UBS On-Air: Paul Donovan Daily Audio 'Market wobbles and economic stability'

Paul Donovan · UBS Global Wealth Management

Slower AI investment would be offset by weaker non-AI investment, so the macro impact of the AI selloff is limited.

A newly launched data center's share price drop sparked Asian equity selling over AI's economic future, but the economic consequences look relatively limited. A slowdown in AI investment growth has to be offset by weaker other US investment. If that other weakness reflects a shortage of people and materials to build houses and factories, then a slower pace of AI investment would be an offset, not a drag.

“Any slowdown in the growth of AI investment has to be offset by the fact that, at least in The United States, other forms of investment have been weaker recently.”at 0:39

Paul Donovan · UBS Global Wealth Management

Equity wealth swings in a narrow sector won't cut US spending; households keep cutting savings to support consumption.

Negative wealth effects from equity declines should be treated with caution, since rising wealth has no direct impact on consumption. For spending to change, something else has to shift, generally a lower savings rate. Developed-economy households, and US consumers in particular over roughly the past eighteen months, have consistently shown willingness to cut savings to support consumption. Fluctuations in a relatively narrow equity sector are likely to have a limited effect on that willingness.

“Negative wealth effects should be treated with caution. Rising wealth has no direct impact on consumption. Something else has to change, generally, a lower savings rate... fluctuations in a relatively narrow sector of the equity market are likely to have a limited impact on that willingness.”at 1:03

Paul Donovan · UBS Global Wealth Management

The PBoC's policy-rate change is technical and doesn't clearly signal easing, and any easing may have little effect.

China's central bank plans to shift its policy rate target from a seven-day lending rate to an overnight rate. This is a technical adjustment, not usually market-moving, though some speculate it may be used to ease policy. China could ease without making the technical change, so the adjustment does not necessarily change the direction of expected rates. Even a disguised easing is unlikely to be very stimulative, given that the constraint on the domestic economy is consumer caution rather than the cost of credit.

“First, China could ease monetary policy without the technical change, so making the adjustment does not necessarily alter the expectation of the direction of interest rates.”at 2:13

Paul Donovan · UBS Global Wealth Management

China's consumers are held back by precautionary saving over future worries, not by the cost of credit.

China's export sector is doing fine, as yesterday's GDP data and resilient developed-market domestic demand signal. The domestic economy does not seem constrained by the cost of credit. Instead, broader concerns about the future keep precautionary savings rates high and limit consumers' willingness to spend. Easing borrowing costs therefore may not revive consumption.

“The domestic side of China's economy does not seem to be restricted by the cost of credit. Rather, it's broader concerns about the future that is keeping precautionary savings rates high and limiting the willingness of China's consumers to spend.”at 2:47

Paul Donovan · UBS Global Wealth Management

UK wages rising faster than inflation isn't inflationary, because revised-up productivity means workers produce more.

UK labor data has had quality problems, and the ONS revised away any productivity crisis. The latest data show stable labor market indicators, some employment gains, a modest fall in unemployment, and average earnings growth stabilising at a low level. Unlike the US, UK average earnings are growing moderately faster than inflation. This should not be seen as inflationary, because revised productivity is higher. Employers are getting more output from workers while paying them modestly more.

“Unlike, say, The United States, average earnings are tending to grow moderately faster than inflation. This should not be considered inflationary, however, because productivity is higher per the recent revisions.”at 3:35

Paul Donovan · UBS Global Wealth Management

Economies are more resilient to oil shocks than forecasters assumed, due to efficiency, renewables and household balance sheets.

The ZEW business sentiment poll, drawn from economists and financial market specialists, was too pessimistic early in the Gulf War. It seemed to lean too heavily on precedents from earlier oil crises and underrated how much has changed. Energy efficiency gains, the rise of renewables and strong household balance sheets have combined to make economies more resilient than backward-looking models could capture.

“Shifting energy efficiency, the rise of renewable energy, and the strength of household balance sheets have combined to allow economies to demonstrate a resilience that backward looking mathematical models were never going to uncover.”at 4:27