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world economics

Jul 10
0

The Slow And Painful Path To Jobs Recovery

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The United States recovered 4.8 million jobs in June, adding to May’s 2.5 million jobs rebound. The United States employment recovery is faster and stronger than the Eurozone one, which has over 40 million workers on subsidized jobless schemes added to a 7.4% unemployment that is expected to rise to 11% by September.

However, the positive headlines show important weaknesses that will have to be addressed in the following months. Labor Department data showed that in the week ending 27 June, initial claims for unemployment fell only slightly, to 1.43 million, on the previous week. Additionally, continuing claims remained stubbornly high at 19.29 million and the share of those reporting permanent job losses increased by 588 thousand.

Considering these factors, the trend shows that the United States unemployment rate would fall to 8.5% with a labor force participation rate of 63% at the end of 2020, according to my estimates. Goldman Sachs has improved its unemployment rate outlook to 9% for 2020 from 9.5% a month ago. However, at this rate the United States would only recover the 2019 record-low unemployment at the end of 2021. Still, much faster than the eurozone.

Subsidized jobless schemes, as the eurozone economies are implementing, is costly and generates extraordinarily little impact on consumption. Government spending is rising at the fastest pace in decades to include the increase in healthcare costs, the jobless insurance expenses, and the subsidised jobless programs. However, workers under these schemes know that their positions are at risk and are deciding, wisely, to save as much as they can. Almost 10% of the labor force in the major European economies is under one of these schemes, designed to help businesses navigate the crisis without letting go of employees.

The World Labor Organization estimates that 400 million full-time jobs have been lost in this crisis. Recovering and strengthening the labor market is crucial for developed economies to achieve the estimates of gross domestic product growth expected in 2021 and 2022. Without a strong job market, consumption and growth are likely to stall in 2021, and it will be exceedingly difficult to see investment growth.

How can economies recover the lost employment and continue to create jobs? Unfortunately, many governments would have to do the opposite of what most developed economies are doing. They should stop bailing out zombie firms, as those already had overcapacity in the past five years and are not going to hire more workers soon. Governments should also reduce unnecessary spending to prevent deficits from rising to unmanageable levels and then increase taxes that would reduce investment and job creation. Bloated public budgets are not going to bring employment back. It did not work in the eurozone in the 2009-2012 period and it will not work elsewhere.

The United States government has taken a more effective approach by combining some demand-side measures with more efficient supply-side policies that have supported the job recovery, even if it is still weak. There is a long and painful road ahead, and the rising number of covid-19 cases may harm the economic recovery as lockdown risks return.

Some commentators in Europe have argued that the job recovery in the United States is stronger due to a larger fiscal and monetary stimulus. It could not be further from the truth. The European Central Bank balance sheet is now 52.8% of GDP, 6.2 trillion euro. It started the year at 39.4%, or 4.6 trillion euro. The Federal Reserve balance sheet is 32.6% of GDP. Fiscal stimulus is also much smaller than in eurozone economies. The US fiscal impulse is equivalent to 5.2% of GDP, compared to 38% in Germany, 30% in Italy, 23% in France, and 10% in Spain.

The reason why the US economy is improving faster than the eurozone is a more dynamic and flexible labor market with more resilient businesses. That does not take away the important challenges of the US. It lost 7.9 million jobs in hospitality and leisure, according to the Bureau of Labor Statistics, and the service sector, which saw the biggest employment reductions, is coming back slowly.

If the United States wants to surprise the world with a much quicker return to record employment it needs to address the permanent job loss figure with tax incentives to hire faster and the continuing jobless claims with a robust and effective set of policies that strengthen business creation and allows existing ones to grow, particularly in digitalization and added-value online services for global customers.

At the current pace, the eurozone will not return to the 2019 employment levels until 2023. In the case of the United States, at the end of 2021 or first quarter of 2022. It is not enough. The global economy may fall back into a recession if the conditions for the labor market and business creation to strengthen are not introduced rapidly.

Governments will have t liberalize the labor market, cut red tape, eliminate harmful overregulation and provide a stable and helpful framework for businesses to start and grow, or they will find themselves in a deeper crisis than feared.

Jun 29
0

Deeper Crisis, Weaker Recovery

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Outlook for 2020 and 2021.

Gold and copper.

Equities and bonds.

 

 

If we look at the recovery so far in the majority of economies it is quite less exciting than what many expected, so what we can certainly rule out is the concept of a V-shaped recovery. I think it’s also very uneven. We see that the recovery is quite rapid in those areas that have to do with government spending and weaker in those areas that have to do with travel and leisure. Considering the outlook for 2021, what we believe is that there will be more of an L-shaped type of recovery.

