Insight archive for Madhur Jha | Standard Chartered

Why bitcoin isn’t a real threat to major currencies – any time soon

Madhur Jha — Tue, 24 Apr 2018 10:12:55 +0000

Cryptocurrency bitcoin has rarely been out of the headlines.

First the price highs, then the dramatic decline, and now ongoing volatility caused by concerns over greater regulation.

Bitcoin remains the most popular cryptocurrency by some margin with a market share of around 35 per cent, despite the introduction of around 1,500 others. Although interest in them persists, we do not think cryptocurrencies will rival traditional money any time soon.

In the early years, interest in bitcoin was muted, but this has changed in recent years. The price of bitcoin skyrocketed, reaching a high of nearly USD19,500 in December 2017. Since then, cryptocurrency prices in general have tumbled by around 65 per cent, supporting claims that they had been the centre of possibly the largest speculative bubble since the global financial crisis, although prices have stabilised more recently.

Regulators around the world are taking different approaches to managing the cryptocurrency hype: while China has banned cryptocurrency exchanges and the Reserve Bank of India has recently stopped the transfer of money into bitcoin wallets, a bitcoin futures index has been launched in the US and Japan has accepted bitcoin coin as legal tender.

"A major problem is the anonymity bitcoin provides, which has encouraged its use for illegal activities"

Madhur Jha Head, Thematic Research

A digital token

The advantages of owning cryptocurrencies like bitcoin are generally held to be threefold: firstly, bitcoin has lower transaction times and costs through its peer-to-peer function; secondly, it provides a level of anonymity; and finally, as bitcoin is supposed to have a fixed lifetime supply, it is also seen as a hedge against the sort of hyperinflation that can result from central banks printing too much money.

Despite these advantages, however, we expect bitcoin to remain a digital token, at best, with little potential to rival traditional money or even a commodity like gold. To be accepted as money, bitcoin would have to fulfil three important functions. It would need to act as: 1) a stable and trusted unit of account, 2) a medium of exchange, and 3) a store of value. Bitcoin fails to qualify on most of these parameters.

It is clearly not widely held or exchanged and while it is store of value, recent price movements show just how volatile it is. More importantly, a major problem is the anonymity it provides, coupled with little or no regulation, which has encouraged its use for illegal activities, raising concerns about its trustworthiness. According to recent research by the University of Sydney (Foley et al), almost half of all bitcoin transactions are associated with illegal activity, such as drugs or terrorist financing.

Unstable and risky

The decentralised nature of cryptocurrencies implies that there are few, if any, safety nets for users in the event of a collapse in prices or panic selling, making cryptocurrencies inherently unstable. Traditional currencies, by contrast, have central banks standing ready to stabilise and defend their value, acting as lender-of-last-resort during times of systemic crisis.

Another source of concern for bitcoin is that mining or producing it requires exponentially increasing computing power. According to the head of the IMF, Christine Lagarde, mining bitcoin in 2018 could utilise the same amount of energy as the annual energy consumption of Argentina. This is clearly not sustainable and will pose severe constraints on the usability of bitcoin and other cryptocurrencies.

"While some central banks and regulators are showing initial acceptance of bitcoin, we feel they will become increasingly wary of the risks associated with it"

Madhur Jha Head, Thematic Research

So, if bitcoin can’t rival traditional money, can it rival a commodity like gold? Bitcoin has been called ‘digital gold’ in some quarters. But there is a problem here as well. Gold has the advantage of intrinsic value, but also a long-established tradition of being a safe-haven asset and a hedge against inflation and risk aversion. This in part stems from the multiple uses of gold (the main one being jewellery) that underpins its low correlation with other financial assets. Bitcoin does not have this and so it is hard to classify it as a commodity either.

While some central banks and regulators are showing initial acceptance of bitcoin, we feel they will become increasingly wary of the risks associated with it and other cryptocurrencies. As such, expect higher levels of regulatory oversight in future, which will likely dampen the attractiveness of the current breed of cryptocurrencies.

Even bitcoin, despite being the largest player in the market, might not be able to withstand increased scrutiny, at least not in its current form.

Important disclosures regarding content from Standard Chartered Global Research can be found in the Global Research Terms and Conditions.

The truth about the productivity slump

Madhur Jha — Wed, 22 Nov 2017 12:23:44 +0000

A paradox is disturbing many economists and businesses across the world – productivity growth in both developed and developing countries is relatively weak despite rapid advancements in digital technology.

