Category: Economics

Economics

What Are the Key Recession Indicators to Watch?

Author ByCFI.co

The Great Recession which occurred in 2009 was so significant that it affected the whole world.

It came about after the US housing market bubble (which had been growing) suddenly burst. A recession is a bad economical state that can lead to significant losses for organizations and individuals. It’s much easier to remain secure in a recession if you know it’s coming ahead of time.

There are some recession indicators you can observe that often precede a recession. For some of these key indicators, keep reading.

1. Yield Curve

When looking at the global economy, one of the most noted trends indicating a coming recession is the “yield curve”. The yield is the interest rate on treasuries or government bonds, and these bonds have varying duration lengths (known as maturity). Some last for just a month, while others last decades, and the yield curve compares how the interest rate of these bonds changes with time.

Bonds with a longer maturity typically have higher interest rates. For investors, this presents a ‘higher risk, higher reward’ situation. When investing in a bond, a lot more can go wrong in 10 years than in 10 months, so by accepting the risk of a longer investment, they also want to receive more in return.

An inverted yield curve will slope downwards and shows that investors are asking for higher yields for short-term investments. This means that they believe there is more risk in holding a bond for a short period.

Historically, the yield curve has been known to precede downturns. A lot of economic indicators seem to lag as they come after the event. A yield curve inversion, however, comes beforehand, making it a suitable indicator to see where the global economy is going.

2. Confidence Indexes

While economics is mostly about facts and figures, people’s feelings still play a large part. A typical example is the trade war that’s going on between the US and China. It has given firms a feeling of uncertainty about the future, which has caused delays in investments and hiring.

Predicting economic trends isn’t easy, and getting things wrong can result in huge losses for businesses. Situations that make people uncertain result in a lot of caution as people don’t want to make any wrong decisions.

This even affects the choices of consumers. When people are worried about the state of the economy and are unsure how things will go, they become more reluctant to spend money. The result of this is reduced profits made by businesses.

Many organizations publish regular reports regarding confidence amongst businesses and consumers. Recent years have seen some notable dips in confidence, causing some economical issues.

With that in mind, month-to-month fluctuations are not something to be too worried about. Like many economical factors, the long-term is more important, and confidence is generally more stable in the long run.

3. Employment Data

Each month the Department of Labor publishes a report on the job market. It contains several employment measures that can be important indicators of a potential recession.

Among the various data points included is the number of hours worked, which is sometimes claimed to be a leading indicator. This is down to the number of hours a business gives to its workers. When they’re worried about sales dropping, the first thing most companies do is cut hours.

Another data point listed is “temporary help”. This is a measure of temporary workers that businesses take on. When a company is less confident they’re likely to take on more temporary workers rather than permanent employees.

“Jobless claims” is another indicator, giving an in-depth look at the labour market. The time frame is also tighter as it’s posted weekly, rather than monthly. It’s simply a count of people applying for unemployment benefits, which is naturally higher when fewer people are working.

4. Leading Economic Index

Like the yield curve, this is one of the few indicators that predicts where the global economy will head. It’s generated by the Conference Board and is comprised of 10 datasets including:

  • Average weekly initial claims for unemployment insurance
  • S&P 500 stock index
  • New orders index
  • Average weekly hours worked by manufacturing workers

A negative year-over-year index has historically been closely associated with recessions. Businesses often use this index to plan future activities, helping to protect them in the event of any downturns.

5. Gross Domestic Product

Gross domestic product (GDP) is a measure of economic growth, and any time the economy isn’t growing, we’re in a recession. Whenever the economy is faltering it will be clear when looking at the GDP. It’s worth noting, however, that the GDP normally fluctuates, so it’s not always a cause for concern.

Comparing the GDP to longer-run expectations from economists can help give an insight into whether or not fluctuations in the GDP are something to worry about. This information can also help determine the “output gap”.

The output gap is the difference between the maximum possible output of the economy (as viewed by economists) and the actual output and can be positive or negative. When the GDP is adjusted for inflation it’s known as the “real GDP”. Sometimes the real GDP will go above its potential, and will then fall back down below it.

6. Recession Probability Model

This is a compilation of data based on the three-month and ten-year treasury yields. It’s specifically designed to determine how likely there is to be a recession in the coming year and is typically updated at the start of each month.

The likelihood is measured as a percentage, and anything over 30% is considered a warning sign. When it reaches the 30% point, it means a recession is predicted for 12 months from that time.

