"Kee" Points with Jim Kee, Ph.D.

The fall in the value of the British pound and the stable transition to a new government has evidently created a surge in interest in commercial property in the UK, particularly among Chinese buyers (Asian Times). That’s a good sign; uncertainty and panic should give way to more opportunistic behavior if a crisis is expected to be more temporary and local than global and permanent. Of course, the maximum negative impact of the Brexit vote on the economy there (and spillover to Europe) hasn’t had enough time to get reflected in the data yet (it is starting to show up), but the stabilization we’ve seen in markets for currencies and for equities since the vote on June 23rd is encouraging.

You probably heard that the International Monetary Fund (IMF) lowered its growth forecast for 2016 to 3.1% (similar to last year). This “mid-year lowering” has been a tradition now in just about every year since the Great Recession. When you have consistent forecasting errors in the same direction for that long, either something’s wrong with your model (you don’t really understand growth) or you have a positive bias for other reasons. With the IMF and other official agencies around the world I believe it has been a little bit of both. The primary reasons for the downgrade are the impact of Brexit on the UK and Europe and the headwind of a stronger yen on Japanese exports and a resulting slowing of growth, which makes sense to me. In fact, I felt that the IMF went into this year finally adjusting for their previous positive bias, which means the unexpected Brexit vote shock should have led to a subsequent growth downgrade, and it did.

Here’s an economist’s aside: Back in the days of the classical economists like Adam Smith, strong positive interest rates (3%-5%) were considered a sign of a healthy and prospering economy. Lower rates were seen as a sign of low growth or stagnation. Rates that are too high of course reflect “default risk” or the risk of economic or currency collapse, but that was less common in Smith’s day because there were fewer “fiat” or pure paper currencies established by government decree (that’s what fiat means). That’s not a bad way to think about the world today. The highest interest rate countries, those with double-digit interest rates or close to it, include economies with debt-default concerns or that have suffered from the oil price collapse, many of whom have resorted to printing money. Examples include Venezuela, Brazil, Russia, and Greece. Those in the more moderate range are the better growers, including the US, China, India, and several smaller Asian economies. The lowest interest rate countries, like Japan and the broad Euro area, are experiencing weaker/stagnant growth. There are exceptions when looking across the 163 World Trade Organization (WTO) countries, but that’s a pretty good way to think about the world right now.