US economic uncertainty remains at near record levels, and the stock market is at an all-time high. If history is any guide, something has to be given.
It’s the message that flashes from an index of economic uncertainty created by three finance professors: Scott Baker of Northwestern University, Nicholas Bloom of Stanford University and Steven Davis of the University of Chicago. Prior to this year, there was a strong correlation between the rise in this index and the decline in stocks. In fact, based on this historical pattern in 1900, the S&P 500 appears to be about 20% taller than it should be.
Such signals may seem surprising given the near-final election resolution and the hopeful news on the Covid-19 vaccine front. But this is how the professor index works.
This index is based on the frequency of mention of words and phrases related to economic uncertainty in major newspapers. In the accompanying chart, this index – known as the Economic Policy Uncertainty Index, or EPU, – has retreated somewhat from its April and May spike, but remains nearly three times higher than average over the past several decades.
In an interview, Prof. Bloom explained that there are several ways in which increasing economic uncertainty is a barrier to economic growth. This increases the cost of capital, for example, which means that businesses can’t justify new projects as much as they do. This causes businesses and consumers to delay spending. And that reduces the effectiveness of the government’s stimulus program.
Financial markets absorbed the news that President Donald Trump contracted Covid-19 with serenity on Friday. The S&P 500 sold off slightly, while bond yields edged up and gold closed. The White House said late in the day that the president was going to the hospital with relatively mild symptoms and receiving experimental antibody treatment. Yet it would be far too premature to give a clear picture of the impact on financial markets and the economy in general. Sure… .
Brazil showed a pulse, economically and politically, after a devastating collision with Covid-19. But the beat looks too weak to trigger a recovery in a depressed stock market. Funds traded on the Brazilian MSCI iShares exchange are inactive 30% this year, meanwhile global developing market almost returned to even.
The Latin American giant has recovered better than expected over the past two months, driven by consumer spending. David Beker, chief Latin American economist at Bank of America, has increased its 2020 gross domestic product forecast to a contraction of 5.7%, from 7.7%. “The destruction of work is not as bad as we thought,” he said.
Politicians are moving beyond spraying the population with cash to focus on the next big reform challenge: rationalizing Brazil’s very complicated tax system.
Finance Minister Paulo Guedes, economic majordomo President Jair Bolsonaro, launched a tax reform blueprint on July 21, and each assembly of Congress has its own pending. “There seems to be some consensus to move forward with tax changes,” Beker said.
But this Band-Aids will hardly cure an economy that hasn’t grown more than 1.5% every year since 2013. Most consumer revival is driven by government emergency donations, called coronavouchers that distribute 600 reals ($ 116) per month to about half population.
However, the state cannot maintain this for long. The Brazilian budget deficit will approach 20% of GDP this year, inflating public debt to nearly 100% of annual output, figures Alberto Ramos, head of Latin American economic research at Goldman Sachs.
“It stands out as one of the weakest fiscal positions in emerging markets,” he said.
Expenditures driven by a pandemic, although deemed necessary, cut one reason for tax reform: to reduce the net burden of Brazilian companies. Now the government must increase revenues, cut expenses, or maybe do both.
“Taking tax in Brazil is already in the low 30s [as percentage of GDP], which is high for EM, “said Aaron Hurd, senior currency portfolio manager at State Street Global Advisors. “Tax reform will have little impact over the next five years compared to the fiscal consolidation that will be needed.”
Last year, Guedes began a way to replenish state coffers and cut corporate taxes: through financial transaction taxes, which basically will take time anytime Brazilians exchange money. However, that was not a popular idea, and the finance minister’s final proposal firmly abandoned it.
The current system is very difficult to use is a deterrent to fix it. Champions need to find a new formula with more winners than losers, then shepherd it through the legislature with nearly 600 members from around 30 different parties.
No wonder this topic has been on the air for decades without much success, noted Ramos. Hopes are also limited for this round. “It might come out better than we have, but I am not betting on major reforms,” he said.
Brazil is disjointed Response to Covid also undermined the belief that it could lead to technocratic heroism in taxation or other structural reforms, said Monica de Bolle, who monitors the country’s 210 million for the Peterson Institute for International Economics. Brazil is number 2 in the global pandemic mortality count, with around 90,000, although only 10 per capita.
“These are all deck chairs dragging Titanic,” he said. “Forget the whole reform effort.”
FRANKFURT – Germany suffered a record economic contraction in the second quarter as a move to slow the spread of a closed business pandemic and keep consumers home, but European power plants are expected to shrink less and recover faster than other major economies.
German gross domestic product fell 10.1% compared to the previous quarter, the biggest decline since comparable records began in 1970, and roughly doubled the contraction at the nadir of the global financial crisis in 2009, federal statistics …
Germany recorded the worst setback in the economy in the second quarter since 1970, according to statistics released on Thursday.
German gross domestic product fell seasonally adjusted 10.1% quarter-on-quarter, which was worse than economists forecast a 9% decline.
The Federal Statistics Office said there was a “major downturn” in exports and imports of goods and services, as well as for household final consumption expenditure and capital formation in machinery and equipment.
Release comes much sooner than usual, only 30 days after the quarter ends versus 45 more typical days. The statistics agency warns that revisions may therefore be larger than usual.
“In the midst of significant uncertainty about current activities, this challenge is even more frightening than usual. While high frequency data such as retail footprint data, flight statistics and truck mileage provide guidance for current trends, it is still unclear how closely some of the steps recently watched track official statistics, “said Florian Hense, an economist at Berenberg The bank, which added the economy could recover about 40% of its losses in the third quarter.
hovering lower after the release, which also came as Germany reported the unemployment rate remained at 6.4% in July. The most prominent reaction on the stock market, such as the German DAX DAX, -2,13%