Watching for Recession Indicators

Ultimately it’s not entirely possible to say exactly what will happen in the future with the economy, but the recession indicators above have historically proven to be good signs to follow. Paying attention to these is the best way to know when we’re on our way into a recession.

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Economics

Investment Portfolio Management: How to Hedge Against Inflation

Author ByCFI.co

2021 saw an inflation rate of 7%, making it the highest rate in decades.

Inflation is a constant factor and affects all investors. It can result in losses for individuals and businesses, and the best way to avoid these losses is to hedge against inflation.

So what does it mean to hedge against inflation? Keep reading to find out.

What Does Inflation Hedge Mean?

Inflation is one of the most important economic forces for investors to understand. It’s the reduction in the value of financial assets along with the returns that those assets produce. While some assets naturally lose value with time, this refers to a loss in terms of purchasing power and relates to all assets.

Investors work to increase their wealth with time, and to do this they need to hedge against inflation. An inflation hedge is an asset that produces returns that match or exceed the inflation rate. This means that with time, the value will either stay the same or increase.

Investors aim to incorporate these kinds of assets into their portfolios while removing any that don’t protect against inflation.

Best Investments to Hedge Against Inflation

Inflation rates change each year, meaning past solutions don’t always work. No assets are guaranteed to hedge against inflation, but some are far more reliable than others.

Gold

People often settle on buying gold to protect against inflation. Despite its popularity, there have been some periods where inflation has been very high and it has not quite stood up.

Gold has a correlation of 0.16 to inflation, which isn’t particularly high. It’s worth noting that gold also generates no dividends or interest, which some other assets do. This means that to hedge against inflation its value has to increase at the same rate.

Real Estate

Real estate has long been one of the best assets for hedging against inflation. The value of property tends to increase at a higher rate than inflation does. On top of that, property can generate a lot of income through renting/leasing.

REITs (real estate investment trusts) are companies that own or finance real estate that generates income and covers a range of sectors. Of the different REITs available, equity REITs have the best correlation with inflation. Mortgage REITs are another option, but can sometimes underperform when inflation is high.

Commodities

Commodities generally perform well against inflation and include a range of assets such as:

  • Oil and gas
  • Precious metals
  • Grains and foods
  • Timber
  • Building materials

You can invest in these through stocks, which will increase in value as the commodities do.

ETFs (exchange-traded funds) track price movements of different commodities, generally holding derivatives or futures instead of the actual commodities themselves. These are ideal for investors who don’t want to invest in a commodity directly.

TIPS and Floating Rate Bonds

TIPS (Treasury Inflation-Protected Securities) are government bonds. They are pegged to inflation, meaning they will increase at the same rate. The coupon payment is reset every year to match the CPI (Consumer Price Index).

Other floating rate bonds work similarly but are pegged to interest rates rather than the CPI.

Stocks

Stocks are another very well-known investment choice. The thing that’s noteworthy with stocks is that they do best when inflation is modest – ideally between 1% and 4%.

When inflation is below 1% most stocks will have negative returns. Above 1% will give positive returns, but when inflation is over 4% it generally exceeds the returns from stocks.

The return rates can vary a lot depending on the type of company a stock is. Companies that deal with sustainable resources tend to have a better correlation with inflation.

Some companies can change their prices without much change in costs, meaning they can adjust to meet inflation. Companies that use many raw materials can’t generally do this as they have much less flexibility.

Value stocks can be a good choice as they don’t tend to be too sensitive to price increases. Dividend stocks are also good as they raise dividends with time.

Worst Investments to Hedge Against Inflation

The above assets are generally good options for hedging against inflation. There are, however, some places you can put your money that aren’t nearly as good.

Most people keep their funds in cash, but it tends to always experience value erosion. Short-term fixed-yield instruments are similar, so not the best choice.

Long-dated US Treasuries and corporate bonds have fixed yields and almost always underperform. Inflation is often higher than the coupon, which will result in a negative inflation-adjusted return.

High-end luxury goods stocks and discretionary goods may seem like a good idea, but when prices rise people tend to opt for cheaper alternatives, which makes these stocks underperform.

What About Crypto?

Bitcoin and other cryptocurrencies are very recent assets, and there is still a lot of debate regarding them. Many people claim they’re an effective hedge against inflation, but due to how new the technology is, there currently isn’t enough data to say for a certainty.