Total factor productivity (TFP), the measure of productivity which most aptly captures technological change, grew by 0.9 per cent per annum during 1996-2006 but collapsed abruptly after the global financial crisis to -0.1 per cent per annum from 2007-14. Since then, TFP growth has turned even more negative, and was at its lowest level since the 1940s in 2015, at -0.7 per cent. It stood at -0.5 per cent in 2016.

"Some believe the global economy has entered an era of sub-par growth unlike what we have seen historically"

To many observers the ongoing productivity slump is puzzling and worrisome, with some believing that the global economy has entered an era of secular stagnation or sub-par growth unlike what we have seen historically. They argue that slow growth is the result of new innovations not being as transformative as old ones and that the digital technology boom pales in comparison with the great innovations of the first and second industrial revolutions.

Why this is not a unique period

The ‘techno-pessimists’, as they’ve been dubbed, say innovations during the 1870-1970 period were powerful job creators, thereby distributing income to a bulk of the population. The rise of the automotive industry created many solid, middle-class jobs in manufacturing, driving, repairing and insuring cars and trucks, for example.

What the pessimists should remember, though, is that the current weak period is not unique. Similar slumps were seen when structural technological changes in the second industrial revolution occurred. Digital technology will be as transformative as older innovations such as electricity and the steam engine – the big impact just hasn’t hit the world yet.

"Digital technology is likely to help the services industry grow in many sectors"

In fact, digital technology is likely to help the services industry grow in many sectors. The internet, for instance, has allowed previously non-tradable services – items which are not traded internationally – to become tradable through integration into global supply chains. Decreases in air travel costs, rapidly declining telecommunication costs, increasing internet adoption around the world, and rapid proliferation of broadband services have made internationalisation of a host of information-intensive (previously non-tradable) services possible.

The boosts will come in waves

In the past, the gains from technology sometimes came in waves. Labour productivity growth during the revolution of electricity, for instance, shares a common pattern with the IT era. In both cases, the sluggish growth at the beginning was followed by a surge in productivity for decades later. We think the digital era will follow a similar pattern.

So when can we expect this surge to manifest itself? We think it’s on its way, but don’t expect a significant impact on productivity in the next year or two. Driven by big data, robotics, the internet of things and 3D printing, it could emerge within three to five years, but is probably more likely to unfold over the next several decades.

This file opens in a new windowHow digital technology will boost productivity

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Trump and trade: an own goal?

Madhur Jha — Wed, 17 May 2017 11:26:47 +0000

While US President Trump has softened his stance on a number of key issues since taking office, trade is decidedly not one of them.

With its ‘America First’ policy, the Trump administration has hinted it wants to rework trade agreements with countries where the US buys more than it sells, including China, Japan, South Korea and Germany.

However, in an era of global supply chains, such focus on bilateral trade deficits is meaningless.

What history tells us

The US is deeply embedded into global supply chains, importing a significant amount of goods with value-added content originating in the US. The US is actually one of the three largest suppliers to the exports of China, Japan, Korea and Germany, so US tariffs and barriers imposed on these countries could come back to hurt US companies.

There is also little evidence that tariffs and barriers on particular countries would lead to higher production in the US and lower imports. More likely, the gap would just be filled by imports from countries that produce similar goods.

"One in five jobs in the US is related to imports and exports"

President Trump has vigorously championed more protectionism as a way of saving US manufacturing jobs and reducing income inequality.

However, previous episodes of US protectionism have only caused net job losses in the economy. One in five jobs in the US is related to imports and exports, so a tit-for-tat trade war with its main trading partners threatens to weaken the US job market rather than bolster it.

More protectionism could also worsen inequality within the US: typically, the poorest are hit hardest, as prices go up and the choice of goods reduces. Tariffs are particularly damaging to lower-income households, which tend to spend proportionately more on traded goods, such as food and clothes.

Widening trade deficit?

President Trump wants to lower the US trade deficit, but his plans to boost fiscal spending to reinvigorate the domestic economy run counter to this ambition.

A country’s trade deficit shows that it is investing more than it saves. Thus, the US trade deficit should be reduced by raising savings in comparison to investment, but the US administration is planning to do the exact opposite. Cutting taxes and raising infrastructure spending is likely to result in higher domestic prices and greater import demand, leading to a wider trade deficit, which might in turn prompt even greater protectionism from the US authorities.

