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Ending Easy Money Will Require Economic Adjustments

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Since the global financial crisis, central banks have added trillions to balance sheets, and many markets have recovered. Now a major question lingers for central bankers, policy-makers and investors about balancing the effects of higher interest rates and tighter monetary policy.

“We are in pretty unchartered territory. Exiting from QE [quantitative easing] will be a difficult exercise,” said Axel A. Weber, Chairman of the Board of Directors, UBS, Switzerland.

“QE has been a resounding success in the US, EU, Sweden, everywhere. It’s the strongest recovery for past 20 years,” said Benoît Coeuré, Member of the Executive Board, European Central Bank, Frankfurt. But the recovery has raised a key question for some central bankers: “How can it be that we’ve injected so much money into the system, and inflation is still weak?” Coeuré asked.

Central bankers focus heavily on inflation rates; however, some economists believe that the meaning of inflation is changing due to fundamental shifts in the markets. Namely, technology has changed the way people live, work and consume.

“Do we really understand what inflation means today?” asked Min Zhu, Chairman, National Institute of Financial Research, People’s Republic of China. Zhu cited e-commerce, artificial intelligence and automation as some of the factors that raise questions about the relationship between inflation and growth.

Low inflation rates are also linked to the low-wage growth that much of the developed world is experiencing. Despite billions of dollars created by central banks in quantitative easing, average wages for most workers have not increased significantly.

“As an employee, you will ask for a higher salary when you have the opportunity to do it,” said Cecilia Skingsley, Deputy Governor, Swedish Central Bank (Sveriges Riksbank). Skingsley noted that changing models of employment – such as the “gig economy”, which offers flexible work options but little income certainty – have left many employees without job security and thus poorly equipped to advocate for higher wages.

While the era of easy money has powered increases in GDP and equity markets, some experts see signs of a future downturn. On the one-year horizon, tax cuts in the United States are likely to stimulate growth, and low interest rates and high government spending in both the US and the EuroZone suggest that markets will continue to prosper. However, some suggest the trajectory is unsustainable.

“We’re at a limited amount of capacity and a lot of stimulation,” said Ray Dalio, Founder, Chairman and Co-Chief Investment Officer, Bridgewater Associates, USA, citing the recent US tax cuts. “There needs to be some kind of tightening.”

With that tightening, some experts see the possibility of downturn on the two- to three-year horizon. For central bankers, investors and policy-makers, a question could be how to soften the landing and find alternative ways to boost wages and find new forms of growth.

Another question on the horizon for monetary policy-makers is the future of the dollar as the global reserve currency. This week, markets experienced confusion about the US commitment to maintaining a strong dollar, and this confusion has generated a conversation about whether the dollar’s role will shift in the future. Some investors see diversification into non-dollar assets as more likely, while others suggest the recent confusion was an aberration and that, in an era of uncertainty, the dollar will continue to play its traditional role given its stability and liquidity.

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Mexico officially joins IEA: First member in Latin America

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Mexico officially became the International Energy Agency’s 30th member country on 17 February 2018, and its first member in Latin America. The membership came after the signed IEA treaty (the IEP Agreement) was deposited with the government of Belgium, which serves as the depository state, following ratification by the Mexican Senate.

Mexico’s accession is a cornerstone of the IEA’s on-going modernization strategy, including “opening the doors” of the IEA to engage more deeply with emerging economies and the key energy players of Latin America, Asia and Africa, towards a secure, sustainable and affordable energy future.

The IEA Family of 30 Member countries and seven Association countries now accounts for more than 70% of global energy consumption, up from less than 40% in 2015.

“With this final step, Mexico enters the most important energy forum in the world,” said Joaquín Coldwell, Mexico’s Secretary of Energy. “We will take our part in setting the world’s energy policies, receive experienced advisory in best international practices, and participate in emergency response exercises.”

“It is a historic day because we welcome our first Latin American member country, with more than 120 million inhabitants, an important oil producer, and a weighty voice in global energy,” said Dr Fatih Birol, the IEA’s Executive Director. “The ambitious and successful energy reforms of recent years have put Mexico firmly on the global energy policy map.”

