18th December 2019

Written by Juan Palenzuela, Associate

Edited by David Gaffney, Partner

Good morning,

Looking ahead to a new decade, the global economy seems to be well placed. The US and China are inching towards a trade deal, there's finally some clarity around Brexit, and the Federal Reserve and many other central banks plan to keep their rates low. These factors have seen America’s business activity improve to a five-month high in December, while China's industrial output and retail sales also accelerated. The cautionary note is the fact that decade now drawing to a close was also very promising, but in reality was defined by crashes and meagre growth across developed economies. In fact, a new research paper from Rice University explains that the reasons for a marked slowdown in private investment in advanced economies are likely to remain in place, pressuring rates to remain low. Interest rates in advanced economies are closing the decade at 1.5%-1.75%, yet investment remains poor. The decade has also seen rising inequality, which is constraining demand growth, given that higher savings at the top of the income distribution coupled with low interest rates mean that there is no effective mechanism for recycling these funds to businesses. In addition, an ever decreasing fertility rate is slowly reducing the workforce faster than productivity can grow, and a debt hangover (£) since the financial crisis of 2008 has further reduced investment. Due to these factors, it is the ghost of secular stagnation , rather than the ghost of Christmas past, that is worrying many economists, who fear the rattling chains of an unlimited period of where high savings and poor investment lead to prolonged, poor or even non-existent growth. In response, some economists have advocated Modern Monetary Theory (MMT) as they question the relationship between inflation and an increasing monetary base and argue that governments could effectively print money to boost expenditure and investment. This view has been rejected by most mainstream economists with Gregory Mankiw arguing in a recent paper that while MMT may allow governments to pay their bills, they will not be able to escape the intertemporal budget constraints due to increased inflation. There is no simple answer to secular stagnation and, while it’s not a topic that will feature heavily around Christmas dinner tables in a week’s time, with the factors that induce it set to remain in the decade ahead, we ought to at least start thinking about it by the twelfth night.

News

In its last mission of the year, Elon Musk’s SpaceX launched a Falcon 9 to deploy a communications satellite and tried, for the first time, to recover all the post-takeoff pieces of the rocket using two nets attached to two ships in the Atlantic. While the first rocket stage landed successfully in a drone ship, the company narrowly missed recovering the rocket nose. The next attempt will be in January. Protests in Delhi continued to grow in opposition to a polemic citizenship law proposed by the country’s governing Hindu nationalist Bharatiya Janata party. The proposed law offers an easy citizenship route for non-Muslims from neighbouring countries but explicitly excludes Muslims from the process. Australia experienced its hottest day on record yesterday with the national average temperature reaching a high of 40.9 degrees celsius. The current heatwave has affected the entire country, sparkling severe droughts and bushfires. Forecasters predict that the heatwave will peak later in the week, meaning the record could be broken again.

Business and economy

Shell revealed it paid no corporate income tax in the UK in 2018 despite generating pre-tax profits of nearly $731m. This was a result of tax refunds related to the decommissioning of oil platforms in the North Sea. Shell disclosed the figures in a report issued yesterday showing the global breakdown of its tax contributions. The company committed to voluntarily disclose the information last year as part of a broader transparency drive. Fiat Chrysler and PSA, the owner of Peugeot, announced a merger pact that would see the creation of the fourth-largest car manufacturer by output, with combined revenues of around €170bn. The tie-up would allow the resulting company greater scale and a reinvigorated ability to invest in new technologies, something they will need as the industry undergoes a period of transformation. Shareholders of each group are expected to hold 50% ownership in the new entity.

Over half a million washing machines in the UK are to be recalled by Whirlpool after the manufacturer found a defect in the machines, branded as Hotpoint, in which their door locking system overheats, creating the risk of fire. The model was introduced in 2014 and, since then, 79 fires are thought to have been caused directly by the fault, which also develops over time according to Whirlpool.

Columns of note

In the Financial Times, Raghuram Rajan argues that a more efficient way of taxing carbon emissions would be to allow for an emission trading system while setting boundaries in place. Countries should, Rajan argues, pay a per-tonne carbon levy. If a country emits more than the per capita world average (about five tonnes), it would then have to pay into an incentive fund. Countries below the global average, which tend to be developing ones, would then receive a commensurate payout to support their sustainable growth strategies.

Writing for The Times, Martha Gill argues that dating apps have empowered women and boosted the dating prospects of men and women alike. Gill argues that these apps do not inherently undermine the value of relationships and points at data which suggests that a third of new marriages in the US now begin online, and that these couples get to the altar sooner. Relationships that begin on dating apps are also happier and longer-lasting, argues Gill.

Markets

What happened yesterday?

American equities have continued to rally as investors welcome positive signals as the US and China move closer to a trade agreement. The Dow Jones Industrial Average was ahead 0.11% at 28,267.16, while the S&P 500 was up just 0.03% at 3,192.38 and the Nasdaq Composite increased 0.10% 8,823.36. Nonetheless, the news was diluted in Europe by new Brexit worries after Boris Johnson announced that the UK Parliament would pass legislation to erase the possibility of extending the 31 December 2020 deadline for agreeing on a trade deal with the EU. In continental Europe, the Stoxx 600 was 0.68% lower at 414.692, Germany's DAX receded 0.89% to 13,287.83 and the French CAC 40 dipped 0.39% to 5,968.26. The FTSE 100, meanwhile, was up 0.1% at 7,525.28. The pound took the biggest hit: it was off 1.61% against the US dollar at 1.3118 and 1.7% weaker versus the euro at 1.1762 as markets closed yesterday.

What's happening today?

Finals Aber. Frnt. Npv Volution Group AGMs GCM Resources Northamber Northern Venture Trust

Interims Creightons Investec Schroder Real Witan

UK Economic Announcements

(09:30) Producer Price Index (09:30) Consumer Price Index (09:30) Retail Price Index

Intl. Economic Announcements

(07:00) Producer Price Index (GER) (09:00) IFO Expectations (GER) (09:00) IFO Current Assessment (GER) (09:00) IFO Business Climate (GER) (10:00) Consumer Price Index (EU) (12:00) MBA Mortgage Applications (US) (16:00) Crude Oil Inventories (US)

Did you know?

If you reach seven foot or taller in the United States, there is a 17% chance that you will play in the NBA at some point in your life.

Parliamentary highlights

House of Commons Swearing in of Members of the House of Commons The swearing-in of Members will continue. This is likely to be the best opportunity for new Members to take the oath or affirm. New Members should aim to swear in before the Queen’s Speech. House of Lords Swearing in of Members of the House of Lords Scottish Parliament Stage 1 Debate Female Genital Manipulation (Protection and Guidance) (Scotland) Bill Members’ Business Financial Abuse to be Recognised Fully as Coercive and Controlling Behaviour

TOMORROW

House of Commons State Opening of Parliament

Swearing in of Members of the House of Commons

House of Lords State Opening of Parliament

Scottish Parliament

General Questions

First Minister Questions

Stage 3 Proceedings: Referendums (Scotland) Bill

Business Motions