The Economist - USA (2019-08-17)

The EconomistAugust 17th 2019 Finance & economics 55

1

I

n the autumnof 2008,strangeand

novel things happened in financial

markets, such as the emergence of nega-

tive yields on Treasury bills. In times of

fear, the safest assets are at a premium.

What was once strange is now ordin-

ary. Negative yields are a familiar feature

of European bond markets. But such is

the anxiety about the world economy

that they are spreading. In Germany,

interest rates are negative all the way

from cash to 30-year bonds (chart 1). In

America yields are still positive. But the

curve is inverted: interest rates on ten-

year bonds are below those on three-

month bills (chart 2). The last seven

recessions in America have been preced-

ed by an inverted yield curve.

Nervous investors are reaching for

the safety of the dollar. The yen and

Swiss franc, habitual sanctuaries, are

amongthefewcurrencies that have risen

against it (chart 3). The price of gold,

another haven, is at a six-year high. That

of copper, a barometer of global industry,

is down from its recent peak (chart 4).

Faced with uncertainty, the go-to

market for equity investors is America’s.

It has left others in the dust (chart 5).

msci’s emerging-market share index

leans heavily towards “Factory Asia”

(China, South Korea and Taiwan), which

is in the eye of the trade-war storm.

Europe’s markets lean towards banks and

carmakers, which suffer in downturns.

Investors fret that the rich world is

slowly becoming Japanese, with econo-

mies that are too feeble to generate in-

flation. Forecasts of inflation in the

swaps market have fallen sharply (chart

6). A fear in 2008 was that deflation

might take root. The fear remains.

The new commonplace

Financial markets

Making sense of investors’ mood

1

4

6

2

5

3

Six charts that explain the state of markets

Sources:DatastreamfromRefinitiv;Bloomberg

Currenciesagainstthe$

January1st-August14th2019,%change

UnitedStates,government-bondyields,%

By maturity

Germany, government-bond yields, %

By maturity

Commodityprices

January1st2019=100

Five-year,five-yearforward

inflation-linkedswaprate,%

Stockmarketindices,totalreturns

January1st2010=100

-20-30-40 -10 0 10 20

Gold

Japanese yen

Swiss franc

Chinese yuan

Euro

Australian dollar

British pound

Turkish lira

South Korean won

Argentine peso

2019

1.0

1.5

2.0

2.5

United States

Euro area

1.0

1.5

2.0

2.5

3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y

Aug 14th 2019

Aug14th 2019

May1st 2019

May1st 2019

-1.0

-0.5

0

0.5

1.0

3M 1Y 3Y 5Y 7Y 9Y 12Y 20Y 30Y

2010 11 12 13 14 15 16 17 18 19

0

100

200

300

400

EURO S&P^500

STOXX 50

MSCIemergingmarkets

2019

90

100

110

120

Copper

Gold

S

ince britainvoted to leave the Euro-

pean Union (eu)in June 2016, Leavers

have been gloating. Despite the Remain

camp’s dire predictions, the economy

seemed to trundle on well enough. But the

crowing is dying down. Figures released on

August 9th showed that Britain’s gdp

shrank in the second quarter. And a grow-

ing body of research suggests that Brexit-

related uncertainty is doing subtle but seri-

ous economic damage.

A paper published early this year by

Meredith Crowley, Oliver Exton and Lu Han

of the University of Cambridge reckons

that uncertainty over trade policy has dent-

ed export prospects. Had the vote not taken

place, 5% more firms would have exported

new products to theeuin 2016 alone.

After the referendum economists from

the Bank of England, the University of Not-

tingham and Stanford University set up the

“Decision-maker panel”, a survey that reg-

ularly polls executives across the country’s

industries and regions. In a new paper the

researchers examine the responses of

5,900 firms, representing 14% of private-

sector jobs, to gauge the effect of Brexit un-

certainty on business.

The results are startling. The uncertain-

ty that comes with a rise in oil prices or an

unexpected bank failure can be costly, but

typically abates as more information be-

comes available. Brexit uncertainty is

unusually persistent—after all, three years

after the vote, the terms of departure are

still unclear. The authors track the share of

bosses reporting that Brexit is one of the

top three sources of uncertainty, if not the

biggest, facing their business (see chart on

next page). This remained elevated a full

two years after the referendum, then rose

further in 2018 as stalling talks with the eu

raised the odds of a no-deal Brexit.

Bosses reporting greater uncertainty

also appear to have scaled back investment

more. But the depressing effect is not quite

what forecasters had envisaged in 2016.

They had pencilled in a steep drop in in-

vestment immediately after the vote that

would ease as firms adjusted to the new

world. But in fact the drag on investment

has worsened over time. (The effect of un-

certainty on hiring is more ambiguous.)

Importantly, the deceleration in invest-

ment has had significant knock-on effects

on Britain’s productivity, which even be-

fore the referendum was dismal. That is

partly because managers have been forced

The chilling economic effects of Brexit

uncertainty are intensifying

Britain’s economy

Deep freeze