May 03
0

Three Reasons Why The Eurozone Recovery Will Be Poor

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The Eurozone economy is expected to collapse in 2020. In countries like Spain and Italy, the decline, more than 9%, will likely be much larger then emerging market economies. However, the key is to understand how and when will the eurozone economies recover.

There are three reasons why we should be concerned:

  1. The eurozone was already in a severe slowdown in 2019. Despite massive fiscal and monetary stimulus, negative rates, and the ECB balance sheet above 40% of GDP, France and Italy showed stagnation in the fourth quarter and Germany narrowly escaped recession. The eurozone weakness started already in 2017 and disappointing economic figures continued throughout the next years. Many governments blamed the weakness on the Brexit and Trade War cards, but it was significantly more structural. The eurozone abandoned all structural reforms in 2014 when the ECB started its quantitative easing program (QE) and expanded the balance sheet to record-levels. Manufacturing PMIs were already in contraction, government spending remained too high and the elevated tax wedge weighed on growth and jobs. In 2019, almost 22% of the eurozone GDP gross added value came from Travel & Leisure, a sector that will unlikely come back anytime soon, while the exporting sector is also likely to suffer a prolonged weakness.
  2. The banking sector is still weak. In the eurozone, 80% of the real economy is financed via the banking channel (compared to less than 15% in the United States). Eurozone banks still have more than 600 billion euro in non-performing loans (3.3% of total assets vs 1% in the U.S.), an almost unprofitable business with a poor return on tangible assets (ROTE) due to negative rates, and a significant challenge ahead, as most of the growth investments, in LatAm in particular, may reduce capital strength significantly in the next months. Most of the eurozone governments are relying on leveraging the banks’ balance sheets in their “recovery plans”. A massive increase in loans, even with some form of state guarantee, is likely to cause significant strains on lending capacity and solvency in the next years, even with massive TLTROs and capital requirement reductions.
  3. Most of the recovery plans go to government current spending, and tax increases will surely impact growth and jobs. The eurozone tax wedge on jobs and investment is already very high. According to the Paying Taxes 2019 report, the majority of eurozone economies show widely uncompetitive taxation levels. As most governments will massively increase deficits to combat the Covid-19 crisis, there is a high likelihood of a massive increase in taxes that will make it more difficult to attract investment growth and jobs. Most of the recovery plans are also aimed at bailing out the past and letting the future die. There are massive bailout packages for traditional conglomerates and industries, but investment in technology and R&D continues to have high burdens and no support. Considering that the eurozone was already in contraction in the middle of the massive Juncker plan (that mobilized more than 400 billion euro in investments) and the large green policies implemented, it is safe to say that relying on a Green New Deal will unlikely boost growth or reduce debt. The main problem of these large investment plans is that they are politically directed and, as such, have a large tendency to fail, as we saw with the Jobs and Growth Plan of 2009.

Almost 30% of the eurozone labor force is expected to be under some form of unemployment scheme, be it temporary, permanent, or self-employed cessation of activity. After a decade of recovery from the past crisis, the eurozone still had almost double the unemployment rate of its large peers, the US, or China. Germany may recover jobs fast, but France, Spain or Italy, with important rigidities and tax burdens on job creation may suffer large unemployment levels for longer.

The eurozone also faces important challenges into a recovery due to its lack of technological and intellectual property leadership. Those two factors will help China and the U.S. recover faster, as well as the reality of having more flexible jobs market and higher support for entrepreneurial activity through attractive taxation. Considering the severity of the crisis, the eurozone is likely to need at last 10% of its GDP o rebuild the economy, but that figure is almost completely absorbed by the traditional sectors (airlines, autos, agriculture, tourism). Furthermore, the New Green deal initiative includes severe restrictions to travel and energy-intensive industries that may act as a brake on future growth.

The ECB policy was already unnecessarily expansionary in the past years, and now it runs out of tools to address the unprecedented challenge of recovery post-Covid-19. With negative rates, targetted liquidity programs, asset purchases of private and public debt, and a balance sheet that exceeds 42% of GDP of the eurozone, the best it can do is to disguise some risk, not eliminate it. We should also warn of adding massive monetary imbalances when demand for euros globally is acceptable but shrinking according to the Bank of International Settlements, and risk of redenomination remains in a politically unstable eurozone.

