The return of IKGW

Today is the day Israelis dread, when “after the chagim” actually arrives, when the holidays are over and there is no choice anymore but to face reality. So to for the entire world: it is no longer possible, given the news flow of economic, financial and market developments in recent days and weeks, to ignore what has happened and is happening. IKGW is back.

Veteran readers of this column may remember IKGW, albeit not fondly. During the financial crisis of 2007-2009, the clumsy but accurate slogan of IKGW — “it keeps getting worse” — was my guideline for tracking and explaining what was going on, and why.

However, for five years beginning in March 2009, it stopped getting worse. Most global stock markets bottomed that month, although the crisis in the real economy deepened until mid-year. But if we use the financial system as an indicator of the health of the overall economic system, then the crisis started in July 2007 and ended in March 2009. The real economy always lags behind the financial one when changes of direction occur, so that the recession in the US, for example, only started in December 2007 and in Europe even later.

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Slowing

That, in one word, is the state of the world economy: slowing. It wasn’t going very fast hitherto, but it is going to go slower henceforth. That was the word from no less august an institution than the International monetary Fund (IMF) yesterday, in its latest forecast for the world, and key regional and national economies. If we skip the detailed numbers, the summary is very simple: Europe — down, China — the same (as the previous forecast), US — up, the world as a whole, including Japan, Russia and the emerging economies — down. Last but not least, global trade — down.

Just to clarify, that’s not saying that the economies will be ‘down’ in the sense of negative growth, only that the rate of growth previously forecast has been cut. In fact, even the new forecast — 3.8% versus 4% in the July forecast for global growth — is still higher than the 3.3% the IMF expects the world to manage this year.

So at least in that sense, this could be construed as good news. However, it’s not really news and it’s certainly not really good. It’s not news because it’s a forecast, or an update of a forecast. By dint of its position as the premier ‘international economic institution’, the IMF is an important player in the game of economic forecasting, but its record in this area is undistinguished — to be charitable. That may be because, for political reasons, it feels obliged to act as a cheerleader rather than a professional player, but the fact is that it has consistently forecast higher rates of growth than were subsequently achieved in practice. The pattern in recent years has been that the IMF’s forecast for a specific year has been steadily reduced as the forecast period shortened and that year approached. This pattern is now being repeated with respect to 2015 — and that’s why there is no reason to think or hope that we will actually see 3.8%, but rather a lower number, possibly much lower.

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Oil off the boil

West Texas Intermediate oil fell below $90 for the first time in 17 months amid signs that supplies from Russia, Saudi Arabia and the U.S. are outstripping demand. Brent, Europe’s benchmark, headed for a bear market.

That was the opening of a Bloomberg report published yesterday morning, under the headline “WTI Oil Plunges below $90 on Supply Glut, Brent Declines”. The ‘bear market’ referred to with regard to Brent crude, by the way, means that its price is almost 20% below its most recent peak — the standard definition of a ‘bear market’, as opposed to a mere ‘correction’. However, these are just traders’ milestones for measuring moves and have no substantive importance.

The absolute price of oil, however, has massive substantive importance. It is by far the most important commodity in the world and entire nations depend on it for their well-being or riches, as the case may be. For that reason, the direction of any move in the oil price, the size of that move and, above all, the cause of it, are critical matters.

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What’s hot and what’s not

The gulf between the make-believe world of stock markets and the real world where real people live and work has never been clearer than over this last week. On the one hand, a Chinese internet retailer succeeded in becoming the largest IPO (initial public offering) in the history of Wall Street. On the other hand, the prices of many basic commodities continued to fall — they have been going down for months, in some cases for years, and recently their rate of decline has increased.

What is one to make of these coincident, but fundamentally contradictory developments?

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Deflation settles in

Last Monday, as on every 15th of the month that does not fall on a Sabbath or holiday, Israel’s Central Bureau of Statistics published the Consumer Price Index (CPI) for August. As usual, this datum surprised the majority of the professional forecasters whose job it is to try and predict this monthly measure of inflation. “As usual” — because this is what happens most months, that the result does not correspond to the consensus forecast. Why that happens, why it happens more frequently than it used to and why large financial institutions continue to employ highly-paid and highly-intelligent people on this thankless task — all of those question can wait for another day. For the moment, suffice it to say that the August CPI went down by 0.1%, instead of rising by a similar amount or, at least, remaining unchanged — as had been “forecast”.

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Current Account data for second quarter of 2014

Bottom line: Israel’s current account surplus on its balance of payments for the April-June 2014 quarter was $2.2bn — a reversion to ‘normal’ levels, after the record-breaking $3.5bn originally announced for January-March (and now revised up to $3.6bn!). As noted here in June, “the factors responsible for [the Q1] outcome are unlikely to be repeated, at least in the same degree, and the surplus will shrink in the current and subsequent quarters”. 

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Trade data for August and January-August 2014

Bottom line: There is no substantive news in the August trade data. The main trends that have been evident since the beginning of the year, especially the weakness in exports, are at work and, indeed, intensifying. There is no evidence of a significant impact of the Gaza fighting on trade patterns.

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Israel-Turkey commercial links: a case study in political disruption of economic logic

Anyone following the Middle East via headlines in the mainstream media would know that diplomatic and political relations between Israel and Turkey have ruptured in recent years. It would therefore seem safe to assume that the economic and commercial links that once formed a central element of a generally close relationship between the two countries had shrivelled, under the impact of the diplomatic freeze.

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Far too much of a good thing

I recently read in an item written in a usually reliable blog, that “China consumed more cement in 2011-2012 than the United States used in the whole of the twentieth century”. There was no source given for this remarkable fact/ statistic, and therefore its credibility must remain in serious doubt. The reason I mention it is because it highlights a genuine, major and extraordinary phenomenon, namely the extent of investment in China in recent years.

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