Hedging Limitations

Even with this knowledge about the different options for hedging against inflation, some limitations make it difficult.

Inflation projections aren’t set in stone, so they won’t always be accurate. Even someone with years of experience in investing won’t always make the right purchases.

While it’s fairly clear that some investments are better than others, no assets are perfect for hedging against inflation. You should do as much research as you can into the options you have, and make a choice based on what you think is best.

Be aware that there’s always a risk with any investment. Determine the risk before investing so you know what the losses will be if things don’t go how you want them to.

Making the Right Choices

Making decisions when it comes to investing is never easy. No one ever knows for certain how their investments will pan out, and there’s always a chance of losing money. The best thing you can do to hedge against inflation is to diversify your investment portfolio – that way, if one of your assets doesn’t do well, you have less chance of making significant losses.

Staying informed with the latest financial news will help you make the best decisions. Click here to head over to CFI.co and sign up for our newsletter so we can keep you up to date.

Conferences

The UAE sits among the top 20 economies for FDI in the world: Annual Investment Meeting (AIM 2022) kicks off today (29 March 2022)

Author ByCFI.co Blogger

International participations of more than 174 countries demonstrate global economic recovery post Covid-19

Expo 2020 Dubai, UAE, 29 March 2022: Held under the patronage of HH Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE, Ruler of Dubai, the Annual Investment Meeting (AIM 2022) was inaugurated today (Tuesday, March 29th, 2022) by HE Abdulla Bin Touq Al Marri, UAE Minister of Economy at the Dubai Exhibition Centre, Expo 2020 Dubai where it was attended by representatives of official delegations and participants from more than 174 countries.

The strong response on the first day of AIM was a barometer of the global economic recovery post Covid-19 as well as the UAE’s global position as a hotspot for investments across the investor spectrum.

Day one of AIM focused on the latest trends in foreign direct investment (FDI) and its growth prospects in emerging markets and the importance of attracting foreign investment driven by a progressive mix of legislation and flexibility in emerging markets.

AIM 2022 presented a platform for decisions makers, officials, investors, entrepreneurs, experts, analysts and academics who gathered under one roof to discuss FDI challenges, potential and growth.

Participants in AIM 2022 had the opportunity on day one to hold meetings, make contacts and share expertise with peers from all over the world. A variety of sessions were held on the first day.

The first day of the three-day event brought together investors, venture capitalists and financial institutions under one roof to participate in discussions, debates and much more.

Day one started with a debate focusing on ‘Investments in Sustainable Innovation for a Thriving Future’, as dignitaries, delegates and the keen-minded alike converged at the Dubai Exhibition Centre.

“Investments in future come at a time when the global investment landscape is changing rapidly thanks to an array of factors such as post pandemic trends, economic priorities and digital revolution; but one fact remains unchanged, FDI plays a significant role in the continuing efforts to achieve economic growth and prosperity,” said HE Abdulla Bin Touq Al Marri, UAE Minister of Economy.

The Vice President of Colombia, HE Dr Martha Lucia Ramirez kicked off the debate as she highlighted the need for “sustainable innovation” and an improvement in the global supply chain, focusing on a more “integrated” solution.

Shifting focus across the region, HE Rebeca Grynspan, Secretary General, United Nations Conference on Trade and Development (UNCTAD) expressed her concern on the lack of development and aid provided to developing countries. “In the developed world recovery went up to 30 per cent but in developing countries only 20 per cent. Developing countries are lagging behind in terms of investment in very important sectors.”

HE Vera Songwe, Under-Secretary-General, United Nations and Executive Secretary, Economic Commission of Africa started off by congratulating Dubai on a “fantastic EXPO” and further added on the “peculiarities” that the African continent faces post pandemic.

“All the ecosystems that support the investment is available in Abu Dhabi that boasts a strong and flexible platform not to mention the easiness of starting businesses. Just plug the business into one of the ecosystems in Abu Dhabi,” said HE Rashed Abdulkarim Al Blooshi, Undersecretary, Abu Dhabi Department of Economic Development.

The debate concluded with the President of the Republic of Tartastan, His Excellency Rustam Minnikhanov, as he highlighted how AIM was progressively gaining traction every year.

“The Annual Investment Meeting is a great platform for us to present investment opportunities for our region, exchange best practices with foreign partners, and make new contacts. Today we heard some informative and engaging discussions and expert opinions addressing a highly important topic of “Investment in Sustainable Innovation for a Thriving Future,” he said.

