The Economist: Finance and Economics articles summarised (3 March 2019)

++ NEW FOR 2019: Thanks to our contributor BallyMoney we will now be bringing you a summary of the finance and economics articles from each week’s Economist ++

A Commerzbank/Deutsche merger would solve neither of their problems
Germany’s banking market is crowded with 1,580 banks grouped into three “pillars” of private, public and co-operative. The public contains 385 Sparkassen (savings banks) and 6 Landesbanken (clearers for Sparkassen). The 875 co-ops have Germany’s second largest DZ Bank, as their clearer. German banks’ average ROE was 1% in 2016, although DiBa (ING’s online version) managed double digit returns. Deutsche Bank only started adapting to the financial crisis of 2007-2008 in 2015 and in 2018 its ROE was 0.4%. Commerzbank’s was 3%. The German govt would like them to merge, although they have limited say as they only hold 15% of Commerzbank and none of Deutsche. A merger would mean they could cut retail costs and the two together hold 20% of total deposits; also Commerzbank mainly covers the Mittelstand (private export-oriented firms) and Deutschebank concentrates on bigger companies. However Deutsche is still tying two systems together with Postbank, meaning Commerz would be a third and both banks are slashing costs now in any case. Germany’s banking industry needs to consolidate faster.

Will the ECB be forced to cut rates?
They have been patiently waiting for inflation to rise. It hasn’t. Core inflation has hovered around 1% since 2015 and that’s despite robust economic growth in 2017 and 2018. Now that growth is slowing there is a concern inflation will too. See chart below for the medium term inflation-linked swap rate, the ECB’s favoured guide to market expectations of inflation. They have committed to keeping rates on hold through the summer but they might have to push this out.


Governments are turning receipts into lottery tickets to make it harder for retail businesses to evade tax
Taiwan was the first in 1951. Worldwide value-added taxes are 20-35% of government revenue but as much as a third of this may be lost through under-reporting. If customers receive receipts with a code that enters into a central prize draw then sales will be recorded and not go unreported by the retailer. Slovakia has had a scheme since 2013 but thinks it only added EUR8mio to VAT receipts. São Paulo is so sure its receipt lottery increases tax collection, not only do they enter the draw but they receive a 30% rebate of the sales tax paid.

The Federal Reserve is reviewing its monetary policy framework
With unemployment at its lowest level in decades, inflation close to target and interest rates globally close to zero, now seems a good time to see if the Fed’s policy toolkit can be expanded. There is concern come the next downturn there will be no room to act with monetary policy. Average inflation targeting is one route. where the 2% target is spread out over time. This means that overshooting is only compensating for undershooting, but people have to believe the Fed can and will do this.

Asking the CEO of a company what is going on may not give you the best answer
Elon Musk has made claims via Twitter that saw him fined and confused investors, but there are alternative data sources. Quandl, a data provider, receives data from insurance companies that tell it how many insurance policies are being taken out on Tesla cars so it can work out how many are on the roads. Bloomberg tracks Vehicle Indentification numbers (VINS) so it can tell how many Tesla are registered. Evidence Lab took apart a Tesla Model 3, Chevy Bolt and BMW i3 to find out how much each vehicle cost to make, thereby calculating when companies become profitable. Tesla’s build quality was poor yet costs were high.

Narendra Modi has not made the decisive break from the past that was hoped for
No big reforms of the labour market, no scrapping of the employment guarantee scheme or identity scheme, but he did implement the nationwide value-added tax that was previously proposed by Congress. Continuity persisted despite Modi’s party winning a rare majority in parliament. His power is checked by the upper house, courts, public auditors and the states. He did cut red tape (India has risen 65 places in the World Bank’s ranking of ease of doing business). He removed fuel subsidies helping to beat inflation and reduced corruption. His most innovative decision was his worst, cancellation of high value bank notes. The government was surprised when most of the notes were redeemed. It seemed to do little harm to the economy but this is hard to know as the government has since discontinued and delayed official data which did not flatter it.

The world’s manufacturing upswing has slowed
It started around the time Trump raised tariffs on washing machines as the govt ratcheted up its trade war with China, but there’s more to it than that. The downturn looks like 2015, which was partly due to the bust that followed the shale boom. China was also a large factor then, as they reined back credit following the financial crisis and tried to implement measures to open their financial markets, which were premature and resulted in money fleeing the country and stock prices crashing. The taps were then turned back on. The “augmented” budget deficit (i.e. the real budget deficit when taking govt’s special purpose lending vehicles etc into account) rose to an estimated 15% of GDP. This was then turned down again. China should not matter so much given its tight capital controls make financial links with the rest of the world modest, but the world has grown to rely on them too much. With rates at or below zero there’s not much room to manoeuvre. China has turned on the taps again.

– Summarised by BallyMoney, 3 March 2019

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