At the last IEA Ministerial Meeting, held in Paris in November 2017, ministers representing the IEA’s member countries unanimously endorsed the rapid steps Mexico was taking to become the next member of the IEA, providing a major boost for global energy governance.

They recognized that Mexico had taken all necessary steps in record time to meet international membership requirements since its initial expression of interest in November 2015. In December, the Mexican Senate ratified the IEP Agreement paving the way for the deposit of the accession instrument and for membership to take effect.

Mexico is the world’s 15th-largest economy and 12th-largest oil producer, and has some of the world’s best renewable energy resources. The IEA family will benefit greatly from Mexico’s contribution on discussion about the world’s energy challenges. The IEA is delighted to continue supporting implementation of Mexico’s energy reform with technical expertise, and further intensifying the fruitful bilateral dialogue of energy policy best practice exchange.

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Guterres: Korean nuclear crisis, Middle East quagmire eroding global security

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Credit: Wikimedia Commons

“Conflicts are becoming more and more interrelated and more and more related to a set of a new global terrorism threat  to all of us,” Mr. Guterres said in his keynote address at the opening ceremony on Friday of the Munich Security Conference.

For the first time since the end of the Cold War, the world is facing the threat of nuclear weapons and long-range missiles posed by the Democratic People’s Republic of Korea (DPRK), which he called “a development made in total contradiction to the will of the international community and in clear violation of several resolutions of the Security Council.”

He said that it was essential to maintain “meaningful pressure over North Korea” to create an opportunity for diplomatic engagement on the peaceful denuclearization of the Korean peninsula within a regional framework.

“The two key stakeholders in relation to this crisis, the United States and [DPRK]” must be able to “come together and have a meaningful discussion on these issues,” he said, adding that it is “important not to miss the opportunity of a peaceful resolution through diplomatic engagement as a military solution would be a disaster with catastrophic consequences that we cannot even be able to imagine.”

The situation in the broader Middle East, which the UN chief said had become a “Gordian knot,” was also eroding global security, with that are crises that are “crossing each other and interconnected.”

Pointing to the Palestinian-Israeli conflict, and wars in Syria, Yemen and Libya, among others, Mr. Guterres said the entire Middle East has “became a mess,” with varied and intersecting fault lines.

He warned of the absence of a common vision in the region and said that even if interests are contradictory, the threats these conflicts represent would justify some efforts to come together.

Turning to cyber-security, Mr. Guterres called for a serious discussion about the international legal framework in which cyberwars take place.

“I can guarantee that the United Nations would be ready to be a platform in which different actors could come together and discuss the way forward, to find the adequate approaches to make sure that we are able to deal with the problem of cybersecurity,” he said, noting that artificial intelligence provides “enormous potential for economic development, social development and for the well-being for all of us.”

The Secretary-General said that Governments and others have been unable to manage human mobility. He warned that this had created mistrust and doubts about globalism and multilateralism.

“This is a reason why,” he said, “we need to be able to unite, we need to be able to affirm that global problems can only be addressed with global solutions and that multilateralism is today more necessary than ever.”

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Supporting tourism development in Africa through better measurement

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In an effort to better measure tourism growth and development in Africa, UNWTO signed a Cooperation Agreement with the Nigeria Tourism Development Corporation for the Strengthening of the National Tourism Statistical System of Nigeria and the Development of a Tourism Satellite Account.

UNWTO is committed to developing tourism measurement for furthering knowledge of the sector, monitoring progress, evaluating impact, promoting results-focused management, and highlighting strategic issues for policy objectives.

On the occasion of the meeting between UNWTO Secretary-General, Zurab Pololikashvili, and the Minister of Information and Culture of Nigeria, Mr. Lai Mohammed, the agreement to host the Sixty-First meeting of the UNWTO Commission for Africa and the Seminar on ‘Tourism Statistics: A Catalyst for Development’ in Nigerian capital, Abuja, from 4 to 6 June 2018, was signed.

The meetings will be open to the participation of UNWTO Member States and Affiliate Members, as well as invited delegations and representatives of the tourism and related sectors. Officials of immigration departments, national statistics bureaus, central banks and other relevant stakeholders will be invited to join.

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