Tag Archives: Economy

Updates from Chicago Booth

India’s economic recovery from its COVID-19 lockdown
By Chuck Burke – In response to COVID-19’s rise, India ordered most of the country’s 1.3 billion residents to stop working and remain indoors starting in March 2020—the world’s largest lockdown. The government began relaxing restrictions in June, and research finds that while India’s economy improved rapidly in the following months, the outlook for a return to prelockdown levels remained unclear.

In a report for Chicago Booth’s Rustandy Center for Social Sector Innovation, Booth’s Marianne Bertrand and Rebecca Dizon-Ross, Centre for Monitoring Indian Economy’s Kaushik Krishnan, and University of Pennsylvania’s Heather Schofield examined household-level survey data to establish a more comprehensive view of India’s initial recovery than national economic indicators could provide. These charts and maps highlight a selection of their main findings. more>

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2021 Bond Market Outlook: Finding Yield in a Recovery

As global economic growth strengthens this year, bonds investors may find opportunities in high quality bonds, higher-yielding debt and assets that hedge against a declining U.S. dollar.
By Jim Caron – As fixed income investors, we expect 2021 to be a year of recovery. Many economic forecasts show U.S. GDP increasing by as much as 5%, or even 6%, and it begs the question: Won’t bond market yields rise in this environment? Rising yields of course mean falling bond prices—at least on paper for investors who own the debt. But yields will be rising for good reasons, based on economic growth and cash flow returning to markets.

Bond market movements will act as key indicators of the health of the recovery, as well as corporate performance and consumer confidence in 2021 and beyond. Compared to 2020, when global monetary and fiscal policies were focused on supporting solvency and bond investors benefited from flocking to safe-haven assets, such as U.S. Treasuries, this year may entail a more idiosyncratic environment for credit, which will make active portfolio management paramount.

As economic growth strengthens (most likely in inverse proportion to the severity of the pandemic this year) and variation in the fixed-income market broadens, so will the opportunities for bond allocators. For investors searching for higher yields and portfolio diversification to hedge against equities and U.S. dollar weakness, we see fixed income opportunities in five key areas.

We see value in taking a tactical barbell investing approach, which involves owning high quality and interest-rate sensitive fixed income to balance more risky credit. During the first half of 2021, investors can consider adding U.S. Treasuries and Australian and New Zealand government bonds amid an expected increase in yields. When it comes to investment grade corporate credit, we have some aversion to highly-rated bonds, including A-rated corporates with high cash balances because there’s risk that M&A activity in this cohort could weigh on valuations. We prefer a combination of triple-B corporate bonds with solid company fundamentals and U.S. Treasuries as a preferred risk allocation, as an example. more>

2021 Global Economic Outlook: The Next Phase of the V

Morgan Stanley projects strong global GDP growth of 6.4% for 2021—led first by emerging markets, followed by reopening economies in the U.S. and Europe—in a macro outlook that diverges from the consensus.
Morgan Stanley – Rising COVID-19 case numbers in the U.S. and Europe make it difficult right now to envision a return to normal. Yet, even as the pandemic drags on, the global economy has proven remarkably resilient.

Following a steep decline in early 2020, the world economy rode a rebound that began in May and remains on track to surpass prepandemic GDP levels by the end of this year—setting the stage for strong post-recovery growth in 2021.

In their 2021 outlook, the economics team at Morgan Stanley Research says the V-shaped recovery that the team forecast in their 2020 midyear outlook is now entering a new self-sustaining phase and is on track to deliver 6.4% GDP growth in the coming year.

“This projection stands in stark contrast to the consensus, which forecasts 5.4% global growth and worries that the pandemic will have a bigger impact on private-sector risk appetite and, hence, global growth,” says Chetan Ahya, Morgan Stanley’s Chief Economist. “We maintain that consumers have driven the recovery, and investment growth—a reflection of the private corporate sector’s risk tolerance and a key feature of any self-sustaining recovery—is bouncing back as well.”

Three key factors will characterize the next stage of the V-shaped recovery, says Ahya: synchronized global growth, an emerging-market rebound and the return of inflation. Against this macro outlook, Morgan Stanley strategists urge investors to trust the recovery and overweight equities and credit vs. government bonds and cash (see the 2021 Strategy Outlook for more). more>

4 Steps to Sustainable Investing

Morgan Stanley – For institutional asset owners, the case for incorporating sustainable investing into portfolio management is only getting stronger. As the wide-ranging implications of sustainability issues, such as public health, climate change and social justice, become more apparent, so too have they become essential to effectively assessing investment risks and opportunities.

