A year ago, Lawrence Summers’ perceptive warnings about the possibility of secular stagnation in the world economy were dominating global markets. China, Japan and the Eurozone were in deflation, and the US was being dragged into the mess by the rising dollar. Global recession risks were elevated, and commodity prices continued to fall. Fixed investment had slumped. Productivity growth and demographic growth looked to be increasingly anemic everywhere.

Estimates of the equilibrium real interest rate in many economies were being marked down. It seemed possible that the world economy would fall into a “Japanese trap”, in which nominal interest rates would be permanently stuck at the zero lower bound, and would therefore not be able to fall enough to stimulate economic activity.

Just when the sky seemed to be at its darkest, the outlook suddenly began to improve. Global reflation replaced secular stagnation as the theme that dominated investor psychology, especially after Donald Trump’s election in November. Why has secular stagnation lost its mass appeal, and has it disappeared forever? Was it all a case of crying wolf? Read more

Investors are an emotional crowd, especially when US equities, measured by either the Dow Jones Industrial Average or the more accurate S&P 500 index, have just hit all-time highs. I am not sure who first remarked that market behaviour is motivated by two competing emotions, fear and greed. But I do know that Albert Einstein claimed that “Three great forces rule the world: stupidity, fear and greed”.

Some of the macroeconomists that I have learned not to ignore, like Lawrence Summers and Martin Wolf believe that the outlook for the US economy under President Trump is at best uncertain, and that the recent equity market highs are a “sugar rush”. I recognise that some of these critics have major political differences with the new Administration. But many others, like the perceptive and apolitical John Authers, are also very concerned about equity over-valuation.

So, are investors being “stupid”?

One of the advantages of using economic models to analyse the equity market is that the models should be good at avoiding all three of Einstein’s great forces.

That does not make the models the only source of wisdom about future asset returns. Far from it. They are good at avoiding some of the behavioural mistakes that investors are known to commit, such as a tendency to dislike losses about twice as much as they like gains. But human beings may be better at recognising when the investment climate is about to change because of policy upheavals.

In this article, I will try to eliminate emotion by reporting some recent results from the suite of economic and financial models built by Juan Antolin Diaz and his team at Fulcrum. The results are somewhat encouraging: recession risks in the US are low and the over-valuation of equities is less clear cut (on some measures) than is sometimes supposed.

In the short term, however, there are signs that the most active short term traders in the market may be heavily exposed to equities at the present time. This could make the market vulnerable in the short term to policy shocks that cannot be incorporated into the models, such as a major outbreak of trade protectionism. Read more

As the global economy enters 2017, economic growth is running at stronger rates than at any time since 2010, according to Fulcrum’s nowcast models. The latest monthly estimates (attached here) show that growth has recovered markedly from the low points reached in March 2016, when fears of global recession were mounting.

Not only were these fears too pessimistic, they were entirely misplaced. Growth rates have recently been running above long-term trend rates, especially in the advanced economies, which have seen a synchronised surge in activity in the final months of 2016. Read more

The response of the financial markets to the US election result has been almost as contradictory as the rabble rousing campaign of the President-elect himself. Unmitigated gloom in the hours after the Trump victory was swiftly followed by a euphoric atmosphere in US markets.

Investors are apparently assuming that the new administration will usher in a mix of fiscal reflation, prudent monetary policy, deregulation and tax cuts that will prove very good for the American economy. Trade controls are seen as damaging the emerging economies, but not the US. A steeper yield curve is seen as reflecting a “better” mix between fiscal and monetary policy.

With one very graceful acceptance speech, Donald Trump has suddenly morphed into Ronald Reagan in the markets’ consciousness. Read more

Maurice Obstfeld, the Research Director at the IMF, said last week at the IMF/World Bank Annual Meetings in Washington that global growth “remains weak”, but is “moving sideways”. That is an accurate description of the current situation compared to previous decades, according to the latest results from the Fulcrum nowcasts of global activity.

However, compared to the more recent past, a better assessment would be “solid at the trend growth rate”. Although that trend growth rate is disappointingly low, it is no longer falling (according to the models), and the actual growth rate is no longer below trend, so the global margin of spare resources in no longer increasing. Read more

This month’s regular update from the Fulcrum nowcast models shows that global economic activity is growing fractionally below its trend rate, and is little changed from last month’s report. Global recession risks have therefore fallen recently to more normal levels, compared to the elevated risks seen in February. However, neither the advanced economies nor the emerging markets appear to be sustaining a break-out to above trend growth.

