Global Economic Political Policy Uncertainty Explodes

2018 wasn’t a great year for the global economy as countries like Germany and China saw sharp growth deceleration. There is heightened political and economic uncertainty in 2019. As you can see from the chart below, global economic policy uncertainty is higher than it has been since at least 1997. It’s even higher than in 2016 when the Brexit vote and U.S. presidential election took place.

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It’s 2019 and we are still wondering what to make of the Brexit. On March 29th it appears Britain will leave the EU. Britain is trying to make a deal with Europe to avoid a hard Brexit. A hard Brexit would make the transition period where Britain leaves the EU tougher. It’s a breakup without a plan to allow it to go smoothly and allow business to still take place right away. There is also uncertainty about the transition of the ECB head. Mario Draghi’s non-renewable 8-year term will expire on October 31st, 2019.

The American government has been shut down for 27 days now. President Trump canceled House Speaker Nancy Pelosi’s trip after she wondered if the President would be able to give the State of the Union speech because the government is shut down.

Global Economic Political Policy -That makes it look like both sides are far from agreeing to open the government. 

I see no way there will be a deal in the next few days.

I still think leaders really don’t want government workers to miss another paycheck. We also have uncertainty with how China’s government will deal with its slowdown if the fiscal stimulus doesn’t work. We also don’t know if America and China will make a trade deal.

American stocks rallied on Wednesday on a rumor that America would lower tariffs with China. However, the U.S. Treasury shot down that rumor, so uncertainty reigns supreme.

Finally, we have the chart below which shows 36% of the planet is voting in 2019. The chart shows the populations of the countries voting and the month the elections are in. As you can see, India’s election is in April. India has now become the new leader in global growth since China is slowing quickly. India will soon pass China in population and total GDP.

Global Economic Political Policy - Global GDP Growth Estimates

The chart below shows the big decline in the consensus for global 2019 earnings growth.

More analysts are lowering their estimates than raising them at the highest rate since the last major recession. As you can see, Citi Strategy is more bearish than the consensus as it only expects 4% growth. The market expects -1% growth.

Out of all the years in this chart, only 2015 had a negative year over year global earnings growth.

I don’t think the global slowdown is over. Some economists aren’t taking the slowdown seriously as they stated if Germany was to go into a recession in the 2nd half of 2018, it would only be a technical recession. They meant GDP growth would be negative for 2 quarters, but serious damage wouldn’t be done.

Ultimately, Q4 GDP growth ended up being 0.1%, so Germany avoided a recession. However, the metric could be updated to show growth went negative.

Global Economic Political Policy -Young People Are Getting Paid

The labor market has changed dramatically for teenagers and young 20-somethings in the past couple of decades. Older baby boomers don’t understand this change and think young people are lazy because many don’t have jobs.

There are fewer entry-level jobs for young people as many jobs have become automated. More young people now stay in school than get jobs. Many starting jobs require a college degree and experience. This makes it tough for a young person to enter the labor force.

Even though this struggle still exists, it certainly helps for the labor force to be tight and for non-supervisory production workers to be getting real pay raises. The cyclical effect is helping young workers relative to older workers.

As you can see from the chart below, workers from ages 16 to 24 are getting paid the most relative to workers 25 and older since 2002. As you can see, there was recently a monthly burst higher. The 4-month moving average is also in an uptrend which tells us this isn’t a one-off event.

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Global Economic Political Policy -Historical Profits Per Employee

Many jobs that don’t require a college degree have been eliminated because of technological advances. That’s great for businesses because it means they can make more money per worker.

As you can see in the chart below, real sales per employee increased steadily from 1986 to 2007. For the next few years, the rate was range bound. It looks like the ratio is breaking out again as the adoption of technologies such as AI are further eliminating jobs.

One challenge businesses have as a whole with becoming less labor intensive is that demographics imply we need more workers. Specifically, older people need healthcare workers. It’s easier to eliminate repetitive jobs in manufacturing that it is to eliminate nursing jobs.

To be clear, the goal isn’t to destroy people’s livelihoods; it’s to make people more effective. Plus, if a machine can take care of a person better than a human, such as through assisting surgeons, patients are getting better care.

One final point on this topic is that businesses becoming more efficient can make them less susceptible to wage inflation. We have noticed this cycle that wage inflation hasn’t boosted overall prices.

Even though automation may seem terrible for workers, if it helps prevent inflation from increasing, it can generate real wage growth for the more effective workers that have skilled jobs. To be clear, a skilled job doesn’t necessarily require a college degree.

Global Economic Political Policy -Conclusion

It could end up being the perfect storm that there is an economic slowdown combined with political uncertainty. I will be watching the Indian election closely in April.

It’s great to see young workers getting paid well even though fewer young people are participating in the labor force because jobs require more skills than in previous decades.