Monthly Archives: August 2010

The (part time) German jobs miracle

August 31, 2010 11:00 am by Gavyn Davies

The exceptionally strong German GDP figures for 2010 Q2 have triggered a lot of commentary on whether Germany has coped better with the recent recession than other countries, especially the US. (See for example this blog and also this one by Paul Krugman, and this analysis in the FT on Monday by Wolfgang Münchau.) But much of this discussion has focused only on the performance of GDP, exports or consumption, where little seems to have changed, and has largely over-looked the performance of the labour market, which has actually been rather remarkable. In the 1950s and 1960s, everyone talked about the German economic miracle. We certainly have not seen that repeated in the last few years, but we have seen a complete overhaul in labour market policy which is now bearing fruit, and which deserves to be more widely recognised.

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Posted in Germany, Macroeconomics, US |

Bernanke speech is neutral, perhaps with some dovish tinges

August 27, 2010 5:21 pm by Gavyn Davies

The much awaited speech by Ben Bernanke at Jackson Hole was largely a holding operation. He did not deviate much, if at all, from the tone of the statement issued after the August meeting of the FOMC, which is understandable given that his policy committee contains several members who do not want the Fed chairman to offer any strong hints about further policy easing at this stage. More evidence of a weakening US economy, and much more discussion within the committee, will be needed before this can happen.

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Posted in Macroeconomics, US |

An assessment of the case against more quantitative easing

August 26, 2010 3:50 pm by Gavyn Davies

Ben Bernanke’s speech at Jackson Hole on Friday will reportedly discuss the pros and cons of further monetary easing in the US. This debate has suddenly taken on a new sense of urgency, because the weakening in US economic data seems to have accelerated quite markedly during August. Under normal circumstances, the Fed would probably now be cutting the Fed Funds rate, and only a few convinced hawks would object too vehemently to this. However, because the only option now left to the Fed is to increase unconventional easing, there are many people (including several on the FOMC itself) arguing that the Fed should do nothing. What are the arguments for doing nothing, and do they make sense?

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Posted in Macroeconomics, US |

US economy is slowing more than the Fed has recognised

August 24, 2010 12:44 pm by Gavyn Davies

I am becoming increasingly concerned about the extent of the slowdown which is now underway in the US economy, a trend which has not yet been fully recognised by the Federal Reserve. Admittedly, some decline in the growth rate was always inevitable at this stage of the cycle, because the large boosts to growth stemming from the upswing in inventories and from fiscal stimulus were certain to lose momentum about now. But the pick up in more sustainable sources of growth, notably consumers’ expenditure and capital investment, has so far been more anaemic than I had hoped, and the improvement in the labour market may be going into reverse. The Fed may soon be forced to confront the choice they most wanted to avoid, which is whether to extend quantitative easing, instead of allowing their programmes of unconventional easing to lapse, as they fervently hoped earlier this year.

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Posted in Macroeconomics, US |

Developed economies could get trapped in a limbo land of zero inflation

August 19, 2010 7:35 am by Gavyn Davies

The battle to avoid deflation in the developed world could prove to be a long one, with twists and turns which could last for many years. In July, the core CPI data in the eurozone were somewhat firmer than expected, as were the core PPI data in the US. This has led some economists to suggest that underlying price pressures are beginning to rise again, and that the deflation scare is over. Would that that were true. Some interesting new evidence from the IMF suggests that while outright deflation might be avoided, at least for a time, the developed economies could soon get stuck in a kind of limbo land, with inflation remaining unhealthily close to zero for a very long period.

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Posted in Macroeconomics |

Golf teaches us about life, not just about sport

August 16, 2010 3:07 pm by Gavyn Davies

Weird, wild, wonderful – that is how the official US PGA website describes the end of the fourth major golf championship of the year, won by the German Martin Kaymer on Sunday. Kaymer was impeccable, in his play and his behaviour, in winning one of the most remarkable championships in golf history. But what everyone will remember will be a decision by the rules officials which prevented American Dustin Johnson from qualifying for a play-off for the title with Kaymer and fellow American Bubba Watson. Johnson took the decision like the true sportsman he is, but most American golf fans believe he was robbed of his tilt at the title. They are wrong. The rules were clear, and were correctly applied. Once again, golf has taught us more about how to live our lives than just about how to play a daft game in a field.