News of the event has quickly spread with technology and sustainability-driven companies and firms endeavouring to network at AIM 2022. With an hour dedicated to networking over lunch after the debate, high network individuals and company representatives can bolster their corporate framework and build relationships that could help boost business.

“We are looking forward to meeting global startups and entrepreneurs at AIM 2022 and providing them with the market knowledge to propel their startups and take them to the next level and give them not only scalability but the right amount of scaling. Additionally, this is a good opportunity to partner with governments and VCs too create co-investment opportunities to support the UAE startup ecosystem,” said Varis Sayed, Chief Executive Officer at Fincasa Ventures.

Currently, the UAE sits among the top 20 economies for FDI in the world, increasing by 4% year on year. The UAE has set an example by combating every challenge and turning it into an opportunity. Furthermore, the nation has developed its economic sectors to achieve qualitative shifts to a newer and more sustainable economic model, cementing itself as one of the top global economies in the world.

Economics

Middle-Income Trap

Author ByCFI.co Blogger

Otaviano Canuto, Senior fellow, Policy Center for the New South

The “middle-income trap” has become a broad designation trying to capture the many cases of developing countries that succeeded in evolving from low- to middle-levels of per capita income, but then appeared to stall, losing momentum along the route toward the higher income levels of advanced economies. We need to approach middle-income countries as being in a complex transition phase between accumulation and innovation-based economies. Individual middle-income country experiences of falling into a “trap” may be approached as cases of lack of or failing performance in footing the bill in terms of appropriate policies and institutions.

Economics

Otaviano Canuto on Commodity Price Cycles

Author ByCFI.co Blogger

Otaviano Canuto, Policy Center for the New South

Commodity prices go through extended periods during which prices are well above or below their long-term price trend. The upswing phase in super cycles results from a lag between unexpected, persistent, and upward trends in commodity demand, matched with a typically slow-moving supply. Eventually, as adequate supply becomes available and demand growth slows, the cycle enters a downswing phase.

The latest super-cycle of commodity prices, starting in the mid-90s, reaching a peak by the time of the global financial crisis, and getting to the bottom by 2015, can be seen as associated to the developments of globalization that we have already dealt with in this series. More recently, some analysts have spoken that we might be on the verge of a new cycle, super-cycle or not.

Economics

Global Current Account Impalances

Author ByCFI.co Blogger

Otaviano Canuto, Policy Center for the New South

After peaking in 2007 at around 6% of world GDP, global current-account imbalances declined to 3% of world GDP in the last few years. But they have never left entirely the spotlight, albeit acquiring a different configuration from that which marked the trajectory prior to the global financial crisis (GFC).

This is not because they threaten global financial stability, but mainly because they reveal asymmetries in adjustment and post-GFC recovery between surplus and deficit economies, and because of the risk of sparking waves of trade protectionism. They also reveal the sub-par performance of the global economy in terms of foregone product and employment, i.e. a post-crisis global economic recovery below its potential.

Economics

Secular Stagnation and the Big Balance Sheet Economy

Author ByCFI.co Blogger

Otaviano Canuto, Policy Center for the New South

Private balance sheets have risen relative to GDP in advanced economies in the last decades, in tandem with a trend of decline in long-term real interest rates. Asset-driven macroeconomic cycles, along with a structural trend of rising influence of finance on income growth and distribution, have become part of the landscape. Underlying secular trends of stagnation may also be suggested, making the macroeconomic dynamics dependent on the balance sheet economy getting bigger and bigger.

Economics

The Pandemic Will Leave Scars on the Job Market

Author ByCFI.co Blogger

Policy Center for the New South

Also: Seeking Alpha, TheStreet.com, Capital Finance International

All economies affected by the pandemic have something in common. The rate of vaccination of the population—quite different in different countries—has been the main factor determining the prospects for the resumption of economic activity, as it is a race against local waves of transmission of the virus.

Personal contact-intensive services have borne the economic brunt of the pandemic. To the extent that vaccination enables them to restart, one may even be able to witness some temporary dynamism in the sector because of pent-up demand. However, international tourism will not be included at the outset since vaccination will have to reach an advanced level both at the origin and destination of travelers.

But let us not be deceived: the pandemic will leave scars and countries will not return to where they were. There will be a need for retraining and job reallocation for part of the populations of all countries.

