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Good morning. Jeff Sparshott here to take you through key developments in the global economy. Send us your questions, comments and suggestions by replying to this email.
We Got This
Economists from around the world gathered in San Diego over the weekend for three days of lectures, panels and job interviews. Among the central bankers in attendance the message seemed to be: We got this. Yes, interest rates, growth and inflation are weak around the developed world and are likely to remain that way for the foreseeable future. And yes there are all sorts of risks from wars, trade conflicts and aging populations. But central bankers expressed confidence they could keep the economy humming using the tools they had.
- Former Federal Reserve Chairman Ben Bernanke said the Fed could once again use asset purchases and explicit communication to boost the economy in a downturn. Those two tools represent the equivalent of 3 percentage points in rate cuts, he said.
- New York Fed President John Williams said he was optimistic in the Fed’s ability to reach its 2% inflation target and to keep inflation expectations from slipping too far. “Further downward trends in inflation expectations can be forestalled,” he said.
- San Francisco Fed President Mary Daly suggested officials could let inflation run higher in good times to make up for inflation shortfalls in downturns. “A new policy framework is likely to be required,” she said.
- That doesn’t mean central bankers can do it alone. More than one speaker emphasized the need for fiscal policy makers to do their part. Taken together, though, the central bankers seemed confident. The next recession, whenever it comes, will provide the test.
WHAT TO WATCH TODAY
IHS Markit’s U.S. services index is out at 9:45 a.m. ET.
2019 ended on a positive note. The U.S. and China struck a partial trade deal. The House approved a revamped U.S.-Mexico-Canada trade pact and kept the government funded. Economic activity around the world stabilized. Stocks posted one of their best years of the decade. So what’s next?
- Economists polled by The Wall Street Journal forecast gross domestic product will advance 1.8% this year, down from an estimated 2.2% growth in 2019 and 2.9% in 2018. The economy is slowing but odds of a recession appear low.
- The good stuff: The labor market is solid, consumer spending strong, housing resurgent, inflation benign and interest rates low.
- The bad stuff: The manufacturing sector is contracting and business investment is lagging.
- Wild cards: There’s still plenty of uncertainty, headlined by Iran, Hong Kong, Brexit, trade policy, climate change and a presidential election. “Buckle-up: Exogenous shocks to become more frequent…and more consequential,” said the Economic Outlook Group’s Bernard Baumohl.
Oil prices rose and gold jumped to a six-year high as an escalation in geopolitical risk in the Middle East reverberated around the world. The moves reflect investor anxiety following the U.S. airstrike last week that killed a powerful Iranian general in Iraq, which could result in more violence across the oil-rich region.
What Have You Done for Me Lately?
The Tax Cuts and Jobs Act is now two years old. So what did it do? Tax bills went down for most families and corporations. But more broadly, it seems the tax cuts contributed to economic growth—though not enough to pay for themselves, as many backers promised. And even some of the intended beneficiaries say the gains haven’t been dramatic: Early growth in business investment seems to have faded; overall economic growth rose before pulling back again. Cross-border investment patterns have changed only modestly, Richard Rubin and Theo Francis write.
The expanding U.S.-China rivalry in the world of technology is set to be put on full display this week, with a smaller Chinese presence expected in Las Vegas for CES, the world’s biggest consumer-electronics exhibition. Chinese exhibit space at the annual show is projected to be down 5% to 6% compared with last year, event organizers said. The drop-off is a reversal from years past. In 2018, the exhibition had 15,383 attendees from China, the country’s highest reported attendance ever, Raffaele Huang and Stu Woo report.
OPEC, but for Chocolate
The West African nations of Ivory Coast and Ghana, which combined produce more than 60% of the world’s cocoa, have banded together to form their own chocolate-coated version of the Organization of the Petroleum Exporting Countries. The decision by the world’s top two cocoa producers is expected to raise the cost of candy bars, ice cream and cake. The two-nation chocolate bloc has decided to charge an extra $400 per metric ton of cocoa, which is currently trading around $2,500 per metric ton, Alexandra Wexler reports. “Who’s paying the bill for this? Ultimately, it’ll be the consumers,” said Jonathan Parkman, co-head of agricultural trading at London-based brokerage Marex Spectron.
The human, environmental and economic toll of Australia’s devastating wildfires is mounting. The flames have torn through an area about the size of West Virginia—killing at least 20 people, shrouding cities in choking haze and stretching firefighters to a breaking point. Australia’s insurance council says more than $260 million worth of claims have been lodged since Nov. 8, when it declared a catastrophe, but that represents a trickle of what is to come, Stephen Wright reports. “We’re talking several thousand homes destroyed, thousands more badly damaged, thousands of acres of farmland, vineyards, orchards, grain crops, livestock absolutely destroyed,” council spokesman Campbell Fuller said. “The economic impact on Australia is going to be far above and beyond purely the raw numbers of insurance losses.”
Notable quotes from the American Economic Association’s annual meeting in San Diego, via the WSJ’s Greg Ip:
“The old world was fighting inflation from above. The new world was fighting inflation from below.” —San Francisco Fed President Mary Daly, on global central bank efforts to get inflation up to 2%.
“We’re seeing a frequency and intensity of weather events…that they are starting to be more than tail events, they’re starting to affect economic outcomes.” —Dallas Fed President Robert Kaplan, on what climate change means to central banks.
Today’s Fed has rejected negative interest rates but former chairman Ben Bernanke says “constructive ambiguity would probably be better.” The mere prospect, however remote, that negative rates might one day be used would make the Fed’s commitments to do what’s necessary to get inflation higher stronger, he said.
“The OECD should be more embarrassed than it is.” —Harvard University’s Larry Summers takes the Paris-based Organization for Economic Cooperation and Development to task for prescribing the same structural reforms year in and year out, whether the world’s problem is too little demand and inflation as it is now, or the opposite as it was 15 years ago.
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