The overall picture is therefore one of steady but disappointing growth, with little indication of a major cyclical acceleration at present. In particular, growth in the US remains subdued, and seems to be running at or below the 2 per cent threshold apparently required by the Federal Reserve to justify a June/July increase in interest rates. Although the jury is out on this point, Friday’s weak employment data have given extra weight to the subdued nature of our recent US nowcasts.

We also report for the first time forecasts for global GDP growth over the next 12 months derived from the dynamic factor models that are used to produce the nowcasts. These forecasts are a natural extension of the nowcast models. They should be used in conjunction with other forecasting methods to assess the statistical likelihood of activity “surprises” relative to consensus forecasts in the months ahead.

The latest results suggest that US GDP growth in the period ahead may well come in below the latest consensus forecasts.

The full set of the latest global nowcasts is available hereRead more


The turbulence in the global financial markets in the past few weeks has been widely attributed to a “China shock” that has increased the risks of a major downturn in global activity. Last month, this blog concluded that our regular “nowcasts” for global activity had not yet corroborated this narrative.

This month, we have identified the first clear evidence that the global economy has slowed down since mid year, with emerging markets and advanced economies both now growing more slowly. A new factor is a clear slowdown in the US economy, though much of this appears to be due to the temporary effects of an inventory shake-out.

The Chinese economy has not shown any further signs of slowdown in September. The dominant contractionary force in the global economy is a commodity shock, which of course is somewhat connected to events in China (as it rebalances its economy away from commodity-consuming sectors), but it is not exactly the same thing.

The commodity shock is redistributing activity away from commodity producers and towards commodity consumers, both within and between countries. Eventually, the commodity shock should be net beneficial to the global economy, but so far global activity growth has dropped to only 2.6 per cent, which is 0.4 per cent below the rate in mid year, and 0.8 percentage points below trend. This means that global spare capacity is currently rising at a worrying rate.

Because the emerging markets are much more exposed to commodity producers than developed markets, they have been hard hit by the commodity shock. They are now growing at 3.5 per cent, or 1.5 percentage points below trend. It is unclear whether this growth rate is still dropping.

In the advanced economies, the growth rate in activity is about 1.7 per cent, which is roughly at trend. The slowdown identified in the US in September has been offset to some extent by signs of firmer activity in the eurozone.

An important and worrying feature of global growth in 2015 has been the large drop in global industrial production relative to services in the second quarter. This was driven mainly by weakness in industrial production in the US energy sector – not in China – and it has since been reversed. Read more

According to the latest results from Fulcrum’s “nowcast models”, the global economy has continued to perform adequately in July, despite considerable doubts in the financial markets about a possible hard landing in the Chinese economy, and rising concerns about weakness in the emerging world, especially in commodity-driven, and smaller Asian, economies.

The latest growth rate in global activity is estimated to be 3.2 per cent (PPP weighted), which is roughly the same as last month’s estimate.

The advanced economies are estimated to be expanding at an annualised rate of 1.7 per cent, which is very close to trend. Meanwhile, the major emerging economies are growing at a rate of 4.6 per cent, which is about one percentage point below trend, but better than recorded a few months ago.

The gap of 2.9 percentage points between the growth rate in the emerging and advanced economies is far smaller than the 3.8 percentage point gap in the estimated long term growth rates in the two blocs, reflecting the continuing cyclical downswing in most emerging economies.

The continuing weak state of the emerging bloc remains a major headache for the world economy and global financial markets, though the risk of a global hard landing does seem to have diminished since the first quarter.

The main conundrum this month concerns the growth rate in China. On our models, which are based on a mix of official economic data and other series (like electricity and cement production, car sales, freight traffic and trade flows through harbors), China is growing at close to its 7 per cent trend. But other factors, like the weakness of commodities and of industrial production in the rest of emerging Asia, seems consistent with much weaker growth in China.