The pandemic is leaving a trail of unemployment, particularly affecting minorities, low-skilled workers and, in Emerging Market and Developing Economies, women, who predominantly occupy jobs in contact-intensive services. Figure 1 displays estimates presented in chapter 4 of the IMF April World Economic Outlook released on March 31.

Figure 1 – Average Unemployment Rate Change in Percentage Points
Figure 1: Average Unemployment Rate Change in Percentage Points. Source: IMF (2021), World Economic Outlook, April (ch. 4)

Before the pandemic, it was already known that ongoing technological changes—automation and digitalization—were posing challenges in terms of the need for training or retraining for part of the workforce. Well then! The response of companies and consumers to the pandemic has deepened these trends and is not expected to be entirely reversed.

A February 2021 report by the McKinsey Global Institute estimated that in eight countries (China, France, Germany, India, Japan, Spain, the United Kingdom and the United States), more than 100 million workers will have to find new, more qualified jobs by 2030. This is 25% more than they had previously projected for developed countries. Figure 2 shows their estimates of shifts in occupations by 2030, with a relative rise in healthcare and science, technology, engineering, and mathematics (STEM), while jobs in food service and customer sales and service roles decline. Less-skilled office support roles would also tend to shrink.

Figure 2 – The mix of occupations may shift by 2030 in the post-COVID-19 scenario
Figure 2: The mix of occupations may shift by 2030 in the post-COVID-19 scenario. Source: McKinsey Global Institute (2021). The future of work after COVID-19, February.

Why? Many of the practices adopted during the pandemic are likely to persist. Where done, consumer surveys indicate that sales via e-commerce, which have grown substantially during the crisis, are not expected to shrink too much. Also, remote work will not be fully reversed, with the hybrid organization of work processes becoming more common. The fact that employees in remote occupations have worked more hours and with greater productivity during the pandemic will encourage continued telework.

McKinsey suggests that changes in “work geography” will have consequences for urban centers and workers employed in services, including restaurants, hotels, shops, and building services—25% of jobs in the United States before the pandemic, according to David Autor and Elisabeth Reynolds (The Nature of Work after the COVID Crisis: Too Few Low-Wage Jobs; July 2020). Indeed, demand for local services in cities has dropped dramatically as remote work has increased, regardless of confinement.

Autor and Reynolds indicated four trends for the world of work after the pandemic. In addition to automation, they highlighted the increase in remote work, the reduction of density of workplaces in urban centers, and business consolidation. The latter is due to the growing dominance of large firms in many sectors, something exacerbated by the bankruptcies of smaller and more vulnerable companies.

All these trends have negative impacts on low-income earners and the distribution of income. They tend to increase the efficiency of processes in the long run, however, leading to harsh consequences in the short and medium terms for workers in personal services, who are generally not present among the highest paid. Workers at the top of the wage pyramid, including professionals in STEM, will see their opportunities grow.

Technological progress is one of the main causes of the increase in income inequality in advanced countries since the 1990s. The acceleration of inequality with the pandemic therefore tends to intensify the challenges. In a way, it can be said that the pandemic is accelerating history, rather than changing it.

The role of public policies will be central in the post-COVID-19 world, both in strengthening social protection—including through unemployment insurance and income transfer programs—and in the requalification of workers. Instead of denying technological advancement, it is better that public authorities help people to adapt, minimizing the resulting scarring.

Otaviano Canuto, based in Washington, D.C, is a senior fellow at the Policy Center for the New South, a nonresident senior fellow at Brookings Institution, an adjunct assistant professor at SIPA – Columbia University, a professorial lecturer of international affairs at the Elliott School of International Affairs – George Washington University, and principal of the Center for Macroeconomics and Development. He is a former vice-president and a former executive director at the World Bank, a former executive director at the International Monetary Fund and a former vice-president at the Inter-American Development Bank. He is also a former deputy minister for international affairs at Brazil’s Ministry of Finance and a former professor of economics at University of São Paulo and University of Campinas, Brazil.

Economics

Global Inequality

Author ByCFI.co Blogger

Otaviano Canuto, Policy Center for the New South

The global trend towards increasing globalization since the 1990s seems to have had two different distributional consequences: income inequality between countries has declined, while economic inequality within countries has increased. However, technological progress has made the biggest contribution to rising income inequality over the past two decades. Domestic policies – fiscal policies, social protection – are the locus where inequality is to be tackled.