Threat to world trade

With supply chains being increasingly global, headwinds will be felt far beyond the countries targeted with tariffs. Some Asian countries, such as Korea, Malaysia and Taiwan, are so tightly integrated into the supply chains of China that they, too, would be hurt by any trade spat.

"Ultimately, US protectionism poses a threat, not just to the US economy, but to world trade and prosperity"

By contrast, some countries stand to win from creeping US protectionism as they get the opportunity to grab a greater share of world trade. The main competitors for US trade are China, Mexico, Germany and Japan, which fiercely compete with each other, so measures against one would benefit the others. Other countries could win as well: Vietnam, Thailand and Philippines in Asia, the UK in Europe.

Ultimately, however, US protectionism poses a threat, not just to the US economy, but to world trade and prosperity. Many countries depend on trade for growth and development, and, although China is likely to assume a greater role in global trade, the US is still the world’s greatest source of demand, so any reduction in US imports is likely to be felt far and wide.

This file opens in a new windowHow likely is a global trade war? Read the full report for more

Important disclosures regarding content from Standard Chartered Global Research can be found in the Global Research Terms and Conditions.

Growing old before getting rich

Madhur Jha — Wed, 15 Feb 2017 10:41:28 +0000

In the West, ageing populations has been a theme for decades, but in future the most rapidly ageing societies will be in Asia.

Already, China has 131 million citizens over 65, more than twice as many as Japan, Germany and Italy put together. And Asia is getting old much faster than Europe and the US did last century.

This means that some countries in Asia, such as Thailand and China, will grow old before they get rich. These countries need to find ways to manage their already rapidly ageing populations or they will end up stuck in the middle-income trap.

(In the chart above the countries in red are set to get old before they get rich)

In contrast, Japan, Korea and most of the rest of the OECD had relatively young populations when they hit the high-income bracket.

Korea and Singapore are already ageing, which means that between 7 and 14 per cent of the population is 65 and over. By 2030, more than one in five Koreans and Singaporeans will be seniors, making the countries statistically ‘hyper-aged’, like the UK and Germany. Thailand and China will be hyper-aged by 2035.

Will this result in growth slowing?

Ageing impacts economies, primarily because it reduces the supply and quality of labour. After decades of enjoying a demographic dividend, China, Korea, Hong Kong and Thailand will start to see an economic drag from ageing before 2020, and Singapore before 2025.

Despite multiple new policies, attempts to raise fertility rates across Asia have so far proven unsuccessful. For the major economies, including China, Thailand, Japan, Singapore and Korea, fertility rates remain well below the 2.1 it would take to replace the current population.

Managing the ‘silver economy’

However, whilst the greying of Asia is unavoidable, the economic effects may not be.

By making even modest improvements in the quality of labour through investing more in education, China could postpone the effect of ageing on economic growth by as much as ten years.

On current trends, China is set to have the world’s biggest pool of educated workers within the coming decades, which will help underpin economic growth, before the impact of ageing sets in, but more investment would stave off the effects for longer.

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"China is facing a ‘4-2-1’ phenomenon"

Asian countries – with their relatively low government debts – can also help by taking on some of the increased costs of ageing through the pension system.

The rapid rise in the number of seniors is challenging the traditional Asian family values system where the younger generations look after the older. China, for example is facing a ‘4-2-1’ phenomenon, where the only child is responsible for two parents and four grandparents. It’s unlikely that the younger generation will be able or willing to afford such a burden.

Pension systems remain unsustainable in many parts of Asia, with China’s nationwide pensions possibly running deficits as early as 2030, followed later by Thailand, Korea and Vietnam.

Government action needed

Governments need to step up their efforts to support ageing populations, through health care provision and social security. Countries like China and Thailand will have limited time to tackle the challenges, before the ageing effect kicks in.

They will also need to implement policies that mitigate the structural decline in the labour force as their working populations shrink. This will be a priority for Asia’s advanced economies, too – Japan, Hong Kong, Singapore and Korea. In particular, they need to maintain or improve labour-force participation rates.

Raising female participation rates will have the biggest immediate impact. Countries like Korea, Singapore, China and Japan have launched various initiatives – including child-care subsidies and allowances and employer incentives – to become more family friendly. This is likely to be the quickest way of mitigating the impact of ageing.

