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  • December 14, 2018
    Macroeconomics & Risk
    Macro Watch
    Silvia Dall’Angelo
    The UK Parliament will vote on the proposed Brexit deal, US inflation is likely to fall sharply, reflecting weaker energy prices, and the European Central Bank (ECB) is expected to confirm the end of its bond-buying programme.
  • October 29, 2018
    Macroeconomics & Risk
    Silvia Dall’Angelo, Senior Economist, responds to UK budget
    Silvia Dall’Angelo
    For all the resounding announcements, catchy slogans and jokes, today’s Budget amounted to little in practical terms. Chancellor Philip Hammond announced “a Budget for Britain’s future” and reiterated that, after almost a decade of spending cuts, fiscal austerity was “coming to an end”, as also suggested by the Prime Minister during the Tory party conference early this month. Alas, it is not happening now, it is only vaguely defined in practical terms, and it is conditional on a good Brexit deal.
  • August 13, 2018
    Macroeconomics & Risk
    Escalating trade war is biggest risk for world economy
    Silvia Dall’Angelo
    The trade tariffs – and corresponding retaliatory measures – implemented are so far limited. In total, the value of affected trade now amounts to about $150bn globally, or 0.8% of overall world exports. However, adding up all the measures currently under discussion and assuming impacted countries retaliate commensurately, the amount of targeted trade could quickly rise to more than $1tn, or 6% of global exports. In her latest Ahead of the Curve, Silvia Dall’Angelo, Senior Economist at Hermes Investment Management, argues an escalation of protectionist measures evolving into a trade war could represent the biggest challenge to the world economy.
  • Protectionism: the $1tn question
    Silvia Dall’Angelo
    The tug-of-war between positive economic fundamentals and the protectionist policies that threaten to undermine them has dominated the macroeconomic story so far this year. Regrettably, this narrative is likely to continue unabated for the remainder of the year. Following the synchronised upswing of 2017, the global economy stuttered at the beginning of the year. Global growth lost momentum in the first quarter, in part reflecting special factors such as the impact from adverse weather conditions. In recent months, economic growth has rebounded to levels that prevailed last year, when global growth came in at 3.7% (see Chart 1). What’s more, global growth has become less synchronised: the US economy has continued to accelerate, while economic growth has slowed in the rest of the world. This creates a fragile backdrop, in which trade tensions – that are likely to continue to brew in the run-up to the November US mid-term elections – could become a catalyst for a sharp and broad-based slowdown.
  • Italy and Europe – the integration dilemma
    Silvia Dall’Angelo
    While Italy’s short-term economic outlook includes some positive elements, material downside risks loom amid high policy uncertainty. In her latest Ahead of the Curve, Silvia Dall’Angelo, Senior Economist at Hermes Investment Management, argues the Italian situation is a symptom of deep-rooted malaise and requires a credible and concerted response. Italy’s recent political imbroglio reignited the debate over the European Union’s (EU) future and the viability of the European single currency within its current institutional framework. While the situation has normalised, the landscape in Italy remains fragile. It is emblematic of the challenges the Eurozone is facing in a new political era. This new political backdrop emphasises national sovereignty, has an inward-looking approach and favours centrifugal forces, posing hurdles to European integration. Effects of the crisis Italy’s double-dip recession – the global financial crisis in 2008, followed by the European Sovereign Debt Crisis in 2012/13 – was particularly severe, as the country was ill-equipped to deal with it in the first place. The typically short-lived political cycle – with 65 administrations at the helm since World War II – has favoured wasteful public spending and quick fixes, rather than long-sighted structural reforms. In this context, public debt grew quickly, thereby reducing the fiscal space available at times of crisis.
  • Italy and Europe: the integration dilemma
    Silvia Dall’Angelo
    •The new political landscape in Italy is hardly surprising: it has emerged from the convergence of both global tendencies and idiosyncratic factors. •Going forward, Italy’s short-term economic outlook includes some positive elements. However, material downside risks loom amid high policy uncertainty, both domestically and externally. •Italy’s long-term issues include the sustainability of its large public debt and more importantly, its poor growth prospects. Labour productivity growth has been on a downward trajectory since the early ‘90s.
  • June 14, 2018
    Corporate News
    Reaction to the ECB meeting
    Silvia Dall’Angelo
    The headline-grabber outcome of the ECB meeting today was the announcement of an end-date for the QE programme: the ECB now anticipates net purchases to grind to a halt at the end of this year. However, the decision was hardly a surprise, following the hints from the ECB’s Chief Economist Peter Praet two weeks ago. Importantly, the ECB made sure to keep in place significant accommodation by strengthening its forward guidance on rates and it retained plenty of flexibility should circumstances change going forward. As largely expected, the ECB announced an extension of QE net purchases at a slower monthly pace of €15bn after September and until the end of the year. According to Draghi, recent “substantial progress” in the inflation adjustment towards the ECB’s 2% target justifies further tapering and the conclusion of the QE programme. Of course, the process is conditional on development in incoming data but it feels like the bar for disappointment is quite high. Other tools remain in place to facilitate the inflation adjustment, most notably a strengthened forward guidance stating the first rate hike will take place in summer 2019 at the earliest. In addition, the stock of ECB holdings – set to hit €2.6tn (22% of GDP) by the end of the year – will remain large, as the reinvestment policy will persist for an indefinite time.
