Friday2 August 2019 ★ FINANCIAL TIMES 11Opinion
chasing managers’ indices for the euro-
zone, the UK, Japan and China all show
manufacturing contracting. That puts
pressure on their currencies and makes
American exporters less competitive.
But there are other important differ-
ences from four years ago. In 2015-16,
consumer spending rose at an average
2.8 per cent annual rate. In the most
recent quarter, it grew by a brisk 4.3 per
cent. Then, a collapse in oil prices
crimped investment in energy; today,
oil prices are much higher than in 2015.
China’s slowdown then was driven by a
deliberate campaign to deleverage.
Today, Chinese authorities are trying to
reflate growth that has foundered amid
a trade war with the US.
Given its impact on Chinese demand
and American factories, the trade war is
the key to whether the US slips into
recession. If Mr Trump were to call it off,
it would remove the weight around
manufacturers’ necks — and allow the
US economy to power through swim-
mingly.The writer is a senior fellow at the Harvard
Kennedy Schooltial growth. However, the impact will be
felt only in the medium term, once
workers have learnt to use the new tech-
nologies to improve their productivity.
In the short term, this shift from tangi-
ble to intangible investment tends to be
bad for workers: factories create more
jobs than the likes of WhatsApp.
Some analysts see parallels with the
manufacturing recession of 2015-16 and
worry this time it will lead to an overall
contraction. In both cases, weakness
was driven by an economic slowdown in
China and a strong US dollar. In 2015-
as now, the dollar appreciated in part
because of stronger perceived economic
fundamentals in the US than abroad.
The Fed’s decision to pause rate rises
as financial conditions tightened
sharply in late 2015 helped weaken the
dollar and arguably kept the slowdown
in manufacturing from dragging the
overall economy into recession. Today,
however, financial conditions are
already easy. The Fed’s rapid shift in
tonefrom rate rises to rate cuts since the
end of last year has done little to affect
the currency.
Meanwhile, factory orders and pur-employment. America has become a
services-based economy, and service
industry data have remained buoyant in
the US and abroad.
Furthermore, the nature of invest-
ment has changed drastically over the
past few decades. In 1998, nearly 50 per
cent of non-residential fixed investment
went into new structures and industrial
equipment to boost manufacturingcapacity, while about 30 per cent went
into informational processing equip-
ment and intellectual property. In the
first half of this yearthe percentages
were reversed, with roughly 30 per cent
going into structures and equipment
and 50 per cent into technology.
Optimists will highlight the potential
for these tech investments to result in
higher productivity growth and poten-1.2 per cent annually in the second quar-
ter. Manufacturing production was
down 1.9 per cent and 2.2 per cent,
respectively. The definition of a techni-
cal recession is two quarters of contrac-
tion. And while manufacturing output
grew relative to the previous month in
May and June, it appears to have been
largely driven by auto and auto part pro-
duction, widely forecast to slow later
this year. Automakers such as Ford and
Nissanare cutting jobs and earnings
forecasts.
President Donald Trump’s trade poli-
cies are receiving much of the blame.
Not only have trade tensionscontrib-
uted to weaker demand from China for
US goods, they have disrupted supply
chains and inventory management for
US manufacturers. Operating a business
when you don’t know what the rules will
be is like trying to complete a triathlon
with a weight around your neck.
Now, a manufacturing recession need
not necessarily result in an economic
one. Fifty years ago, manufacturingrep-
resented almost 25 per cent of US gross
domestic product. Today it accounts for
only 11 per cent of GDP and 8 per cent ofT
he US manufacturing sector
has now contracted for two
consecutive quarters,
according to the Federal
Reserve, raising concerns a
general recession is drawing near. But
those fears remind me of a triathlon I
recently completed. With burning lungs
and a pounding heart, I’d really flagged
during the swimming section. Then I
recovered and finished fine. So does a
limping manufacturing sector really
mean the American expansion will end?
A recession is a bit like the death of a
star — you can only see it clearly after it
happens. We can’t be certain manufac-
turing is leading the US to contraction.
But it could be a portent: industrial pro-
duction was down 1.9 per cent annually
in the first three months of the year andTrade tensions are a weight around the neck of US manufacturing
We cannot be sure that
industrial production isleading to a contraction,
but it could be a portent
ready to gamble the UK union. Brexit
has become the only thing that matters.
