Tear up the textbook In a low-growth world, traditional assumptions about the global economy will be overturned


Some things in economics ought to be reliably predictable, year after year. Wage restraint in Germany is one. Economic misery in Argentina is another. Hard-nosed tax officers are almost as certain as tax (and death) itself. But 2017 is shaping up to be a year in which many economic conventions are turned upside down. There are three particular trends to look out for.

First, the slow-burning effects of negative interest rates across much of western Europe and Japan will start to influence behaviour in odd ways, including the manner in which tax is collected. Second, countries with an ironclad reputation for thrift, notably Germany, will start to spend a lot more freely. The third upside-down trend is that unstable trouble spots such as Argentina will register some of the strongest growth in GDP.

Start with negative interest rates, which are strange but hardly new. The European Central Bank (ECB) first reduced its deposit rate, which it applies to the reserves of commercial banks, to -0.1% in 2014, and has since reduced it further. Instead of receiving a small payment for depositing money overnight with the ECB, as is normal, commercial banks are now charged for the privilege. In theory banks could swap their reserves into cash and avoid the negative interest rate; in practice cash is costly to store and move, so banks have had to put up with the charges. They have shielded retail customers from negative interest rates, for fear that they would otherwise turn their deposits into cash. But they have passed on some of the cost to corporate clients with large deposits: they can do so because other safe stores of value, such as government bonds (and even some corporate bonds) have negative yields.

Topsy-turvy times
As firms seek other ways to avoid charges for holding cash, more examples of odd behaviour will emerge. Companies will rush to file their tax returns as promptly as possible. Supermarkets will start to pay their suppliers before the goods fly off the shelves and not months afterwards. The longer that interest rates stay negative, the more likely it is that banks will experiment with imposing them on depositors more widely. Small savers would then resort to any form of prepayment—gift vouchers, long-term subscriptions, transport cards—to avoid the cost of keeping money in the bank. A prepaid mobile-phone card might be a status symbol; paying for services after use, a sign of weakness.

For a second oddity in 2017, look to habitually high-saving countries, notably Germany. Its current-account surplus, a broad measure of its international trade, was above 8% of GDP in 2016. A country with a surplus of this size would normally see an eventual rise in its exchange rate to encourage imports and discourage exports. But Germany is locked in a currency union with countries that are less competitive in export markets: the euro’s trajectory must reflect the influence of Spain, Italy and other members, too. So the adjustment will come in other ways: through stronger wage growth, easier credit and faster house-price inflation.

These are already visible in Germany. Unemployment is down to 4%. As the jobs market tightens further, the prospect of a more generous wage round in 2017 increases. The federal government has said it will raise the minimum wage in January by 4%, to €8.84 ($9.72) an hour, which will boost consumer spending. It has also pledged to tighten fiscal policy, but in an election year such promises may fall by the wayside. All told, the outlook for wage growth and consumer spending in Germany is the brightest it has been since the early 1990s.

The third through-the-looking-glass trend in 2017 is that GDP growth will be surprisingly strong in places that are usually known for poor economic policy. Argentina is one of them. Since December 2015 the new administration of Mauricio Macri has floated the currency, lifted capital controls and export taxes, and struck a deal with hold-out creditors. Such measures have come at a cost. Inflation has soared as prices adjust to a more realistic exchange rate. The squeeze on real incomes that has resulted has tipped the economy into recession. But if Argentina stays the course, inflation should fall back in 2017, and the economy will rebound.

Russia’s economy is also set to bounce back from recession. Its currency is cheap; inflation has fallen from a peak of over 15% in early 2015 to around 6% and should fall further; and, almost unnoticed, Russia has been reforming. It has moved to 51st in the World Bank’s ease-of-doing-business rankings, from 123rd in 2011. Look out for eyebrow-raising GDP growth in Pakistan, Romania, Nigeria (currently in recession) and perhaps even Egypt, which has sharply devalued its currency. These are not places that have got economic policy right in the recent or distant past. But then 2017 will be an upside-down kind of year.

Source: The Economist

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