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IMF-Europe's Inflation Outlook Depends on How Corporate Profits Absorb Wage Gains
June 26, 2023-- Rising corporate profits account for almost half the increase in Europe's inflation over the past two years as companies increased prices by more than spiking costs of imported energy.
Now that workers are pushing for pay rises to recoup lost purchasing power, companies may have to accept a smaller profit share if inflation is to remain on track to reach the European Central Bank's 2-percent target in 2025, as projected in our most recent World Economic Outlook.
Inflation in the euro area peaked at 10.6 percent in October 2022 as import costs surged after Russia's invasion of Ukraine and companies passed on more than this direct increase in costs to consumers. Inflation has since retreated to 6.1 percent in May, but core inflation-a more reliable measure of underlying price pressures-has proven more persistent. This is keeping the pressure on the ECB to add to recent interest-rate rises even though the euro area slipped into recession at the start of the year. Policymakers raised rates to a 22-year high of 3.5 percent in June.
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Source: IMF.org
IMF Working Paper-Euro Area Inflation after the Pandemic and Energy Shock: Import Prices, Profits and Wages
June 23, 2023--Summary:
We document the importance of import prices and domestic profits as a counterpart to the recent increase in euro area inflation. Through a novel consumption deflator decomposition, we show that import prices account for 40 percent of the average change in the consumption deflator over 2022Q1-2023Q1, while domestic profits account for 45 percent.
The increase in nominal profits was largest in sectors benefiting from increasing international commodity prices and those exposed to recent supply-demand mismatches.
While the results show that firms have passed on more than the nominal cost shock, and have fared relatively better than workers, the limited available data does not point to a widespread increase in markups. Looking ahead, assuming nominal wage growth of around 4.5 percent over 2023-24-slightly below the level seen in Q1 2023 – and broadly unchanged productivity, a normalization of the profit share to the average level over 2015-19 will be necessary to achieve a convergence of inflation to target over the next two years. Monetary policy will thus need to remain restrictive to anchor expectations and maintain subdued demand such that workers and firms settle on relative price setting that is consistent with disinflation.
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Source: IMF.org
Investment managers predict impending booms in two high growth areas: SIX study
June 22, 2023--Global members of the buy-side community are bullish on digital assets and ESG investing amid widespread dialogue on both spaces, according to new research from SIX Group.
The study, 'Cornerstones for Growth' (a Future of Finance Report from SIX), surveyed 300 portfolio managers, asset allocators, and hedge fund managers, across Europe, Asia, and the United States.
There were strong indications from the respondents that there is a significant role to play for market infrastructure providers, data vendors, and technology providers if firms are to reach the levels of growth in each area that was broadly predicted.
The demand for extensive institutional experience was particularly felt in the digital assets arena, where confidence in the way digital assets are traded is being consistently cited as a gateway to greater adoption. Over 60% of respondents pointed to a safer trading environment as the key driver.
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Source: six-group.com
Europe's digital retail ETF market catches State Street's attention
June 22, 2023--SSGA is exploring digital distribution of exchange traded funds
Inflows to ETFs from retail investors without financial intermediaries have been rising, particularly in Germany, where savings plans have encouraged the use of low-cost products.
The number of ETF savings plans in Germany has grown from 160,000 in 2014 to about 3.76mn. Assets in the plans have grown from €194mn to €7.7bn over the same period, according to extraETF Research.
Source: ft.com
Official Statistics: Forecasts for the UK economy: June 2023
June 21, 2023--A comparison of independent forecasts for the UK economy in June 2023.
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Source: gov.uk
New Amundi ETF on Xetra: access to the global bond market for investment-grade corporate bonds
June 21, 2023--Since Wednesday, a new exchange-traded fund issued by Amundi Asset Management has been tradable on Xetra and via Börse Frankfurt.
The Amundi EUR Corporate Bond 1-5Y ESG UCITS ETF allows investors to invest in a global portfolio of investment-grade fixed income corporate bonds.