Our estimates show that, even with large fiscal and monetary stimulus, the eurozone economy will not recover its output and jobs until 2023, and rising debt to record highs as well as monetary imbalances due to massive supply of euros in a diminishing demand environment, may cause significant problems for the stability of the eurozone.

The eurozone needs to understand that if it decides to increase taxes to address the rising debt due to the Covid-19 response, its ability to recover will be irreparably damaged.

Feb 14
0

U.S. Budget: Spending Is The Problem

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Every time there is a budget debate, politicians from both parties will discuss the deficit and spending as if the first one did not matter and the latter could only increase. However, the main problem of the US budget in the past four decades is that total outlays rise significantly faster than receipts no matter what the economic growth or revenue stream does. For example, in the fiscal years 2018 and 2019 total outlays rose mostly due to mandatory expenses in Social Security, Medicare, and Medicaid. No tax revenue measure would have covered that amount.

Total outlays were $4,447 billion in 2019, $339 billion above those in FY 2018, an 8.2 percent increase. No serious economist can believe that any tax increase would have generated more than $300 billion of new and additional revenues every year.

The idea that eliminating the tax cuts would have solved the deficit is clearly debunked by history and mathematics. There is no way in which any form of revenue measure would have covered a $339 billion spending increase.

 

 

No serious economist can believe that keeping uncompetitive tax rates well above the average of the OECD would have generated more revenues in a global slowdown. If anything, a combination of higher taxes and weaker growth would have made the deficit even worse. Why do we know that? Because it is exactly what has happened in the Eurozone countries that decided to raise taxes in a slowdown and it is also what all of us witnessed in the United States when revenue measures were implemented.

The US was maintaining a completely uncompetitive and disproportionately high corporate income tax (one of the highest in the world) and all it did was to make it similar to other countries (the Nordic countries have corporate income tax rates of 21.4% Sweden and 22% Denmark, for example).

What happened to corporate tax receipts before the tax cut? The evidence of a weakening operating profit environment: Corporate tax receipts fell 1% in 2017 and 13% in 2016. The manufacturing and operating profit recessions were already evident before the tax cuts. If anything, reducing the corporate rate helped companies hire more and recover, which in turn made total fiscal revenues rise by $13 billion to $3,328 billion in the fiscal year 2018, and rise by $133 billion in 2019, to $ 3,462 billion, both above budget, according to the CBO. Remember also that critics of the tax cuts expected total receipts to fall, not increase.

Mandatory spending is now at $2 trillion of a total of $4.45 trillion outlays for the fiscal year 2019.  This figure is projected to increase to $3.3 trillion by 2023. Even if discretionary spending stays flat, total outlays are estimated to increase by more than $1 trillion, significantly above any measure of tax revenues, and that is without considering a possible recession.

Any politician should understand that it is simply impossible to collect an additional $1 trillion per year over and above what are already record-high receipts.

For 2020, tax receipts are estimated at $3,472 billion compared to $4,473 billion in outlays, which means a $1,001 billion deficit. With outlays consistently above 20% of GDP and receipts at 16.5% average, anyone can understand that any recession will bring the gap wider and deficits even higher.

Deficits mean more taxes or more inflation in the future. Both hurt the middle class the most. More government spending means more deficit, more debt, and less growth.

When candidates promise more “real money” for higher spending they are not talking of real money. They talk of real debt, which means less real money into future schools, future housing, and future healthcare at the expense of our grandchildren’s salaries and wealth. More government and more debt is less prosperity.

Anyone who thinks that this gap can be reduced by massively hiking taxes is not understanding the US economy and the global situation. It would lead to job destruction, corporate relocation to other countries and lower investment. However, even in the most optimistic estimates of tax revenues coming from some politicians, the revenue-spending gap is not even closed, let alone a net reduction in debt. The proof that the US problem is a spending issue is that even those who propose massive tax hikes are not expecting to eliminate the deficit, let alone reduce debt, that is why they add massive money printing to their magic solutions.

Now, let us ask ourselves one question: If the solution to the US debt and deficit is to print masses of money, why do they propose to increase taxes? If printing money was the solution, the Democrats should have massive tax cuts in their program. The reality is that neither tax hikes nor monetary insanity will curb the deficit trend.

No tax hike will solve the deficit problem. Even less when those tax hikes are supposed to finance even more expenses. No amount of money printing will solve the financial imbalances of the US, it only increases the problem. If money printing was the solution, Argentina would be the highest growing economy in the world.

If the US wants to curb its debt before it generates a Eurozone-type crisis that leads to stagnation and high unemployment, the government needs to really cut spending, because deficits are soaring due to ballooning mandatory outlays, not due to tax cuts.