Whether the numbers would add up
in a Commons vote is another question.
No one knows how many disaffected
Labour supporters Mr Johnson can
sweep up eventually into his great patri-
otic crusade; or, for that matter, how
many Tory seats will be lost to the
Liberal Democrats in southern England
as the party’s moderate voters defect.
The irony is that the prime minister’s
most valuable card is Mr Corbyn — an
opposition leader so possessed by the
warped ideology of the far-left and by
his own anti-European prejudices as to
repel large swaths of voters who would
otherwise count themselves part of the
progressive centre-left.
Not so long ago, the complaint most
often heard in Britain was that Brexit
had paralysed parliament. The damage,
though, runs much deeper. The argu-
ment about Europe has shredded the
very fabric of British politics and may
yet destroy the United Kingdom itself.[email protected]a poll that he cannot win without dis-
arming Mr Farage. Hence the decisive
shift to the right. By shedding its trad-
itional identity as a broad coalition
across the centre-right, the Tories
become the Brexit, or more precisely,
the English nationalist party.
The past few days have seen Mr John-
son wrap himself in the UK flag. In
truth, he is uninterested in the smaller
nations of the UK. He has never been
popular in Scotland and will not have
been surprised at the public abuse that
greeted his visit to Edinburgh. Ruth
Davidson, leader of the Scottish Tories,
has told Mr Johnson that a no-deal
Brexit would see the party badly dam-
agedin a general election.
Scotland’s first minister and leader of
the Scottish Nationalist party, Nicola
Sturgeon, could not have wished for a
better enemy in her campaign for inde-
pendence. Mr Johnson seems equally
unmoved by the threat of a no-deal
Brexit to the Conservatives in Wales
or by the boost it could give to the case
for the reunification of Ireland. All the
signs are that the prime minister isGood Friday peace agreement bytear-
ing up the guarantee in the draft Brexit
accord to maintain an open Irish Border.
He cannot be surprised that they do not
share his recklessness.
Mr Johnson may think he can yet
postpone an election by persuading the
House of Commons to back a cliff-edge
Brexit. Having rid the cabinet of fifth-
columnists, he may calculate he can face
down theRemainers on the Tory back-
benches. Would even ardent Tory
Europhiles really risk putting Labour
leader Jeremy Corbyn in Number 10?
By promising to pump public money
into Brexit-supporting Labour seats,
Mr Johnson is also bidding for the votes
of a sizeable group of opposition MPs.
Maybe. But, whatever his hopes, most
roads point towards a general election —Nation Tories permitted to stay in post
have been obliged to sign an oath of
fealty to a no-deal Brexit. Senior offi-
cials who present ministers with incon-
venient facts risk being accused of
attempted sabotage.
Brexit has rubbed out politics’ famil-
iar left-right dividing line. Mr Johnson
has thrown overboard fiscal conserva-
tism in favour of state largesse for the
Brexit-backing working classes. Contra-
dictions such as those between big tax
cuts and boundless public spending do
not disturb identity politics.
This is not to say that Mr Johnson has
a firm date in mind for polling day.
Assuming that politicians arrive in
office possessed of some grand design is
a common mistake. In Mr Johnson’s
case, the presumption should perhaps
be the opposite. He has never been
guided by principle or impressed by
strategy. The present blizzard of sunny
optimism, spending pledges, and the
brusque ultimatum to the EU27, might
be aimed at creating a new dynamic in
the negotiations with Brussels.
If so, it has badly backfired. European
leaders areunimpressed.Plainly, the EU
had been prepared to offer some conces-
sions on the thorny question of the Irish
border. Until last week there had been
chatter in Brussels about applying pres-
sure on Leo Varadkar, the Irish prime
minister, to accept a face-saving fudge.
Mr Johnson’s maximalist position has
put an end to that.
The prime minister is asking Ger-
many’s Angela Merkel and France’s
Emmanuel Macron to jeopardise theB
ritain’s Brexiters set a simple
rule to fight the 2016 refer-
endum. Disdain facts, disre-
gard truth and appeal instead
to visceral emotion. Cultural
insecurities and grievances did indeed
trump economics. Invited to strike a
blow against metropolitan elites, to
throw rocks at experts and to close the
door on immigration, a small majority
of those who voted backed Brexit.