Mitigating the consumption effect

A greying population could also affect consumption and investment, though, again, this need not be the case. There’s a considerable growth potential in the senior consumer markets in emerging Asia, particularly in China.

The trend in more developed markets may point the way. In the US, for example, by 2020, only 11 per cent of investable assets will be held by people younger than 45. As their economies develop, we should expect spending patterns to mirror more closely what is happening in the West.

"We expect spending patterns to mirror more closely what is happening in the West"

While governments in Asia have shown willingness to tackle the challenges of ageing demographics, their continued attention to balancing the negative effects with rising consumption among the ‘silver economy’ will prove crucial over the longer term.

Important disclosures regarding Standard Chartered Global Research content can be found in the Global Research Terms & Conditions.

Women’s jobs at risk from tech disruption

Madhur Jha — Thu, 08 Dec 2016 10:44:15 +0000

Dubbed the ‘fourth industrial revolution’, technology disruption could be a key growth driver for economies over the coming years. But for women, advances in technology also pose a threat, as many of their jobs could be displaced.

A perfect storm of technological trends, from mobile internet and cloud technology to ‘big data’ and the ‘internet of things’, means that, as new work trends evolve, existing gender inequalities could worsen further.

"Disruptive technologies will cost 5.1 million jobs net by 2020 in fifteen of the world’s largest economies"

The World Economic Forum’s (WEF) The Future of Jobs report finds that the ones most at risk are those that can be automated easily. This include roles with the largest share of female employees – office and administrative jobs – as well as jobs with the highest gender imbalances – architecture, engineering, computer science, maths, and manufacturing.

According to the report, disruptive technologies, including robots and artificial intelligence, will cost 5.1 million jobs net by 2020 in fifteen of the world’s largest economies. These countries – including China, India, Japan, South Africa, Turkey, the UK, the US and Brazil – account for 65 per cent of the global workforce.

The weight of the job losses falls almost equally on women (48 per cent) and men (52 per cent). But as women make up a smaller share of overall jobs – on average, 54 per cent of women work, compared with 81 per cent of men – the impact will be greater on them.

WEF’s analysis shows that in absolute terms, men stand to gain one job for every three jobs lost to technology advances, while women are expected to gain one job for every five or more jobs lost.

STEM to the rescue?

Some of the job losses could be partially offset by emerging roles in science, technology, engineering and mathematics (STEM). But currently, these roles are very male-dominated. Women are expected to gain only one new STEM job per 20 jobs lost from technological disruption, while men are set to gain nearly one new STEM job for every four jobs lost.

Worryingly, there has been a slowdown globally in closing the gender gap in recent years. As women are under-represented in the fast-growing STEM jobs, based on current trends, this suggests a worsening gender gap over time. Expanding access to secondary and higher education with an emphasis on STEM will be critical if we are to see improvements in the quality of work for women.

There is also a need to address sectoral and occupational segregation, and the gender wage gap. We also need to make critical changes to workplace policies and procedures while improving access to finance through subsidies and grants to ensure that women do not lose out on the transition to digital jobs. Below are policy suggestions for achieving this.

Tackling the root causes and sectoral and occupational segregation

Encouraging young girls and boys to break gender stereotypes through education and outreach
Offering training to women and men to enter into non-stereotypical fields
Promoting women’s entrepreneurship
Supporting women’s participation and leadership in decision-making, including governments, employers’ and workers’ organisations

Addressing the gender wage gap

Eliminating unequal treatment of men and women in the labour market
Promoting equal pay for work of equal value through wage transparency, training and gender neutral
Supporting adequate and inclusive minimum wages and strengthening collective bargaining
Promoting and normalising good quality part-time work
Limiting long paid hours and overwork
Transforming institutions to prevent and eliminate discrimination
Changing attitudes towards unpaid care work

Implementing a framework to achieve the harmonisation of work and family responsibilities

Providing maternity protection to all women according to international labour standards
Guaranteeing adequate social protection to recognise, reduce and redistribute unpaid care work
Implementing gender-transformative leave policies: increasing leave entitlements for fathers and boosting their take-up rates
Making quality early childhood care and education a universal right
Promoting family-friendly flexible working arrangements
Encouraging individual income taxation to increase women’s labour force participation

Huge rewards for getting it right

Few would disagree that technology advancement has its benefits. Its transformative power means a future with new opportunities and limitless possibilities. However, women stand to lose as they are less likely than men to be working in areas where the adoption of technology will create jobs.