Helping to make the case is evidence showing that incorporating environmental, social and governance (ESG) factors in portfolios could aid investors in capturing above-market returns. While the coronavirus pandemic induced a global recession and market volatility in the first half of 2020, sustainable funds—across stocks and bonds—in general helped investors weather the period better than many of their traditional peers,* according to a recent study by the Morgan Stanley Institute for Sustainable Investing. During a longer time horizon, from 2004 to 2018, sustainable funds experienced 20% less downside risk compared with traditional funds,* according to another Institute report, and 4-in-5 asset owners agree that sustainable investing may be an effective risk-management strategy and lead to higher profitability. In addition to financial performance, asset owners see an opportunity to target positive social and environmental impact, avoid reputational risk and comply with regulations. more>

Updates from Chicago Booth

Some basic economics of COVID-19 policy
A look at the trade-offs we face in regulating behavior during the pandemic
By Casey B. Mulligan, Kevin M. Murphy, and Robert H. Topel – The costs of the COVID-19 crisis come in two primary forms. The first is the direct impact in terms of health and lives lost. The second is the indirect impact that comes from efforts by individuals, private institutions, and governments to mitigate those health impacts, such as social distancing, stay-at-home orders, and mandatory business closures. It is imperative that we keep in mind that both are costs, and that less of one typically means more of the other. Like it or not, the first lesson of economics is that there are trade-offs, and choices are inevitable.

Regardless of how we choose to bear them, the costs of the pandemic will be large. Some very rough estimates provide perspective. Based on our earlier work on the value of mortality reductions and improved health, we estimate that an unrestricted pandemic infecting 60 percent of the US population and with an infection fatality rate (IFR) below 1 percent would result in roughly 1.4 million deaths, heavily concentrated among the elderly, with a total value of lost lives of about $6 trillion. For comparison, that is equivalent to about 30 percent of annual US GDP, suggesting that even small progress against the spread of the disease can be quite valuable.

Against this, we estimate that efforts to slow the pandemic via a nationwide shutdown of “non-essential” economic activities would carry a cost approaching $7 trillion per year (roughly $20 billion per day), even ignoring other long-run costs from reduced values of human and physical capital and any intrinsic value of reduced civil liberties.

Of course, an unrestricted pandemic is implausible even in the absence of government interventions, as individuals have powerful incentives to engage in self-protection once the risks are even partially known. Even so, these are big numbers. more>

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Updates from Chicago Booth

A simple framework to help revive the US economy
By Emily Lambert – The COVID-19 crisis has seemingly left US policy makers with a choice between two terrible options: keep the economy shut down, or risk allowing the disease to run rampant throughout the populace, overwhelming the health system and opening the door to an unthinkable number of deaths.

But there is a middle course that decision makers can chart, and Chicago Booth’s Eric Budish has created a framework to help them do so. Managing COVID-19 for the time being, he says, requires bringing the rate of the disease’s spread down to an acceptable level and then finding ways to maximize economic activity without exceeding those epidemiological bounds. And he suggests that some combination of low-cost interventions, such as public-awareness campaigns and requiring people to wear masks in public, could be the way forward.

His framework starts with the rate of transmission of the coronavirus that causes COVID-19. Let’s assume the rate of transmission is 2—one person infects two people, those two infect four, the four infect eight, and so on. The actual rate is currently uncertain, but many estimates put the unconstrained rate, absent interventions, at between 2.5 and 3.

Ideally, interventions would bring the rate of infection to 0 and wipe COVID-19 from the planet. But there could be huge social and economic costs involved, at least until a vaccine or cure is developed. For example, one influential epidemiological model by scholars at Imperial College London, which helped push the US and UK governments to impose lockdown measures, predicts that schools would need to be closed for most of two years, Budish notes.