Boris Johnson, who led the Leave
campaign, has been setting much the
same course in preparing for a general
election. Every scrap of solid evidence
and independent analysis says a disor-
derly Brexit would have a calamitous
impact on the economy and living
standards. The vast proportion of busi-
nesses report a risk to investment and
jobs.The pound is sinking fast. Michael
Gove publicly scorned experts during
the referendum campaign. Now he has
taken charge of preparations for Britain
to crash out of the EU on October 31.
“Do or die” is how the prime minister
puts it. Instead of outflanking Nigel
Farage’sBrexit party, the Conservatives
have become the Brexit party. Mr John-
son has purged the government of non-
believers. The token handful of OneTories have
become the
Brexit party
Shedding its broad
centre-right traditions,the party now represents
English nationalism
A
transaction occurred on
Wednesday that should
give investors pause. Two
hours before the US Federal
Reserve announced a 25
basis point interest rate cut, Pegasus
Investments said it hadarranged the
saleof Water Tower Place, a 270,000 sq
ft shopping centre in Des Moines, Iowa,
to a “California-based family office”.
Sadly, the buyer’s name and the price
were kept secret, although Pegasus said
it was “the second highest price ever
paid for a shopping centre in Iowa his-
tory ” and — strikingly — was paid
entirely in cash.
However, the motive is easy to guess.
Once, property advisersmainly sold
malls to developers, retail groups or
banks. Now, however, there is risingdemand from family offices. The new
owner of Water Tower Place was said to
have experience acquiring and manag-
ing other “trophy quality, grocery-an-
chored shopping centers” in the US.
As the Fed and other central banks
loosen monetary policy, private pools of
capital are searching for ever-more
innovative ways to earn returns. Thus, if
you want to understand the impact of
Wednesday’s rate cut, don’t just watch
bond and equity prices, track what is
happening with assets such as Water
Tower Place as well.
It is not easy to monitor such financial
flows with precision, since the family
office sector — which is estimated to
control almost $6tnin assets — is highly
secretive. However, financiers say that a
shift is under way. A few decades ago,
the sector (like most asset managers)
put most of its money in public bond
and equity markets, with a smaller allo-
cation to real estate.
Then investing in hedge funds
became all the rage. But a survey con-
ducted late last year by UBS and Camp-
den Wealth suggests just 5.7 per cent of
family office assets now sit in hedgefunds, sharply down from recent years.
Meanwhile, the allocation to public
markets is also falling, with just 28 per
cent in equities and 16 per cent in bonds.
At the same time, investments in pri-
vate equity and real estate have risen to
account for 22 per cent and 17 per cent
respectively. This trend seems set to
intensify. After all, holding cash is unat-
tractive, as banks such as UBS startcharging for large deposits, and the rally
in equity and bond prices looks at odds
with many fundamentals. Indeed, pub-
lic markets as a whole now seem danger-
ously hostage to the whims of unfath-
omable politicians and central banks —
as shown by Wednesday’s market
swings.
While the traditional asset classes
“generated average negative returns” in2018, private equity “generated
expected double digit returns”, the
Family Office Exchange pointed out in a
recent report.“Family offices continue
to re-evaluate traditional approaches to
investing [with] accelerating interest in
making direct investments in real estate
and operating businesses.”
This means that family offices are no
longer just investing in private equity
funds (which are already bloated with
cash), but increasingly cutting direct
deals. Moreover, 73 per cent are doing
this in what the exchange calls an
“opportunistic way”, up from 54 per
cent last year. That is, they are grabbing
unorthodox avenues for higher returns,
whenever they materialise.
“It is the hardest investing climate I
have ever seen in my career in public
markets now,” explains a luminary of
one of America’s largest family offices.
“So it’s all about real assets now and
being creative.” Indeed, this particular
investor has recently started buying and
running data centers and converting
multifamily residences to Airbnb-style
rental units.
Is this good for the economy? Classiceconomic theory suggests yes. Loose
monetary policy is supposed to boost
economic activity partly by forcing capi-
tal to embrace investment risk — and
fund growth. In that sense, it is good
news when family offices back “real”
commercial projects such as data cent-
ers rather than putting all of their
money in safe assets such as govern-
ment bonds.