  • June 14, 2018
    Corporate News
    Hermes: Fed hikes rates as expected
    Silvia Dall’Angelo
    “At the end of its two-day meeting, the Fed raised its policy rates by 25bps to a range of 1.75-2.00%, as fully expected by financial markets. This marks another step along a gradual normalisation process that is now well underway: the central bank has raised interest rates seven times since December 2015, while it began reducing its bloated balance sheet in October 2017.” “The general tone of the meeting was upbeat, reflecting recent positive news on the US economy. The statement sounded more confident about the outlook, and economic forecasts were upgraded slightly. In addition, the Fed’s projections for the policy rate (the so-called dot plot) showed a slightly faster pace of tightening this year (four hikes in total according to the median dot), but little change in following years. The terminal rate is still expected to be 3.4% in 2020, implying monetary policy would be somewhat restrictive at that stage. That said, the Fed’s overall strategy was unchanged and the Fed confirmed its gradual approach to monetary policy normalisation.
  • The Fed’s challenge: normalisation in the new normal
    Silvia Dall’Angelo
    “Participants generally agreed with the assessment that continuing to raise the target range for the federal funds rate gradually would likely be appropriate if the economy evolves about as expected. These participants commented that this gradual approach was most likely to be conducive to maintaining strong labour market conditions and achieving the symmetric 2% inflation objective on a sustained basis without resulting in conditions that would eventually require an abrupt policy tightening." The message from the minutes of last month’s FOMC meeting is clear: the Fed will continue to gradually raise official interest rates in the short term, a strategy that has proved successful thus far. Today, the Fed’s normalisation process is well underway. It involves the two primary levers of the current monetary policy framework: the policy rate and balance sheet.
  • ECB normalisation: the journey is more important than the destination
    Silvia Dall’Angelo
    •The strength of the eurozone’s recovery in 2017 prompted the European Central Bank (ECB) to adjust its bond-buying programme. However, the bank’s overall policy stance has remained accommodative. As the region’s expansion continues, a review of monetary policy tools within the bank’s current framework will be needed to allow for additional steps towards policy normalisation. •Policy support has been effective. Quantitative easing (QE) has compressed sovereign bond yields by 70bps to 160bps since it began in 2015, according to our analysis. The ECB estimates that the policy measures taken between mid-2014 and October 2017 will boost growth and inflation by about 1.9 percentage points, in both cases, for the period between 2016 and 2020. However, cost-benefit considerations suggest that it is now appropriate to start preparing for an exit from QE. •The evolution of the ECB’s monetary policy stance will largely depend on a sustained adjustment in inflation in the medium term towards the ECB’s target. The outlook for inflation is clouded by uncertainties and risks. In particular, escalating US-China trade tensions and further euro appreciation could blur this outlook.
  • February 13, 2018
    Outcomes
    The US yield curve as a predictor of recession: should we trust it this time?
    Silvia Dall’Angelo
    The shape of the US Treasury yield curve generally contains useful information about future developments in the real economy. In particular, when the Treasury yield curve inverts – that is, when short-term rates exceed long-term yields – a recession usually follows in the next 12 months. Historically, the yield curve has been a very accurate forecasting tool: a curve inversion has preceded each of the last seven recessions in the US. The Treasury yield curve flattened significantly in 2017, and last month, the spread between 10-year yields and two-year yields narrowed to about 50bps. It is therefore possible that the spread could turn negative at some point this year. As such, it is unsurprising that market observers have become nervous about the possibility of an economic slowdown. But given the current environment of loose monetary policy, to what extent should we trust the US yield curve as a harbinger of a recession?
  • January 16, 2018
    Macroeconomics & Risk
    Searching for the Phillips curve: the puzzle of missing inflation
    Silvia Dall’Angelo
    •Despite the recent acceleration in economic activity, inflation has been absent. This has led to questions about the robustness of the traditional Phillips curve framework, which is based on the relationship between inflation and resource utilisation. •In general, the framework makes economic sense. However, its shortcomings could be due to poor estimates of its inputs. For instance, there might be more slack in the economy than generally believed. •In addition, external factors might be responsible for masking the Phillips curve. Productivity growth has been slow since the global financial crisis, in turn curbing wage inflation. •Also, globalisation and technological progress might have affected the structure of the labour market, likely resulting in downward pressures on wages. Labour has become more fragmented and commoditised in the last 10-15 years, weakening workers’ bargaining power. •In 2018, typical Phillips curve models for the US and the eurozone suggest that inflation will rise slightly. The US will probably take greater strides towards its official target in the next couple of years, while slack in the eurozone implies slower progress.