19th November 2019

Written by Juan Palenzuela, Researcher

Edited by David Gaffney, Partner

Good morning,

In 1938, the American economy looked dire. In a speech to the American Economic Association that year, the economist Alvin Hansen commented how the recovery from the economic depression had been puny, and how classic macroeconomic theories were not making much sense anymore. The efforts of the Fed to kickstart the economy were futile. Hansen referred to the situation as “secular stagnation”, to describe a long period of lethargic economic growth. Things changed dramatically after the second World War. The massive government expenditure and subsequent population boom led to an unseen period of economic expansion, characterised by investment, and productivity and wage growth. It wasn’t until the early 2010s that the ghost of secular stagnation showed up again, terrifying economists and politicians alike. This time, the most likely culprits are declining population growth, the maturing of the economy and, more importantly, a movement away from capital intensive activities and towards a digital economy. Prior to this ghostly return, the previous four decades had seen an impressive growth in productivity - of nearly 77% - and yet average workers have barely received the payoffs. Real wages have risen by a meagre 12% in the developed world over the same period. Economic growth has been extremely low, but unlike the 1930s, so has inflation. Despite efforts from central banks around the world to stimulate expenditure and investment by lowering rates, it seems like the tools of classical macroeconomics are broken once again. This time, however, we have another challenge to contend with: automation. Millions of jobs are now under threat of disappearing permanently, at a scale that we have not seen before. In dealing with this transition, the government will play a central role, and it does at least have something new on its side. Low interest rates mean that it’s incredibly cheap for the government to borrow money. Not only that, but the government might be able to rake up big deficits and increase spending without causing inflation. In today’s incarnation of secular stagnation, deficits may not matter like they used to. But instead of using new resources to fund classical examples of government expenditure in hopes that it would produce a positive demand shock, I believe the government should instead implement a complementary universal income. That action would not only redistribute the payoffs of increased productivity more fairly but, above all, it would serve as the catalyst for a massive demand shock, perhaps one on a similar scale to that which followed the war. It might just help bring developed economies back into rude health, boost demographic growth and enable more people to live happier, more fulfilling lives.

News

A standoff between police and students at Hong Kong's national Polytechnic University has continued overnight. Nearly 200 students remain barricaded inside the university campus where they have been since last week. Meanwhile, the Chinese government has defended its "right" to interpret the city’s laws when dealing with the crisis. The US government has reversed its position on the illegality of Israeli settlements in the occupied West Bank. The move was announced by secretary of state Mike Pompeo yesterday, who said that the status of the West Bank was for Israelis and Palestinians to negotiate. The settlements are communities established by Israel on land occupied during the Six-Day War in 1967. The American president Donald Trump is reportedly preparing to testify before Congress. The impeachment process has already seen two top officials testify, and more are expected to do so this week. If successful, the process could result in Trump becoming the third US president to suffer such a fate.

Business and economy

Monzo's chief operating officer, Tom Foster-Carter, has announced his departure from the challenger bank to launch a grocery start-up. Foster-Carter assumed his role in August 2017 and is reportedly leaving in order to develop technology designed to improve the logistics of distribution and other related areas that could help the incumbent players in the supermarket price wars. The price of initial public offerings on the US market have been hit by WeWork’s lacklustre debut on the New York Stock Exchange earlier in the year. According to data collected by Goldman Sachs, JPMorgan and Morgan Stanley, three in every four IPOs during the fourth quarter have been priced below the midpoint of the range announced by underwriters, increasing from an average of 31% during the rest of the year. (£) EasyJet has officially relaunched its package holiday business and has also announced an ambition to become the world’s first major net zero carbon airline. Speaking to BBC Radio 4’s Today programme, chief executive Johan Lundgren said that measures were “not a long-term solution” and that “offsetting is not perfect”. The news came as the carrier reported a 26 per cent fall in pre-tax profits to £427m for the year to 30 September.

Markets

What happened yesterday?

Global equities performed relatively better yesterday amid increased positivity over US-China trade talks. Overnight, China's Ministry of Commerce described contact over the weekend between top trade negotiators from both sides as "constructive". By the end of trading, the Stoxx 600 had dipped 0.01% to finish at 405.99, with Germany's Dax down by 0.26% at 13,207.01 and the French CAC 40 falling by 0.16% to 5,929.79. London's FTSE 100 meanwhile rose by 0.07% as markets seemed cautiously optimistic of a smoother Brexit process. In the US, the Dow Jones Industrials dipped by 0.02% to 27,998.64, alongside a drop of 0.12% to 3,116.70 for the S&P 500 and a fall of 0.32% to 8,513.50 for the Nasdaq Composite.

What's happening today?

Interims

Big Yellow CML Microcircuits Halma Homeserve Palace Capital Scapa Srt Marine Sys. Telecom Plus Trufast

AGMs

Bmo Real Est Dunelm Jupiter Uk Gr Petro Matad Physiomics

UK Economic Announcements

(11:00) CBI Industrial Trends Surveys

UK Economic Announcements

(09:00) Current Account (EU) (13:30) Housing Starts (US) (13:30) Building Permits (US)

Columns of note

Writing in the New Statesman, Siobhan Fenton considers whether citizens' assemblies are really the answer to the climate crisis. Public assemblies have been posited as a solution to many topical issues but the writer holds Ireland's experience up as a cautionary tale. While there have been positive headline stories of successful assemblies on abortion and marriage equality in the country, she points out that they are notoriously slow. But, at a time of unprecedented political upheaval, Fenton concludes that civil society could offer a powerful way out of some of the serious challenges we face. In the Financial Times, Gideon Rachman assesses the situation in Hong Kong and concludes that it is now turning into a nightmare for China’s president Xi Jinping. Although there is a case to be made that Hong Kong’s chief executive Carrie Lam is chiefly at fault, Rachman suggests that the broader drive towards authoritarianism across China in recent years is a major factor. This has made the relative gap in freedoms between Hong Kong and the mainland more pronounced and, from that perspective, the writer feels that Xi has only himself to blame.

Did you know?

In 2018, more people were killed in the USA by lettuce than by snakes and alligators combined.

Parliamentary highlights

TODAY

House of Commons No business scheduled. House of Lords No business scheduled. Scottish Parliament Topical questions (if selected) Ministerial statement International Year of Plant Health 2020 Scottish government debate Sea fisheries and end of year negotiations Committee announcements Education and Skills Committee: Inquiry into STEM in the early years

TOMORROW

House of Commons No business scheduled.

House of Lords No business scheduled.

Scottish Parliament Portfolio questions Culture, Tourism and External Affairs

Education and Skills

Scottish Labour Party Debate Universal Credit

Investing in Scotland

Business motions