Many observers are very sceptical about the accuracy of Chinese data, especially during downturns, but an alternative explanation is that Chinese growth has recently been more concentrated in service sectors, which have lower commodity useage than manufacturing and real estate sectors. In the absence of any obviously superior sources of data, official or unofficial, our activity models are driven by the latter view. Read more

Ever since the crash in 2008, the central banks in the advanced economies have had but one obsession — how to set monetary policy to ensure the maximum growth rate in aggregate demand. Interest rates at the zero lower bound, followed by a massive increase in their balance sheets, was the answer they conjured up.

Now, those central banks contemplating an exit from these policies, primarily the US Federal Reserve and the Bank of England, are turning their attention to the supply side of their economies. When, they are asking, will output reach the ceiling imposed by the supply potential of the economy?

The Bank of England has been in the lead here, with the Monetary Policy Committee recently conducting a special study of the supply side in the UK. Its conclusion was that gross domestic product is now only 0.5 per cent below potential, which implies that tighter monetary policy will soon be needed if GDP growth remains above potential for much longer.

In the US, the Fed has been much less specific than that, but the unemployment rate has now fallen very close to its estimate of the natural rate (5.0-5.2 per cent). Sven Jari Stehn of Goldman Sachs has used the Fed staffers’ supply side models to calculate that their implied estimate of the US output gap may be only 0.6 per cent, not far from the UK figure.

If the UK and US central banks were to act on these calculations, the implication would be that they no longer hold out much hope that they can ever regain the loss in potential output that has occurred in the past decade, relative to previous trends. That would be a massive admission, with an enormous implied sacrifice in future output levels if they are wrong. It would also be very worrying for financial assets, since it would draw the market’s attention to a downgrade in the Fed’s estimation of the long-run path for GDP. Read more

This photo taken on October 17, 2011 shows a worker monitoring the loading of containers on to a ship at the harbour in Qingdao, in northeast China's Shandong province (STR/AFP/Getty Images)

  © STR/AFP/Getty Images

China’s economic rebalancing has been the main downside risk to global economic activity in 2014, and will probably remain so for the foreseeable future. The industrial production figures for August were the weakest seen since the 2008-09 recession, and they were followed by a statement from finance minister Lou Jiwei to the effect that there would be no change in economic policy “in response to one indicator”.

This echoed Premier Li Keqiang’s recent speech at the summer Davos meetings, which indicated broad satisfaction with the overall thrust of policy. “Just like an arrow shot, there will be no turning back”, he promised.

The possibility of a clash between a slowing economy and a Chinese administration that appears implacably set on a pre-determined course was not what the markets wanted to hear. Many western investors have long been predicting a hard landing for China, and do not need much persuasion to believe that it is finally at hand. But recent data do not suggest that it is happening yet. Read more

The decline of 0.1 per cent in US real GDP in 2012 Q4 (at a seasonally adjusted annualised rate) is a definite negative surprise for financial market sentiment, which has become very complacent about the ability of the US economy to withstand the fiscal tightening due to hit the economy.

Fortunately, the underlying picture for final domestic demand is reassuring, which is why the markets have taken these figures in their stride. Today’s figures are unlikely to signal a serious downturn.

But the US economy almost never posts a negative quarter in the middle of a robust upswing, so the figures should give us some pause for thought. Furthermore, the weakness of exports, which is more than a one quarter phenomenon, shows that the global economy had become dangerously dependent on the strength of the US consumer towards the end of last year. Read more

The chancellor’s Autumn Statement exactly marks the halfway point in the current UK parliament, and sets a course for the next election which will now be hard to change. When the coalition embarked on its economic strategy in 2010, it was fully expected that there would be a bleak electoral patch in mid-term, but the Treasury believed that the strategy would be seen to be successful by 2015. In point of fact, however, the mid term blues have been worse than predicted, and GDP forecasts for the remainder of the parliament have been sharply downgraded.

Mr Osborne has reacted to these developments by amending his budgetary strategy in two respects. First, he has allowed the fiscal stabilisers to operate in full, so the effects of the GDP downgrades have been reflected in extra public borrowing in 2011/12 and 2012/13. Sensibly, he has not been overly rigid and there has been no attempt stick to his original fiscal path. As a result, there has been almost no tightening in the underlying fiscal stance this year, and the planned tightening for next year is about 1 per cent of GDP, similar to the plans in other major economies.

