Hutchins Roundup: GDP growth, negative interest rates, and more

Studies in this week’s Hutchins Roundup find that the slowdown in exports growth and government spending accounts for a significant part of the unexpectedly slow GDP growth after the financial crisis, negative interest rates in Denmark and Sweden reduced banks’ margins but the ill effects were offset by other developments, and more.

Weak international demand and a slowdown in government spending were a big drag on post-recovery GDP growth

Between 2010 and the second quarter of 2016, U.S. GDP grew at an annual average rate of about 2%. In comparable stages of the previous three expansions, GDP growth averaged 3.75% annually. James Stock of Harvard and Mark Watson of Princeton find that about half of the slowdown is attributable to long-term trends, primarily demographic changes such as population aging that reduce the long-term supply of labor. The remainder was caused by unexpectedly slow growth of exports, unusually slow growth in government expenditures, and possibly measurement problems, they find. Trends in consumption and investment during the recovery explain very little of the slowdown, posing a challenge for explanations that operate through a channel of weak private aggregate demand.

Negative interest rates in Denmark and Sweden hurt banks’ profits but these were offset by other factors

Denmark’s central bank was the first to introduce negative policy rates. Sweden’s followed a couple of years later. Rima Turk of the IMF finds that negative rates weakened banks’ profitability by reducing net interest income, but the decline in profits was offset by reductions in wholesale funding costs and higher fee income, such as mortgage refinancing and corporate advisory services. Nonetheless, she concludes that the impact of negative rates on bank health and lending might grow in the near future and needs to be monitored closely.

Mergers and acquisitions increase market power but not productivity

Using plant-level data from 1997 to 2007 for the entire U.S. manufacturing sector, Bruce Blonigen of the University of Oregon and Justin Pierce of the Federal Reserve Board conclude that M&A activity increased the average markup—a measure of how much a firm’s price exceeds its marginal cost—but had no significant effect on plant- or firm-level productivity. They also find no evidence that merged firms improved productivity by reallocating production to more efficient plants or combining non-production activities.

Chart of the week: Banks’ net interest margins have been declining for two decades

The net interest margin is the difference between the income banks earn on investments and loans minus the cost of deposits and borrowed money. It is usually expressed a percentage of a bank’s interest-earning assets.

Quote of the week: “What is different from the past… is that today we must devote more attention to the redistributive aspects of integration, and especially to those people who have paid the highest price,” says European Central Bank President Mario Draghi.

“I do not think there will be significant progress in terms of opening up markets and competition if Europe does not listen to the demands of those left behind by a society built on the pursuit of wealth and power; if Europe, as well as being a catalyst for integration and an arbiter of its rules, does not also moderate its outcomes.”