Is there an acceptable alternative? Reducing the rate to 1 or less would contain the spread, he notes. Take R as the rate of transmission. If R = 2, the number of infections doubles constantly and quickly, but R < 1 constrains the exponential growth. China, South Korea, Singapore, and Hong Kong have all managed to bring the rate under 1 by using social distancing, widespread testing, and other nonpharmaceutical interventions, Budish writes. Other countries could similarly reduce the rate to below 1, maybe by overshooting it at first to err on the side of human health. more>

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China, America, and the International Order after the Pandemic

By Mira Rapp-Hooper – As people around the world fall ill, global markets convulse, and supply chains collapse, COVID-19 may also reorder international politics as we know it. No analyst can know when this crisis will end, much less divine the world we will meet at its conclusion. But as scholars have begun to note, it is plausible that China will emerge from the wreckage as more of a global leader than it began.

Following World War II, the United States was a chief architect of the so-called liberal international order and became its uncontested leader with the Cold War’s end. China, with its breathtaking economic growth and vast increases in military spending, has been on the ascent for decades, but long remained focused on domestic stability and the security of the Chinese Communist Party. It clambered to center stage after 2008, when the global financial crisis appeared to signal a weakening of American primacy.

China and others took the American financial stumble as a blunder of democratic capitalism, and a moment of opportunity to advance their own agendas. Under Xi Jinping, Beijing has seen the last decade as a period of “strategic opportunity” — one it did not necessarily expect to last, as it faces its own expected economic and demographic slowdowns. It built military bases in the South China Sea in contravention of international law, launched the vast and opaque Belt and Road Initiative to spread economic and political influence, doubled down on the state’s role in the economy and prejudicial policies, and coopted international human rights bodies. Along the way, it began to develop its own global governance aspirations and visions.

With the election of Donald Trump, the United States widened Beijing’s window of opportunity with its self-inflicted political convulsion. To China’s great fortune, American foreign policy was now expressly hostile to multilateral institutions, bellicose on trade, and defined national security in terms of narrow, homeland defense. To experts in the United States and abroad this looked like a willing abdication of the system the United States had constructed and led. But alongside these fears, and in another significant shift, foreign policy thinkers from both major parties increasingly agreed that the United States and China had entered a period of a great-power competition, in part, over the future of the international order and which power would set its terms.

Alone, the United States could not hope to match China’s economic and military heft in Asia. With allies by its side, America could remain peerless and manage peaceful change. Narrow unilateralism stoked renewed perceptions of further American decline and attenuated an otherwise favorable balance of power.

Enter the novel coronavirus.

It should be stunning that a virus that originated in China and spread in part due to Chinese government mismanagement may reorder the world to Beijing’s advantage, as Kurt Campbell and Rush Doshi have argued. more>

Updates from Chicago Booth

Many retailers are making a basic mispricing mistake
By Robin I. Mordfin – Retailers have long set prices ending in 99 cents, knowing that buyers view $4.99, for example, as significantly less expensive than $5. But many companies underestimate consumers’ left-digit bias and should be using these prices more than they do now, according to research by Chicago Booth’s Avner Strulov-Shlain.

Strulov-Shlain analyzed price data from 1,710 popular products in 248 stores of a single US retailer, as well as data on 12 products carried by more than 60 chains and in 11,000 of their stores. He finds that one-quarter to one-third of all prices ended in 99 cents.

But companies tend to miscalculate how customers react to a one-cent price change, Strulov-Shlain asserts. Buyers treat a price increase from $4.99 to $5 as if it were a 15–25 cent increase, while companies behave as if customers respond as though it were a 1.5–3 cent increase.

To learn how much companies should charge, Strulov-Shlain built a model that combines previously established left-digit bias models with a profit-maximizing formula that takes left-digit bias into account. Using the model and retailers’ pricing data, he estimates what price sensitivity and left-digit bias the companies had in mind when setting prices. Many items would have been better priced with a 99-cent ending, because demand dropped when the dollar digit changed, he finds. That was also the case at higher costs, where selling more units for the lower 99-cent price was more profitable than selling fewer units at a higher price. more>

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A Foreign Policy for All

Strengthening Democracy—at Home and Abroad
By Elizabeth Warren – Around the world, democracy is under assault. Authoritarian governments are gaining power, and right-wing demagogues are gaining strength. Movements toward openness and pluralism have stalled. Inequality is growing, transforming rule by the people into rule by wealthy elites. And here in the United States, many Americans seem to accept—even embrace—the politics of division and resentment.