For the sake of future global growth, it’s vital to give women access to the skills and qualifications in areas where jobs will be created. The World Bank estimates that closing the gender gap could add an additional USD1.2 trillion to US GDP and USD2.5 trillion to China’s GDP by 2020. The rewards of getting it right could be huge.

A version of this article first appeared on the World Bank’s blog on 12 December 2016.

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How to escape the productivity slump

Madhur Jha — Thu, 22 Sep 2016 14:58:42 +0000

With manufacturing productivity in the doldrums, services are fast becoming the key driver of GDP and jobs just about everywhere, but which countries have what it takes to make the most of this trend?

We’ve looked at the figures, and find Hong Kong, Singapore, the US and the UK out in front amongst the developed markets when it comes to the ability to drive productivity in services.

The four have a number of favourable conditions in common, including strong education systems, a high degree of innovation, advanced technologies and well-functioning markets.

"The Philippines has improved the most in overall rank"

Among emerging markets, Malaysia, Turkey, Kenya and the Philippines top our index of countries with potential to increase services productivity.

We’ve also looked at who has made the most progress in improving services potential since the global financial crisis:

The Philippines has improved the most in overall rank, with notable landmarks in foreign direct investment (FDI), technology transfer, financial-market development and innovation. China has also moved up quickly, deepening and strengthening its financial markets, as well as improving government efficiency.

Why does this matter?

Getting growth out of services

Until recently, few economists paid much attention to services productivity. One reason is that it’s hard to measure. Whether one hairdresser or doctor is more productive than another depends on the quality of the service, not just the number of people served.

Another reason is the general assumption that manufacturing productivity will always outstrip services productivity, as it’s easier to automate. It is hard to conceive of a hairdresser being able to style two people’s hair at the same time, for example.

But times are changing, and there are many reasons why governments and academics are now looking again at squeezing more growth out of services.

Slumping productivity – output per person – has become a major concern for policy-makers and markets around the world. Over time, productivity growth is the main driver of improvements in living standards, and underpins returns in asset markets.

The recent bout of weakness is pervasive across most developed and emerging countries and a key reason why incomes have stagnated. This, in turn, has likely contributed to the polarisation of politics we see in some countries.

Meanwhile, services have grown to account for nearly 70 per cent of global output, and fewer than 7 per cent of jobs in the US are now in manufacturing.

Emerging markets leapfrog

Emerging markets are also seeing a rising share of services, as traditional manufacturing-led economies such as China reorient towards services. Some emerging economies in Sub-Saharan Africa and Asia even face ‘premature de-industrialisation’, meaning they are becoming predominantly service economies without ever developing a strong industrial sector.

And now, economists are beginning to question whether productivity growth in services must inevitably be slow. Growing tradability and new digital technologies are helping to elevate services productivity in many services sectors.

"Productivity growth in frontier firms in modern services averaged 5 per cent a year"

According to the OECD, while overall service productivity growth still lags manufacturing, labour productivity growth in frontier firms in modern services averaged 5 per cent a year in recent years, much higher than that of frontier firms in the manufacturing sector which averaged only 3.5 per cent per annum over the same period.

Increasingly, sectors such as retail and wholesale trade, finance and information and technology can rival or even exceed the productivity performance traditionally associated with the manufacturing sector.

Higher productivity in the new services sectors such as telecommunications and IT can help raise productivity in more traditional service sectors like health and education as well. All of these in turn help boost productivity in the wider economy, including manufacturing and agriculture.

The impact of ageing populations

Services productivity growth will also become particularly important for countries with older populations. Older people spend more on health care and financial planning than manufactured goods. As populations age, the service sector will become an even larger share of the economy. And manufacturing itself is increasingly being unbundled into a series of processes from design to production to marketing and sales, most of which fall in the services sector.

Fulfilling the productivity potential in services will require the rapid adoption of new technology, processes and business models. But regulatory barriers and human capital limitations – including skills, business sophistication and an innovation culture – may be a constraint.

According to our research, Korea and India have seen their services potential deteriorate the most in recent years – a particular worry for India, which, unlike Korea, has no manufacturing base to fall back on.

Each country will have its own challenges, but what does seem clear is that – if the global slump in productivity is to be reversed – governments everywhere will need to focus more on services.

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How to spot an opportunity entrepreneur

Madhur Jha — Tue, 26 Apr 2016 06:33:36 +0000

What makes some entrepreneurs grow their businesses and employ hundreds, or even thousands, of people? Knowing this is crucial for all governments keen to drive economic growth.

