Tags: politics | economy | direction | investors

Politics Will Continue to Be Swing Vote in Economy's Direction

pair of businessmen shaking hands with an american flag and money falling down around them
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Monday, 07 January 2019 11:21 AM Current | Bio | Archive

2018 was a year when economies did almost exactly what economists expected and markets were volatile nonetheless.

The difference of course was “politics.”

A lot of economics is about “relative” performance, about one part of the economy performs relative to another part of the economy.

For many years, large listed companies have outperformed the overall economy with a rising profit share of GDP and tax systems benefitted larger companies, generally speaking, and the global trade system that has worked to the advantage of large companies, and so forth…

That relative performance was challenged by politics last year. Labor costs for large companies have started to increase. The global trade system that has become so important to the efficiency of large companies became less efficient. The underlying economy continued to perform just as expected, but the relative position of large listed companies within that economic performance was questioned because of the political outlook.

Relative economics says it is perfectly possible for the economy to be fine but for financial markets to be at a relative disadvantage.

That said, last Friday, the U.S. gave us a strong employment report for December. This was showing that companies have to pay up to attract workers and indeed having to pay higher wages to attract people back into the workforce. This is a signal of economic strength. Companies do not hire more workers and pay meaningfully higher wages to hire more workers if there are serious concerns about the economic outlook.

This means that household incomes should continue to be supported, which will help the economy.

However, in a relative sense it also does mean that large companies may start to face some increased cost pressures in the future.

Federal Reserve Chairman Jerome Powell, in remarks on Friday, was keen to stress the strength of the overall U.S. economy reflecting this economic position, but the Fed chair also recognized the relative challenges that the large listed corporate sector faces by acknowledging financial market volatility.

Politics will continue to influence markets by continuing to change relative performance within economies more than it changes the absolute performance for the economies.

The U.S. government shutdown continues with the exciting prospects of yet more talks over the next few days. The longer this goes on, the greater the negative impact on specific sectors of the U.S. economy.

The other issue with the government shutdown is that it does prevent publication of many government statistics. Private sector opinion polls like the ISM non-manufacturing survey that is due today will still be published.

Brexit

In the UK, the political focus on the interminable tedious process of leaving the European Union (EU) continuous with the UK Parliament returning to discuss the matter this week.

The government’s proposed plan for exit is widely expected to be rejected by Parliament this week, but there are no alternative solutions that could command a majority in Parliament at the moment.

Speaking yesterday, UK Prime Minister Theresa May warned that if Parliament rejects her Brexit deal, the country faces "uncharted territory."

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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Relative economics says it is perfectly possible for the economy to be fine but for financial markets to be at a relative disadvantage.
politics, economy, direction, investors
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2019-21-07
Monday, 07 January 2019 11:21 AM
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