How did we get here?

There’s a story Americans like to tell ourselves about how we built a liberal international order—one based on democratic principles, committed to civil and human rights, accountable to citizens, bound by the rule of law, and focused on economic prosperity for all. It’s a good story, with deep roots. But in recent decades, Washington’s focus has shifted from policies that benefit everyone to policies that benefit a handful of elites. After the Cold War, U.S. policymakers started to believe that because democracy had outlasted communism, it would be simple to build democracy anywhere and everywhere. They began to export a particular brand of capitalism, one that involved weak regulations, low taxes on the wealthy, and policies favoring multinational corporations. And the United States took on a series of seemingly endless wars, engaging in conflicts with mistaken or uncertain objectives and no obvious path to completion.

The impact of these policy changes has been devastating. While international economic policies and trade deals have worked gloriously well for elites around the world, they have left working people discouraged and disaffected. Efforts to promote the United States’ own security have soaked up huge resources and destabilized entire regions, and meanwhile, U.S. technological dominance has quietly eroded. Inequality has grown worldwide, contributing to an unfolding nationalist backlash that seeks to upend democracy itself. It is little wonder that the American people have less faith in their government today than at any other time in modern U.S. history. The country is in a moment of crisis decades in the making.

To fight back, we need to pursue international economic policies that benefit all Americans, not merely an elite few. We need strong yet pragmatic security policies, amplified by diplomacy. And the United States can no longer maintain the comfortable assumption that its domestic and foreign policies are separate. Every decision the government makes should be grounded in the recognition that actions that undermine working families in this country ultimately erode American strength in the world. In other words, we need a foreign policy that works for all Americans.

The urgency of the moment cannot be overstated. At home and abroad, democracy is on the defense. The details of the problem vary from place to place, but one cause stands out everywhere: the systematic failure to understand and invest in the social, political, and economic foundations on which democracies rest. If we do not stand up to those who seek to undermine our democracy and our economy, we will end up as bystanders to the destruction of both. more>

Updates from McKinsey

Four ways governments can get the most out of their infrastructure projects
Best practices can help governments invest in infrastructure that expands the economy and better serves the public.
By Aaron Bielenberg, James Williams, and Jonathan Woetzel – Infrastructure—for example, transportation, power, water, and telecom systems—underpins economic activity and catalyzes growth and development. The world spends more than $2.5 trillion a year on infrastructure, but $3.7 trillion a year will be needed through 2035 just to keep pace with projected GDP growth.

National, state, and local governments are devoting increased amounts of capital to meet these needs, and for good reason. The McKinsey Global Institute estimates that infrastructure has a socioeconomic rate of return around 20 percent. In other words, $1 of infrastructure investment can raise GDP by 20 cents in the long run.

Gains from infrastructure are fully realized, however, only when projects generate tangible public benefits. Unfortunately, many governments find it difficult to select the right projects—those with the most benefit. Furthermore, infrastructure can provide social and economic advantages only when the capital and operating costs can be financed sustainably, either by the revenues a project generates or by the government sponsor. Too many projects become an economic burden and drain on finances when a government borrows money for an undertaking and neither its revenues nor its direct and indirect economic benefits adequately cover the cost.

Our framework includes four key best practices to help modernize decision making for infrastructure and to improve its social and economic impact. Each step is enabled by and contributes to a consistent, fact-based process for identifying and executing infrastructure projects. The first step—ensuring that projects yield measurable benefits—lays the foundation for all the rest.

  1. Develop projects with tangible, quantifiable benefits
  2. Improve the coordination of infrastructure investments to account for network effects
  3. Engage and align community stakeholders to promote inclusive economic and social benefits
  4. Unlock long-term capital

Consistent, transparent assessments are required to determine if infrastructure satisfies the elements of our framework—whether a project offers robust public benefits, is compatible with other projects and appropriately aligned with the community’s objectives, and uses the best long-term financing available. Thus, governments may have to invest in capabilities to evaluate the benefits of projects and commit themselves to transparent evaluations that include the necessary checks and balances.

Governments should assess their institutional capabilities against the framework’s elements, such as mapping current processes to develop infrastructure projects from concept to operation.

Can the government complete a structured quantification of public benefits?

Is there a way to assess the portfolio as a whole in light of the debt-management strategy? more>

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