But there is also a $6tn catch. The
more that elite private pools of capital
find juicy returns outside public mar-
kets, the more this risks fuelling wealth
gaps. After all, most non-elite investors
remain stuck in public markets and
bank deposits, exposed to the vagaries
of low interest rates.
This return gap may be going largely
unnoticed now, because private mar-
kets are so opaque. However, the differ-
ence is likely to grow. Therein lies
another mostly unnoticed consequence
of central bank easing; and another rea-
son why the 20th-century vision of
democratic capitalism based around
public markets is under political attack.[email protected]They are re-evaluating
‘traditional approacheswith accelerating interest in
making direct investments’
Family offices are diving into new markets
FINANCE
Gillian
Tett
A
s global policymakers try to
divine Facebook’s true
ambitions for itsnew dig-
ital currency,Libra, one
thing is clear: payments are
the battleground. Even if it does not suc-
ceed, Facebook has upped the stakes for
its competitors just by entering the field.
Technologybusinesses, payments
companies and banks are each trying to
become the gateway into the platform-
based economy. The prize for the win-
ners can be huge: Chinese groupsAlipay
and WeChatPaycontrol more than 90
per centof Chinese mobile payments.
Even in the west, moving money can
be costly and inefficient. Those who end
up paying the most are often the vulner-
able, who can least afford to do so.
Improving these processes offers signifi-
cant returns and social benefits. That is
why I argued in myFuture of Finance
reportfor the Bank of Englandthat cata-
lysing payments innovation should be a
priority for the UK. In emerging mar-
kets, the need is greater, and the poten-
tial returns even higher. Some of the
most interesting innovations are hap-
pening outside the west.
The remittance market is ripe for dis-
ruption. In India, the largest market glo-
bally for remittances,the World Bank
calculatesthat the cost of international
peer-to-peer payments was about 7 per
cent, for a $200 payment. Families send
back home more than $80bn a year —
about one-quarter from the US and
roughly half from the Middle East,
according to a recentReserve Bank of
India survey.
India is also the largest market glo-bally for the unbanked, after China.
This means that if Facebook is serious
about the remittances market and the
unbanked, then India ought to be its
number one target. India is also Face-
book’s largest international market,
with more than 300m users. The most
successful new payment networks of
the past decade — Alipay, WeChat Pay
and PayPal — each benefited fromhuge
online platform partners to help build
their networks. That said, it is not at all
clear that Libra can succeed in India.
First, India has largely cracked the
identification problem withits own,
audacious nationwide scheme,Aad-
haar, which dramatically simplifies the
way networks know their customers,
and helps give access to basic bank
accounts. Then there is the memory of
Facebook’s previous attempt toprovide
its servicesto India’s unconnected. Its
“free basics” programme, which prom-
ised to connect millions of Indians to a
free version of the internet curated by
the company, was stymied in 2016 by
local opposition.
Facebook is also entering a fast-mov-
ing, competitive field in which the Chi-
nese, Amazon,Appleand Googleare
already well ahead of Facebook. Paytm,
backed by Chinese group Ant Financial,
already has 300m customers in India
and Google Pay has 50m. Meanwhile,
Visa,Mastercardand many others are
trying to make cross border payments
cheaper, more secure and faster.
Perhaps most importantly, India
doesn’t like cryptocurrencies and has
proposed a draft bill to ban trading in
them,which could carry up to a 10-year
jail sentence. While there is a heated
debateas to whether Libra really counts
as a cryptocurrency,the country will
take some persuading, and a lot of time
to counter this wariness. That might be
why local media reports suggest Libra is
not targeting India. An offering using
local currencies and following the Chi-
nese playbook may have been a faster
route to market.
Right now, we don’t know enough to
weigh up whether Libra will be a signifi-
cant presence in the payments sector.
But Facebook’s moon shot has raised the
stakes for everyone involved. A far more
complex payments system that uses
new technology calls for updated regu-
lation. And whether Libra is a success or
not, it is already a catalyst for banks and
paymentcompanies to dramatically up
their own games.The writer is a senior adviser to the gover-
nor of the Bank of England. He writes in a
personal capacityTo succeed,
Libra must
prove itself
in India
Huw
van SteenisIf Facebook is serious
about remittances andthe unbanked, it should
target the subcontinent
ECONOMICS
Megan
Greene
POLITICS
Philip
Stephens
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