economic growth. Another source of potential volatility is the upcoming French, German and Dutch elections in 2017.

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Monthly-Notes-January-2017.pdf

Newell Palmer: Monthly Economic Notes-December 2016

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Economic Overview

Goldman Sachs examined the key Trump policy proposals — higher tariffs on trade, curbing illegal immigration, increased federal stimulus, tax cuts for corporations and Americans — and found that while the plan would give the US a short-term bump in GDP growth, it would be a drag on global growth. The near-term effects are positive because the fiscal stimulus package boosts US demand and this has positive spill over effects to other economies. However, the longer-term effects on US growth are negative because the fiscal boost peters out and the other policies — higher tariffs, reduced immigration, and tighter Fed policy — weigh on growth. The policy proposals have negative spill over effects on other economies, especially in emerging market economies with partially fixed exchange rates or US-dollar based economies. The reason for the greater impact there is that the Trump agenda is likely to result in higher US interest rates and therefore a stronger dollar. Essentially, lower imports to the US and a stronger dollar from Federal Reserve rate hikes, combined with higher servicing costs for debt held in dollars, would curtail economic activity, especially in emerging markets, and drive global GDP lower than it would be otherwise. Global growth is expected to be 0.1% lower annually than the baseline projection without Trump’s policies by 2020. While this may not seem like a lot, global growth was at only 3.1% for 2015, and analysts call anything under 2% growth a global recession, so there is little room for negative shocks.

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Monthly-Notes-December-2016-continual.pdf

 

Newell Palmer: Monthly Economic Notes-November 2016

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Economic Overview

 

The lack of inflation and the possibility of deflation has been the focus of central banks around the world as they cut interest rates and then embarked on non-conventional monetary policy such as quantitative easing in an attempt to stimulate growth and push prices higher.

However, inflation is seemingly at an inflection point. The word ‘deflation’ may exit the financial lexicon over the coming months as commodity prices stabilise and global excess capacity is slowly reduced, and investors position for modestly higher rates of inflation.

Inflation in both the UK and the US has reached the highest rates in almost two years at 1.0% and 1.5% year-over-year respectively.  In the US economy the rise in the price of oil over the last year is filtering through into higher energy costs, meanwhile the UK inflation rate got an additional boost from the tumbling value of the pound.

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Monthly-Notes-November-2016.pdf

Newell Palmer: Monthly Economic Notes – October 2016

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Economic Overview

Since the Global Financial Crisis (GFC), central banks have relied on experimental monetary policies. However, these policies have more of an impact on financial markets rather than economic fundamentals.  Asset prices have been driven higher to the point where valuations for global equities, fixed income and housing markets are at or near record highs. Quantitative Easing (QE) had become the tool of choice for most global central banks needing to promote economic growth and inflation when lower interest rates have failed.  Unfortunately, QE has not been as successful as hoped in achieving its key objective. Global growth has slowed and price inflation remains well below target in the vast majority of developed nations.  We may now be at an inflection point.  The Bank of Japan’s (BoJ) September meeting was a key turning point in central bank policy where it changed its monetary framework from targeting the monetary base to focusing on yield curve control.  Under its new policy framework, the BoJ will buy and sell long-term bonds in order to keep the 10-year bond yield at 0%. This means that if 10-year government bond yields fall below 0%, the BoJ will actually have to sell bonds rather than buy them, which effectively amounts to quantitative tightening, not easing.

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Monthly-Notes-October-2016.pdf

Newell Palmer: Monthly Economic Notes – Sept 2016

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Economic Overview

Following the economic crisis of 2008, government debt levels in many advanced economies rose as governments sought to rescue the financial system and boost demand, but the underlying issues of employment and stagnant incomes have remain unresolved creating a backlash against globalisation and international trade. Housing affordability has declined due to excess liquidity causing property values to rise. The inability of governments to deliver on promises to restore growth and prosperity is a factor causing the rise of populist movements and nationalism. Brexit, for example, is symptomatic of these pressures. Looking ahead, these same forces will be in the background for the US presidential election, and the German and French elections in 2017. Even if they are unlikely to gain power in their own right, far-right and far-left political parties or movements are reshaping agendas. The United Kingdom Independence Party (which has a single elected member in the U.K. House of Commons) was influential in June’s EU referendum.

