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By HaleStewart September 25, 2016 7:55 am
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International Economic Week in Review: Three Central Banks Talk and Act

     What’s behind the weak global trade situation?  Both the EU and OECD attempted to answer that question this week, with each institution releasing a study on the topic.  The EU argued there were several factors, starting with a changing composition of global trade elasticities:

Shifts in the global trade elasticity can reflect both changes in individual country elasticities and the change in the relative weights of each country within the global aggregate.  Thus, in addition to fluctuations in elasticities at the national level, changes in the global elasticity also reflect shifts in import shares and relative growth across countries with different trade intensities. In particular, the increasing importance of emerging economies, whose growth is typically less trade-intensive, has implications for the global trade elasticity.  The shift in trade and GDP growth from advanced economies towards emerging market economies implies a weaker relationship between trade and economic activity at the global level.

Here, the EU is arguing that countries that previously drove trade increases have either sufficiently grown so that they rely more on internal demand (a la China) or that the increased size simply means the macro level composition has sufficiently changed to alter the trade-weighted balance.  The OECD argues there are 4 primary causes for weak trade: 1.) overall weak demand (lower GDP growth), 2.) Creeping protectionism, 3.) The end of fragmenting global value chains and 4.) China’s slowdown.  Regardless of the answer, the slowdown is something policy makers should be concerned about.

     The Bank of Japan expanded its QE program.  They will now use “yield control” which means they will purchase bonds to maintain a 0% interest rate for the foreseeable future.  They will also overshoot their 2% inflation target until prices maintain this higher level “in a stable manner.”  Japanese inflation expectations are now deflationary, which the bank attributes to the following developments:

First, exogenous developments, including (1) the decline in crude oil prices, (2) the weakness in demand following the consumption tax hike in April 2014, and (3) the slowdown in emerging economies and volatile global financial markets, have lowered the observed inflation rate. And second, amid this decline in the observed inflation rate, inflation expectations -- after having been largely flat -- weakened, reflecting the fact that expectations formation in Japan is largely adaptive, that is, backward-looking.   

Here, the BOJ is being “responsibly irresponsible” a la Paul Krugman.   

     There were several important Australian releases: the RBA’s latest Minutes and a central bank presentation to the Australian government.  Overall, these reports showcased an economy in fairly good shape.  The latest GDP report showed a 3.3% Y/Y growth rate, with a fairly strong employment situation.  While household spending was good, the business sector continues to make the transition from one of heavy commodity based investment to one with more balanced sources of growth.  On the positive side, commodity prices were up about 30% from their yearly lows.  The housing market, which some feared was over-heating, is cooling off.  And like most other developed economies, wage growth has been weak. 

     The ECB released their latest statistical report which showed a region that grew .3% in the second quarter.  While increased wages, lower unemployment and higher lending goosed household spending higher, investment remained weak.  Low export growth also contributed to the weaker business environment.  In other news, Markit released their latest flash EU estimate: the 52.1 service reading was the weakest since 12/14 while the 52.6 manufacturing number the strongest since 12/15.  Overall, the current 52.6 composite reading points to continued moderate growth.

     Overall, the major economies remain in slow-growth mode: Japan is dangerously close to stagnation, while the EU is expanding slowly.  Australia is actually in fairly strong shape, but they’re in a unique situation.  Other countries are, at best, expanding “moderately.”

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