Not all entrepreneurs go on to make it big. In fact, nearly one in ten (or as many as three in ten in some emerging markets) start businesses out of necessity, because they are unable to find work.

Subsistence entrepreneurship is typically low on productivity and innovation. While valuable to individuals, these types of operations – such as roadside stalls – are unlikely to expand or employ many people beside immediate family.

"Opportunity entrepreneurs are likely to grow their business faster, employ more people, and introduce innovation"

For economic development, it is important to focus on ‘opportunity entrepreneurs’ instead. These are people who start businesses to exploit a potential opportunity. They are likely to grow their business faster, employ more people, and introduce innovation that could help fill important gaps in the market, while boosting productivity in the economy.

The only problem is that opportunity entrepreneurs form a very small proportion of those starting up businesses in any economy. According to one UK study, they made up only 6 per cent of entrepreneurs, but accounted for over 50 per cent of net job creation in the UK between 2002 and 2008.

So how can you tell if someone is an opportunity entrepreneur?

More than Facebook and Microsoft

The image that springs to mind for most people is someone like a Mark Zuckerberg or a young Bill Gates. We typically think of someone young, involved with technology or service sector start-ups.

However, our survey of 62 opportunity entrepreneurs in Singapore, India and Kenya challenges this stereotype. Most of these business starters are actually slightly older (aged between 30 and 50) and highly educated, with over 85 per cent of them having completed a degree.

This file opens in a new windowEntrepreneurship – A growth tonic

"These entrepreneurs are in manufacturing, wholesale and retail trade, and construction and real estate"

The business of an opportunity entrepreneur is not a start-up, but a company that has been around for three to five years, and is relatively small, with close to 10 employees. What makes them different is their strong growth in the past three years, and their confidence that their business will expand significantly over the next two years.

Technology is not the only show in town for opportunity entrepreneurs. Our survey shows that these entrepreneurs are involved in a wide range of sectors, including manufacturing (around 25 per cent), wholesale and retail trade (around 27 per cent), and construction and real estate (around 9 per cent).

Need more than financial support

Contrary to popular belief, opportunity entrepreneurs don’t rely heavily on financial support from venture capitalists or angel investors. Our survey shows that venture capital or angel funds account for a meagre 2 per cent of total funding needs of these entrepreneurs. Instead, they tend to rely on their own or family savings, and reinvest more than 70 per cent of profits back into the business.

Knowing who these job-creating entrepreneurs are is one thing – but how do we help them realise their potential?

"Policies have been too focused on providing financial support to start-ups, largely in the technology or services sectors"

The three most important success ingredients for opportunity entrepreneurs are business friendly government regulations and policies, ample finance options and access to a skilled workforce. Other conducive factors are – not surprisingly – strong demand and a stable political system.

Government policies in many countries so far have largely failed to distinguish between opportunity and subsistence entrepreneurs. Policies have been too focused on providing financial support to start-ups, largely in the technology or services sectors.

Help them build networks

Our survey suggests that what is required is a change in tack from piecemeal support for entrepreneurs to a more holistic approach. This needs to include not just financial assistance, but also more general support for entrepreneurs, such as forums for network building, and management advice from executives in more established firms.

There is also a growing consensus that policies to support entrepreneurship should be made at a local or regional level rather than nationally, in order to address the more specific concerns of entrepreneurs.

"To grow your economies, identify and support opportunity entrepreneurs"

Our survey suggests that policies should promote entrepreneurship not just in technology and services, but in those sectors that are already dominant in the economy, so that opportunity entrepreneurs can benefit from links to established businesses, and learn from their management.

The message to government is simple: to grow your economies, it is critical to identify and support opportunity entrepreneurs.

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Money, money, money – the forgotten indicator

Madhur Jha — Tue, 15 Mar 2016 09:01:05 +0000

Amid the hubbub last week over the European Central Bank’s (ECB) latest stimulus measures, an important question got lost: how will anyone know if or when monetary policy is working?

The standard answer for at least a generation has been to look at growth of gross domestic product (GDP) and inflation data, but policy makers and economists are ignoring a much more powerful tool. That’s the money supply itself.

Why money supply fell from grace

Money-supply growth used to be viewed as a crucial indicator for measuring the interaction between central banks and the economy. The theory, which goes back more than 200 years, is relatively simple. More money leads to more transactions, which in modern terms means more GDP. Weak money growth leads to a weak economy.