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Monthly-Notes-September-2016.pdf

Newell Palmer:Monthly Economic Notes-Aug 2016

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Economic Overview

Following the economic crisis of 2008, government debt levels in many advanced economies rose as governments sought to rescue the financial system and boost demand, but the underlying issues of employment and stagnant incomes have remain unresolved creating a backlash against globalisation and international trade. Housing affordability has declined due to excess liquidity causing property values to rise. The inability of governments to deliver on promises to restore growth and prosperity is a factor causing the rise of populist movements and nationalism. Brexit, for example, is symptomatic of these pressures. Looking ahead, these same forces will be in the background for the US presidential election, and the German and French elections in 2017. Even if they are unlikely to gain power in their own right, far-right and far-left political parties or movements are reshaping agendas. The United Kingdom Independence Party (which has a single elected member in the U.K. House of Commons) was influential in June’s EU referendum.

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Monthly-Notes-August-2016.pdf

More Old Than Young: A Demographic Shock Sweeps the Globe

More Old than Young

Photographer: Michael H/Getty Images

It’s known as the historic reversal, and it appears irreversible: Places where the old outnumber kids.

What began in 1995 in a single country, Italy, will spread to 56 nations, economies as diverse as New Zealand and Georgia, by 2030. These are the findings of Joseph Chamie, who spent a quarter of a century studying population patterns at the United Nations in New York and now is an independent researcher.

Continue Reading: http://www.bloomberg.com/news/articles/2016-08-11/more-old-than-young-a-population-plague-spreads-around-the-globe

 

Newell Palmer: Monthly Economic Notes – July 2016

 

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Economic Overview

 

The UK’s momentous decision to leave the European Union brings long-lasting political and economic consequences. It is expected that European leaders will focus on fending off domestic populist movements emboldened by the British exit and on preventing the entire EU edifice from falling apart. This points to a tough negotiating stance toward the UK and less focus on much-needed structural reforms. It is expected attitudes on immigration to harden, and the risk of a protracted standoff feeding uncertainty.

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Monthly-Notes-July-20161.pdf

Newell Palmer: Monthly Economic Notes – June 2016

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Economic Overview

US economic data has been surprising to the upside over the last couple of months. However, none of the structural headwinds that seem to have plagued the global economy in recent years (a mix of excessive indebtedness, deteriorating demographics, rising political uncertainty as well as the end of the China growth miracle and the commodity supercycle) have been resolved. According to Citibank, the following are some reasons to be concerned for global growth:
1.The Chinese stabilisation could be even more short-lived than currently expected. Much of China’s growth has been reliant on increasing debt.
2.One contributor to the potential stabilisation in China’s and emerging market activity has been the weaker US dollar and receding expectations of a US rate hike. The market may be under-pricing Fed rate hikes over the next two years.
3.A US downturn could threaten. While most US data has been decent recently, it has not been very strong. This leads to some caution, especially if there is more economic weakness to come.
4.Political risks in Europe are high and rising. This includes, Brexit, the refugee crisis, elections in Spain and extremist parties in a variety of European countries.

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Monthly-Notes-June-2016.pdf

Newell Palmer: Monthly Economic Notes – May 2016

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Economic Overview

The emerging view is that the world has relied on monetary policy for too long and governments will have to embark on fiscal stimulus to boost their economies. Some central banks have pushed interest rates into negative territory, and it is now debatable whether further reducing already negative interest rates would further stimulate the economy.  Low and negative interest rates are harming savers and reducing their capacity to spend, and this is contractionary for the economy. The next step in policy would have to target spenders, rather than investors and savers, through measures that may include sending money to people directly or other fiscal measures.

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Newell Palmer - Monthly Economic Notes May 2016