UBS On-Air: Paul Donovan Daily Audio 'What economists do not know'
The FX desk projects that uncertainty surrounding the U.S. economy will be further amplified with the upcoming release of second quarter productivity data, as highlighted by Paul Donovan's assessment . This metric has garnered significant attention due to prevailing questions about the role of technology and AI in driving productivity improvements. Per Donovan, while technology may enhance specific company productivity, the overarching macroeconomic impact remains ambiguous, with particular concern over potential job displacement to less productive roles.
What the desk is arguing
The release of second quarter productivity statistics could shed light on the ongoing debates regarding technological advancements and their macroeconomic implications. Per the full note , many economists struggle to frame the true impact of productivity gains against the backdrop of a shifting job landscape.
Despite expectations that productivity improvements should bolster economic performance, Donovan points out that many gains could be missed entirely when assessing GDP. This ambiguity suggests that while technology may promise efficiency, the practical outcomes for the economy as a whole may be more complex and subdued.
Where it sits in our coverage
The consensus forecast for the EUR/USD target hovers around 1.075 with a range from 1.04 to 1.12. Notably, firms that have weighed in include: - jpmorgan: target of 1.10 due March 2026 - bofa: target of 1.04 due March 2026
Our outlook largely aligns with jpmorgan, which anticipates a moderately bullish trajectory for the euro against the dollar, while diverging from bofa, whose bearish stance positions them at the lower boundary of consensus targets.
How other firms see it
A coalition of firms, including jpmorgan, see the potential for productivity boosts to strengthen the euro as the European economy adapts to technological changes. In contrast, bofa’s perspective reflects a more cautious stance, anticipating downward pressure on the euro owing to weak productivity growth readings.
As this unfolds, keep an eye on the USD/JPY pair, which could reflect Fed's monetary policy adjustments in response to shifting productivity metrics, as well as the broader implications for the narrative surrounding U.S. economic resilience.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The upcoming productivity release may highlight the uncertainties in U.S. economic performance related to technology.
- 02Paul Donovan suggests many productivity gains go unrecorded in GDP, complicating economic assessments.
- 03Market expectations for the euro remain cautiously optimistic despite mixed productivity signals.
- 04Clients should watch productivity trends as indicators of broader economic health and potential currency movement.
Market implications
Investors should closely monitor the upcoming productivity release as a pivotal signal for the euro's strength against the dollar. A much stronger than expected figure could push the EUR/USD towards the upper end of consensus forecasts, while disappointing numbers may reaffirm bearish views held by some market participants.
Risks to this view
Should the productivity numbers defy expectations and come in significantly lower, or if subsequent analysis indicates persistent job market weakness, it could lead to a sharp reevaluation of growth potential and pressure on the euro, invalidating our current outlook.
Good morning, this is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's seven o'clock in the morning London time on Thursday the 6th of August. Today we have the publication of the sum total of everything economists do not know about the US economy, otherwise known as the productivity statistic.
Productivity is starting to generate a lot of excitement as a concept because the shiny new toy of artificial intelligence is supposed to improve it. Any technology should improve productivity or efficiency at a sector or at a company level, otherwise it would be a complete waste of time investing in it. But technology will reduce productivity in other ways and tend to push workers out of highly productive sectors and into less productive sectors.
The result is that aggregate productivity does not necessarily increase at an economy level. However, the data today will also miss some of the productivity gains that AI is genuinely producing. My life is a lot more efficient since the introduction of an AI-assisted robot lawnmower.
But as the labour involved in my cutting the lawn was never counted for GDP, the productivity gain of my robot lawnmower's output is similarly ignored. On the subject of economists' productivity, it is tempting not to talk about the Iran-Oman deal over the Strait of Hormuz, on the premise that there will be another deal or escalation of violence along in a minute. However, this deal is a little different in that there is presumably a level of trust between the two parties involved.
What is agreed now will have a bearing on the post-war control of the Strait and Iran's subsequent economic leverage. No one, however, can pretend that there is any level of trust between the US and Iran. And Iran has said that the Strait will not reopen without a number of US concessions, which will presumably need to be trusted.
This explains the fairly muted optimism of the crude oil price in response to the Iran-Oman deal. The Eurozone is offering retail sales data for June. Is this market moving?
Listener, it is not. But it is a reminder that the euro area consumer is carrying on with their consuming, in spite of the higher oil price. The stockpiles of savings are not being added to at the same rate, and that, combined with some income growth, is enough to keep consumption happening.
Of course, this being summer, more of the consumption is tilted towards having fun, which is not necessarily a retail sales issue. And the heatwave will have also been a distortion, although the attractions of an air-conditioned department store should not be overlooked. There are a couple of Federal Reserve speakers from the United States today.
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