"The rapid expansion of new instruments like money-market funds blurred the definition of money"

The money supply as an indicator worked well until the 1980s. Then the link seemingly broke down as the rapid expansion of new instruments like money-market funds (MMFs) blurred the definition of money.

Clearly these were ‘money’ in the sense that they could be used at some point to fund transactions, but because they were less liquid than cash or savings deposits, it was hard to quantify their relationship to growth. Before long, the measure of money seemed no longer to be linked to GDP trends, at least in the short and medium run.

Resurrecting money supply as an indicator

Now the statistical tools finally exist to solve the problems economists encountered in the 1980s. Applying those tools can yield new insights. It’s time to resurrect money supply as an indicator.

The relevant measure is known as ‘Divisia money’ after the French economist Francois Divisia. Divisia developed statistical tools that could assign different weights over time to different components of an index. In the context of money supply, this means new money-like products can be weighted according to their ‘degree of moneyness’ which is inferred from the interest rate they earn.

For example, when you earn a higher interest rate by buying an MMF or putting money in a time deposit instead of keeping it in your checking account, you give up some liquidity. Chances are you only put the money in these instruments if you think you won’t be spending it soon. So it is still potentially money, but the Divisia method gives it a lower weight than cash or checking accounts.

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Continued but disappointing growth on the cards

Economists have worked since the 1980s to apply this approach to measuring the money supply, and the research is now at a point where a Divisia monetary index can be used for economic forecasting.

Doing so yields some interesting results. Our Divisia measure of global money-supply growth has picked up in the last year, but is still well below pre-2008 levels. This suggests the global economic upswing will continue but will likely stay disappointing, and further stimulus will be necessary.

"The US Federal Reserve should raise interest rates only very slowly, if at all"

This is clearest in the US. Divisia money growth has accelerated in the past two years but remains less than 4 per cent, well below the 6 per cent to 7 per cent growth prevailing before 2008. This slow growth is despite low interest rates and quantitative easing, and underlines the headwinds facing the US.

Business is still cautious in the face of the slowdown in China and other emerging markets and the slow recovery in Europe as well as the effects of increased regulation and taxes at home. Slow money growth supports the view that the US Federal Reserve should raise interest rates only very slowly, if at all.

Why the ECB is on the right track

In other places, the message from Divisia money is surprisingly positive. Our forecast is for eurozone economic growth of only 1.4 per cent in 2016. But Divisia money growth in the eurozone – which has surged over the past year and is now running faster than in the US, UK or Japan – suggests Europe could spring a growth surprise.

"ECB shouldn’t let up on its stimulus. Divisia money suggests it is finally on the right track"

This may mean quantitative easing (QE) has been more effective than people realise. Last week’s expansion of the size of QE and also of the assets the ECB will buy will make it more effective still. With unemployment still over 10 per cent, the ECB shouldn’t let up on its stimulus. But Divisia money suggests it is finally on the right track.

Good news from China

There is similar good news from China, where Divisia money has also picked up in the past year. This likely reflects cuts in interest rates and reserve requirements as well as increased fiscal stimulus, and supports our above-consensus forecast of 6.8 per cent for China’s economic growth in 2016.

This underlines an important advantage of the Divisia approach. Because of the uncertainty over exactly what is money these days, central banks have tended to look at narrow measures of money such as M1 and M2, if they look at any at all. By using the Divisia approach, we can resurrect broad measures of money as an economic signpost.

"New twist on an old statistic could give central banks and analysts a much-needed tool"

As other indicators become less effective in today’s unusual economic and monetary environment, this new twist on an old statistic could give central banks and analysts a much-needed and powerful tool.

This article first appeared in Wall Street Journal on 14 March 2016

Important disclosures regarding Standard Chartered Global Research content can be found in the Global Research Terms & Conditions

China’s housing market: the world is watching

Madhur Jha — Wed, 25 Nov 2015 09:48:26 +0000

China’s volatile housing sector may be the single most important sector in the world economy at present. With its extensive impact on other industries, demand for housing drives 20-25 per cent of the world’s second-largest economy.

A few years ago the market was buoyant, with housing and sectors dependent on it contributing about 3 percentage points of GDP growth in 2010.