Second, he has extended the time period over which the fiscal austerity will take effect, so that his formal fiscal objectives will be reached in 2016/17, instead of 2015/16. The fiscal stance will tighten by about 1 per cent of GDP in each of the next 5 years. The same amount of fiscal austerity, spread over a longer period, is the consequence of these changes. Read more

The transfer of power in China from the outgoing regime led by Hu Jintao to the incoming leadership of Xi Jinping has occurred without a hitch. This is a mark of increased political maturity in China.

In fact, the handover has been described by Citigroup economists as the first complete and orderly transition of power in the 91-year history of the Chinese Communist party.

During President Hu’s decade, China’s real GDP per capita rose at 9.9 per cent per annum. China accounted for 24 per cent of the entire growth in the global economy, and Chinese annual consumption of many basic commodities now stands at about half of the world total. Perhaps the most important question in the world economy today is whether China’s economic miracle can continue in the decade of Xi Jinping. The IMF forecasts shown in the graph above suggest that the miracle will persist, but many western economists disagree. Read more

The annual meetings of the IMF and the World Bank take place in Tokyo this week, and as always they provide a good opportunity to take stock of the condition of the global economy, and of economic policy.

There is much less of a crisis atmosphere surrounding this week’s meetings than there was a year ago, largely because the actions of the ECB have succeeded in calming the eurozone storm for the time being.

However, there have been significant downgrades to growth prospects in China and India in the past year, and growth in the major developed economies has been extremely unsatisfactory. Read more

Risk assets rose slightly last week, and global equities are still trading within about 2 per cent of their highs for the year. The resilience of equities was slightly surprising in a week which saw both a disappointing set of US GDP data and a Fed policy statement which was on the hawkish side of expectations. Goldman Sachs’ economists commented that the US economy and financial markets are “moving into a tougher environment”, in which the economy is slowing and the Fed is shifting its policy reaction function in a less stimulative direction.

One reason why risk assets have remained firm recently, is that earnings in the latest company reporting season have once again been beating expectations in the US and the eurozone. According to Jan Loeys at JP Morgan, US corporate earnings per share for 2012 Q1 have come in 8 per cent higher than analysts’ expectations, while the drop in eurozone earnings has been 4 per cent less than feared. Clearly, corporate financial strength has been helping investment sentiment, but that would not persist for very long if the Fed really did change its tune on monetary policy. Read more

American flag over the NYSE

American flag draped over the New York Stock Exchange. Getty Images

Such has been the intensity of the market’s focus on events in the eurozone in recent weeks that the performance of the American economy has barely merited any attention. At least, that has been the case in this blog, which usually tries to concentrate on the key events in global macro which are dominating market sentiment at any given time. So I have been looking across the Atlantic to check on what I might have missed.

In sharp contrast to the eurozone, the US economy has been performing better than was generally expected a couple of months ago, but it remains very vulnerable to the fiscal tightening which now seems likely next year, and to a worsening in the eurozone financial shock. This shock has not yet crossed the Atlantic with any force, but might do so before too long. Read more

How much government debt is too much government debt? That question is pertinent in most economies today, but is especially pertinent in the US, where Congress is debating whether to raise the government debt ceiling, and if so on what terms. Unless economists can give sensible advice on the appropriate maximum level for public debt, much of the debate on budgetary policy is based on little more than political bias or, even worse, gut feeling dressed up as expert opinion. Read more

The Bank of England’s latest Inflation Report was certainly a downbeat document. Mervyn King, Bank governor, said there are “difficult times ahead”, because the economy is still undergoing a slow adjustment to the impact of the financial crisis. By reducing its GDP growth forecasts while simultaneously increasing its inflation projections, the Bank has signalled that it believes the UK is now facing a series of supply side problems – and those are always the most difficult for any central bank to handle. Read more

When the first estimate of UK GDP in 2010 Q4 showed a fall of 0.5 per cent, I commented in this blog that this news was “too bad to be true”. The second estimate for Q4 came out this morning and, sure enough, the figures were – worse. Undaunted, I am still strongly of the view that this depressing quarter does not give an accurate reading on the true state of the UK economy at present. Most other information points to a continuation of reasonably healthy growth in recent months, and a strong bounce-back in the official GDP number is still to be expected in Q1. Read more

The UK GDP data for 2010 Q4 were so bad, and they are potentially so important as a signal for other countries which are about to embark on fiscal tightening, that they are worth another look. Read more