All bonds in the portfolio are denominated in euros and were issued by companies from developed and emerging markets. The remaining maturity of the underlying bonds ranges from one year to up to five years. All securities must have a rating of at least BBB.
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Source: Xetra
New ETFs from L&G on Xetra: access to Gerd Kommer's global portfolio concept as well as high quality companies from the UK and emerging markets
June 21, 2023--Since Wednesday, four new exchange-traded funds issued by Legal & General Investment Management have been tradable on Xetra and via Börse Frankfurt.
For the first time, the L&G Gerd Kommer Multifactor Equity UCITS ETF offers investors the opportunity to invest in companies from developed and emerging markets that are selected according to Gerd Kommer's global portfolio concept.
The countries are weighted 50 per cent by market capitalisation and 50 per cent by economic growth, measured by gross domestic product (GDP). In particular, this aims to reduce the so-called cluster risk of the US market. The ETF also takes a multi-factor approach by overweighting the factor premiums size, value, quality, investment and momentum. Investors can choose between a distributing and an accumulating share class.
With the two L&G Quality Equity Dividends ESG Exclusions UCITS ETFs, investors participate in the performance of high-dividend companies that have high profitability. Companies that do not meet certain ESG criteria are excluded. You can choose from companies from the United Kingdom and emerging markets.
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Source: Xetra
Solactive Partners with LGIM and Investment Expert Gerd Kommer to Launch Solactive Gerd Kommer Multifactor Equity Index
June 21, 2023-Solactive, in collaboration with Legal & General Investment Management (LGIM) and renowned German investment expert Gerd Kommer, is excited to announce the launch of the Solactive Gerd Kommer Multifactor Equity Index.
This index, built upon a sophisticated multifactor optimization strategy and a comprehensive global markets universe, aims to provide investors with exposure to the equity market in both developed and emerging countries as well as small-, medium- and large-caps. The Solactive Gerd Kommer index consists of around 5,000 stocks. The weights of stocks are tilted towards undervalued, more profitable and lower-capitalisation stocks.
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Source: Solactive
UK government debt rises above 100% of GDP for first time since 1961
July 21, 2023--In blow to Rishi Sunak's plans to cut taxes before general election, net debt reached £2.6tn at of end of May
The UK's total government debt pile in May reached more than 100% of annual national income for the first time since 1961 as state borrowing more than doubled, according to official figures.
In a blow to Rishi Sunak's plans to cut taxes before the general election, which is expected next year, the Office for National Statistics (ONS) said net debt reached £2.6tn as of the end of May, estimated at 100.1% of gross domestic product (GDP).
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Source: theguardian.com
IMF Working Paper-Firm Leverage and Boom-Bust Cycles
June 16, 2023--Summary:
This paper explores the dynamic relationship between firm debt and real outcomes using data from 24 European economies over the period of 2000-2018. Based on macro data, it shows that a rise in credit to firms is associated with an increase in employment growth in the short-term, but employment growth declines in the medium-term. This pattern remains similar, even when the changes in credit to households are accounted for.
Next, using data from a large sample of firms, it shows that firm leverage buildups predict similar boom-bust growth cycles in firm employment: Firms with a larger increase in leverage experience a boost in employment growth in the short-term, but employment growth decreases in the medium-term. Relatedly, the volatility of employment growth increases in the aftermath of firm leverage buildups. Finally, this paper provides suggestive evidence on the role of a financial channel in the relationship between firm leverage buildups and employment growth. The results show that a rise in firm leverage is associated with a persistently higher debt service ratio, pointing the drag on finances. Consistently, boom-bust growth cycles in the aftermath of firm leverage buildups are not limited to employment growth, but are also pronounced for investment. Moreover, the medium-term decline in firm employment growth as predicted by leverage buildups becomes even larger if aggregate financial conditions tighten. The findings are in favor of "lean against the wind" approach in policy making.
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Source: imf.org
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