Lately, however, the sector has been going through a major downturn. Home building in China has slumped in the face of a glut of unsold properties and falling prices, pulling down the country’s GDP growth rate and impacting commodities markets globally.

"The slowdown in China’s housing investment is hitting markets beyond the Asia region"

China is the world’s largest consumer of steel and cement, and dominates demand for other commodities such as aluminium and nickel. All of these depend heavily on a blossoming housing market. So do domestic consumer durables, such as refrigerators, washing machines and the like, sales of which have stalled in recent months.

The slowdown in China’s housing investment is hitting markets beyond the Asia region. Capital goods manufacturers in Germany, along with their counterparts in Japan, are particularly exposed through their close direct and indirect trade links with China. Commodity producers worldwide have seen the effects of China’s slowdown.

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In our view, China has not suffered a general house price bubble. However, the ready availability of land has generated a serious over-supply of housing in some cities

The question is – how much longer will the housing downturn last?

Markets will pick up

We believe the market will stabilise soon, though the sector will only start to pick up after 2017. China will have to build at least 150 million additional homes by 2030, in order to satisfy demand fuelled by urbanisation and income growth.

China’s government has taken measures to relax macro-prudential policies, hoping to boost housing demand as quickly as possible and turn the economy around.

"Until the market picks up again, the housing downturn will be casting a long shadow"

China is not alone. Other major countries in Asia are also going through a period of adjustment.

In Singapore, prices have already started to fall, and, with a housing bubble in Hong Kong, a correction may be coming there soon. The prospect of US Federal Reserve rate rises is looming, and – based on our detailed analysis – we think a price correction of up to 20 per cent from the peak is possible for both markets in the next two to three years.

But, as the second largest economy in the world, all eyes are on China right now. Until the market picks up again, the housing downturn will be casting a long shadow on the domestic and global economy.

Important disclosures regarding Standard Chartered Global Research can be found in the Global Research Terms & Conditions

Inflation: down, but not out

Madhur Jha — Tue, 13 Oct 2015 09:49:13 +0000

Investors are obsessing once again about deflation risks in the West, spooked by a collapse in commodity prices and slowing growth in emerging markets, particularly China.

Six years after the global financial crisis, the world economy is stuck in a ‘lowflation’ environment, with inflation below the common target of 2 per cent, and we expect this to prevail in the next two years.

Looking five years out, however, we believe it is most likely that inflation will move back towards target.

"We believe that demand from burgeoning middle classes in emerging markets will boost consumption and investment"

In this, we’re not as pessimistic as some, who fear that demand will stay chronically weak, keeping inflation very low, or forcing it below zero.

We believe that demand from burgeoning middle classes in emerging markets will boost consumption and investment. The OECD expects the combined purchasing power of the middle classes globally to double by 2030 to USD56 trillion, with more than 80 per cent of this demand coming from Asia.

Easing of headwinds

This expansion should support global demand, alleviating concern about ‘secular stagnation’ – very low or no economic growth.

We see a general easing of the headwinds that have been driving inflation lower, such as fiscal tightening and deleveraging. We also think that fear of derailing economic recovery – and the desire to avoid deflation – makes central banks more likely to err on the dovish side, potentially allowing higher inflation.

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"The biggest risk is a new recession in the next few years"

Whether we’re right will hinge upon the extent to which investment picks up, the pace of China’s slowdown, the response of wages to low unemployment, and whether productivity growth recovers. All these are factors that we will be keeping a close eye on.

The biggest risk is a new recession in the next few years. To avoid this, we believe central banks need to keep policy accommodative. A new global downturn this soon would push inflation lower, and, starting from a very low level, threaten a slide into deflation.

Above all it’s this fear of another downturn – and the knowledge that there is very limited scope for new fiscal or monetary manoeuvres to counter it – that we think will make central bankers cautious about tightening monetary policy.

Inflation targeting here to stay

The US Federal Reserve, European Central Bank and the Bank of England have done a reasonable job at keeping inflation close to 2 per cent since the 1990s. But there is criticism that they have focused on inflation at the expense of ensuring financial stability, with some now calling for the inflation-targeting regime to come to an end.

We think central banks will eventually conclude that the costs of moving away from inflation targeting are higher than the benefits.

Meanwhile, with ‘lowflation’ a reality for the foreseeable future, expect deflation fears to continue to make the headlines for a while yet.

Important disclosures regarding Standard Chartered Global Research can be found in the Global Research Terms & Conditions