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Update: Goldilocks Zone

By beled | November 10, 2017

Extract from the September 2017 quarterly report:

We have expressed the view repeatedly in previous commentaries that going for growth globally was the only sensible option available to policy makers in the major economies and thankfully it appears that this is succeeding. According to Christine Lagarde, the Managing Director of the International Monetary Fund (IMF), the world economy is gaining strength and extending the broadest recovery since the start of the decade. Global industrial production (IP) is currently growing at 3.7% year-on-year (YoY) with the recovery largely driven by developed markets (DM), as shown in chart 1:

Chart 1: Global Industrial Production growth (% change YoY)


Since these economies have in the main been following austere (contractionary) fiscal policies, it is a testament to the success of the very stimulatory monetary policies (QE) which have succeeded without re-igniting inflation.

“The success of Quantitative Easing (QE) in promoting a global economic recovery calls for its reversal and the resumption of more normal monetary affairs. The scale of QE, that is the creation of cash by central banks since 2008, has been extraordinary and unprecedented. Why this injection of cash has not led to more spending, much more inflation and a much greater expansion of the banking systems and in bank deposits than has occurred has been the big surprise. Providing an explanation for these highly muted reactions can explain why the reversal of QE may also be less eventful than might ordinarily be predicted.” (Prof Brian Kantor, ZAeconomist, 13/10/2017).

From chart 1 it can also be seen that growth has accelerated in emerging markets (EM’s) albeit from a higher base. However the flow-through effect from DM’s augurs well for even higher growth rates in due course.

Overall, of the 192 economies that the IMF examines and for which it provides projections, only 12 are expected to have negative GDP growth rates in 2017 (chart 2), falling to 7 in 2018, the lowest since 1981.

Chart 2: Number of countries with negative growth rates

Less contractionary, or even stimulatory, fiscal policies are in prospect in major economies. For example, in the US bi-partisan support is currently being mustered for a tax plan which would see corporate tax fall from 35% to 20%. Should these be adopted, the outlook for global growth is even more favourable. With inflation and interest rates likely to rise only gently, we see the world economy entering a “Goldilocks Zone” (not too hot, not too cold) which we would otherwise describe as high growth with low inflation. This is in direct contrast to the “stagflation” of 1970’s, which was defined as “low growth with high inflation”, the return to which was the recent fear of many economists and investment analysts.

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