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Posted in Sport |

Germany continues to gain from the predicament of the euro

August 13, 2010 4:37 pm by Gavyn Davies

If the eurozone were a genuine single economy, like the US, then the buoyant second quarter GDP figures, published today, would be a cause for unbridled celebrations. The increase of 1.0 per cent in GDP in Q2 was nearly double the growth rate in the US and, if maintained, it would be more than enough to bring down the unemployment rate in Europe. Yet much of the market reaction has focused not on the fact that the eurozone as a whole enjoyed a fantastic quarter, but on the widening gaps which are developing between the healthy German economy and the ailing economies on the periphery of the bloc, and which leave the troubles of the euro far from resolved.

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Posted in Eurozone, Macroeconomics |

Markets worry that further policy actions may be infeasible, or ineffective, or both

August 12, 2010 2:58 pm by Gavyn Davies

The shift in market prices since the Fed meeting on Tuesday has been very minor in the great scheme of things, but it has obviously got some people worried that it is the start of a much bigger move in the coming weeks. I stick to my original view that the doves won on Tuesday, but in the 36 hours after the Fed’s statement, risk assets on average fell by around 2-3 per cent, with all of the main risk categories – equities, commodities and risk currencies – suffering similar rates of decline. Since the Fed was probably hoping to reassure market sentiment on Tuesday, this may have come as a disappointment to the authorities.

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Posted in Macroeconomics, Monetary policy, UK, US |

Fed and Bank of England still seem more dovish than hard currency mob at ECB and BoJ

August 11, 2010 1:09 pm by Gavyn Davies

The Fed decision announced last night seems to have disappointed markets, yet it will surely come to be seen as a clear win for the doves. Prior to yesterday, the default option at the Fed was to allow the size of its balance sheet to decline whenever its holdings of mortgage debt matured. Although this would not have led to much shrinkage of the balance sheet in the near future, it signalled that the Fed was looking for opportunities to reverse its policy of unconventional easing. That bias has now been removed, though not yet reversed.

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Posted in Eurozone, Macroeconomics, UK, US |

Structural unemployment is a new problem, needing new solutions

August 10, 2010 3:39 pm by Gavyn Davies

Edmund Phelps wrote an op ed piece in the New York Times on August 6 arguing that much of the recent rise in US unemployment (and, by implication, global unemployment) has been structural in nature, and therefore will not be amenable to correction simply by boosting aggregate demand. I predict that we are going to hear a lot more about structural unemployment in the near future, and the work of Phelps (who won the Nobel Prize in 2006 for his lifelong dedication to employment and innovation theory) is a good place to start. Basically, he says that we will only get unemployment back down to pre-recession levels if we think much more radically about supply-side labour market solutions than we have done to date.

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Posted in Macroeconomics, US |
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Gavyn Davies

on macroeconomics

About this blog About Gavyn Blog guide
A blog on macroeconomics, economic policymaking and the financial markets. Gavyn usually writes about a key topic of the week on Sunday.

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Gavyn Davies is a macroeconomist who is now chairman of Fulcrum Asset Management and co-founder of Prisma Capital Partners. He was the head of the global economics department at Goldman Sachs from 1987-2001, and was chairman of the BBC from 2001-2004.

He has also served as an economic policy adviser in No 10 Downing Street, an external adviser to the British Treasury, and as a visiting professor at the London School of Economics.

Gavyn Davies is an active investor and may have financial interests and holdings in any of the topics about which he writes. The views expressed are solely those of Mr Davies and in no way reflect the views of Prisma Capital Partners LP, Fulcrum Asset Management LLP, their respective affiliates or representatives. This material is not intended to provide, and should not be relied upon for, investment advice or recommendations. Readers are urged to seek professional advice before making any investments.

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