January, 20 2017 by lsr team

- Germany & EA both growing above-potential, inflation rising
- Less inordinate ECB stimulus to be announced this summer
- Rising euro vs. dollar later in 2017 to put pressure on Italy
- Germany to accept fiscal union, or Italexit a risk in 2018-19
- Ultra-cheap euro, huge trade surplus: a cause of Brexit-Trump
- World impatient with prolonged resolution of new euro-crisis
- German domestic imbalances could shrink over 10-15 years
- Baby boomers retire – saving down. Immigration raises capex

October, 14 2016 by lsr team

The euro area LI continues to put in an above consensus call. It is probably over predicting growth somewhat but its strength is fundamentally underpinned by the newly emerged German locomotive. While German demand often turns out to be derived from others, chiefly China, in this case it is genuine. In fact, this is highlighted by our below consensus Australia call. China’s stimulus has not fed through to a rebound in private demand, although easing PPI deflation is helping manufacturers.

June, 02 2016 by lsr team

China’s rebalancing started only in 2015, with recent numbers showing significant progress in rebalancing from excessive saving and capex towards more consumer spending. Capex in 2015 fell by 1.8% of GDP, while gross savings dropped by 1%. This is the first concrete evidence of genuine rebalancing, but still remains small in relation to what is needed. Our Chief Economist, Charles Dumas explains how further rebalancing can be achieved through explicit yuan devaluation against the dollar and other major currencies. Click above to watch the full video. &...

April, 07 2016 by lsr team

We held a client seminar on the economic impact of Brexit in June 2015 – as always at LSR we like to be well ahead of the curve! As we stated then, the longer term implications of a vote to leave are likely to be small in either direction. However, since the middle of last year our concerns about the immediate impact of the referendum have been amplified by the declining household savings rate. With consumer demand closer to the end of its own cycle, any investment disruption will be keenly felt. Our senior economist, Richard Batley discusses Brexit and its impact...

March, 24 2016 by lsr team

We recently published the Q2 2016 edition of the LSR UK Outlook. Our central forecasts assume that the UK remains in the EU, but we also modelled a ‘Brexit risk’ scenario. This risk involved shocking the model in a number of different ways, in particular by weakening trade-weighted sterling, increasing the level of household’s precautionary saving and reducing the share of business investment associated with exports to the EU to a ‘depreciation-replacement’ only level. The difference in the quarterly profile of growth between our central pro...

March, 22 2016 by lsr team

Households have been borrowing more and saving less, suggesting their finances are increasingly vulnerable to shocks – not least in view of stretched property market conditions. This is a topic that was repeatedly raised during out recent visits to Australian clients. Spurred by easy monetary policy and a buoyant property market, the leverage of households –predominantly mortgages- has risen to a record 1.8 times income. At the same time, their savings ratio has been declining through the RBA’s extended easing cycle, raising questions about the robustne...

February, 25 2016 by lsr team

We held a client seminar on the economic impact of Brexit in June 2015 – as always at LSR we like to be well ahead of the curve! As we stated then, the longer-term implications of a vote to leave are likely to be small in either direction. However, since the middle of last year our concerns about the immediate impact of the referendum have been amplified by the declining household savings rate. With consumer demand closer to the end of its own cycle any investment disruption will be keenly felt. To what extent sterling will contin...

February, 15 2016 by lsr team

The UK cycle is rapidly maturing. We have stressed before that uncertainty over Brexit is likely to add a burden to the end of the cycle, dampening investment intentions just when consumption bottlenecks would otherwise have driven up capex. As with the Scottish referendum, polls have narrowed. The latest poll of polls put those who want to remain in the EU on 51%, with those who wish to leave on 49%. Many of those who expect an exit presumably think it would be a good thing. But in the short term, uncertainty over how Brexit would affect trade and capital flows will tak...

January, 29 2016 by lsr team

Both the UK and the US are relying on consumers to power recovery. But while British households have largely shaken off the after-crisis blues, their US counterparts seem to be suffering from a case of Post-Traumatic Stress Disorder caused by past job and home losses. The difference is clearest in the savings rate. In both economies, there is a strong historical relationship between wealth and savings. However, whereas American consumers are currently saving more than their wealth ratios would suggest, UK consumers are setting aside less. What has driven this divergence?...

January, 14 2016 by lsr team

Twelve months ago, economists were busy trying to assess the impact of the collapse in oil prices on the global economy. Opinion was divided. Some thought the 60% drop in prices would provide a sizeable boost to consumer demand. Other economists were sceptical, worrying that the plunge told us something disturbing about the state of the global economy. A final group of commentators was even gloomier, arguing the inevitable correction in shale fracking would cause a US recession and tip the world into a crisis. At LSR we were on the optimistic side of the debate, though w...

December, 09 2015 by lsr team

Twelve months ago we said 2015 would be a year of ‘deceptive calm’. With the S&P 500 up 5% and US 10-year yields around 5bps higher, you could say our forecast was accurate. Markets spent much of the year in an anxious state, fretting about Greece, then China, then the risk of a synchronised global recession. In 2006 and 2007, LSR had a high conviction that a financial meltdown was about to wreak havoc on the global economy. This time around we stick with our 2015 theme ‘Keep Dancing’ but with no great conviction. Looking ahead to 2016, China...

November, 24 2015 by lsr team

Beginning in the early 1970s, Japan embarked on a long quest to reform its financial sector. Liberalisation in one area brought unintended consequences in others. Excessive leverage and regulations that failed to keep up with changes inevitably led to a crisis. Today, China has come to a point where financial reform is critical. While China does not have Japan’s luxury to pursue financial reform gradually, Japan’s experience however could shed some light. We visit Japan’s story and look at its implications and what China could do to avoid Japan’s...

November, 18 2015 by lsr team

Last week we summarised the first panel discussion of our recent conference in New York, “The New Abnormal: American monetary policy and China’s liberalisation”. The second panel addressed the question of whether China’s financial transformation would be “a boon or a curse for the world economy”. LSR’s own Diana Choyleva was joined by Chinese political analyst TL Tsim and Fraser Howie, co-author of “Red Capitalism”. The panellists agreed that the process of financial market reform had reached a critical point, exempli...

October, 09 2015 by lsr team

Abenomics is a response to frustration with Japan’s poor economic performance since its bubble burst in 1990. But Abenomics treats the symptoms, especially deflation, rather than the disease, which it makes worse. Disastrous consequences of Abenomics have only been avoided so far, because it has failed to generate inflation – courtesy of the oil price slump and Japan’s enfeebled domestic demand. But can QE ever be stopped and more importantly, is Japan about to face a financial crisis? Click below to find out our latest View on Japan.

September, 30 2015 by lsr team

We were delighted to have Charles Goodhart, Professor of London School of Economics and a former Chief Advisor at the Bank of England as our guest speaker at LSR's September conference in London. Professor Goodhart shared his recent in-depth analysis for Morgan Stanley of the impact of future demographic trends on global saving and investment rates and the balance between them. The past three decades saw a profound positive shock to the global labour force but we are now on the cusp of a sharp reversal. Charles discussed with enviable eloquence how demographic changes a...

September, 07 2015 by lsr team

Financial markets are right to be obsessed with China’s prospects. But they may be plain wrong to assume that the current Chinese slowdown is bad for global prospects: either of stock markets or the economy. On the contrary, China’s grotesque economic distortions have been major contributors to the sluggishness of world growth. Their correction should benefit most of us, not just China itself. China’s excessive, wasteful capex now being curbed, have been a major cause of weak recovery. The widespread assumption that reducing these excesses will be bad f...