Five signs this week of global recovery from an unemployment crisis
This will be a quiet week for finance, if a noisy one for politics. It is a short week for the markets – today is a holiday in both the US and UK – and also a week short of new information about the world economy. The background, however, is a solid and widening expansion so the sort of things to look for will be evidence that growth is indeed broadening from the US to Europe and beyond, and whether the present confidence in the financial markets persists.
The most important bit of news will be what is happening to employment and unemployment in the US. The question is simply: how low can US unemployment go? Jobs are still being created and official unemployment numbers are still nudging downwards. The US would seem to be at or close to full employment, with unemployment at 4.4 per cent. That is at the bottom of its range of the past 30 years.
But there is not much sign of wage pressure, or at least not enough to lead to cost-push inflation. So maybe something has changed in US society that will enable unemployment to go much lower, say to 3.5 per cent. The numbers, out on Friday, will presumably convince the Federal Reserve to increase interest rates again, as it has clearly signalled it wishes to do.
In Europe, the issue is how fast can employment rise? German unemployment figures are published on Wednesday and will confirm the strong recovery there. But the more interesting story, which the financial markets have picked up but which is still not widely appreciated, is that there is a Europe-wide growth spurt under way.
Not everyone has felt that. Unemployment in France is still 9.6 per cent, and according to official figures nearly a quarter of young people are unemployed. But the direction of travel is very clear, and it is up. This sharpens the dilemma facing the European Central Bank. Germany needs, or at least could stand, the end of quantitative easing and a return to more normal interest rates. The rest of the eurozone, including France, could not.
Up to now world markets have been calm and content in the face of rising US interest rates and political uncertainty. Volatility, as measured by the Chicago Board Options Exchange’s Volatility Index, or “fear index”, is at an all-time low. Can volatility stay low with markets at record levels? Or are we all being lulled into a false sense of security? This is not a new question, for it has been rumbling away in the background for weeks, but the longer it hangs in there, the sharper the tension between financial calm and political uncertainty.
The strong share valuations are underpinned by solid company results worldwide. We are through the reporting season now so there is no big news on that front, but we will get a feeling for the strength of global manufacturing from the purchasing manager indices this week. The all-important services PMIs for the UK won’t come out for another week, the last bit of significant data before the election, but decent manufacturing numbers will be good for all.
Finally I am interested in the oil market. Will another round of Opec production cuts really steady prices? Or is the great shift away from fossil fuels happening too swiftly for oil producers to adapt? A quarter of the UK’s electricity supply came from solar for a period last week. All right, the sun was unusually strong and it is late May so the days are long. But I don’t think we have got our minds round the shift in general economic power that will result from the move away from fossil fuels. The G7 meeting in Sicily last week was short on commitments to shift to greener energy, but economics is doing the job that politics seems to be failing to do.