The quantitative easing retreat
The world has entered a new era, with the central bank liquidity tap – on full since the 2008 crisis – now being gradually turned off. While the Fed continues with quantitative tightening (QT), that is, the shrinking of its balance sheet, the ECB ended its quantitative easing (QE) programme on 31 December 2018. Monetary tightening could have disruptive effects.
Can the euro challenge “King Dollar”?
In his State of the Union speech in Strasbourg on 12 September, European Commission President Jean-Claude Juncker announced that proposals would be presented before the end of year aimed at “strengthening the international role” of the euro against the dollar. “It is absurd, he lamented, that European companies buy European planes in dollars and not in euros“. But does the euro have the means to challenge the hegemony of the dollar?
China’s Mission Impossible
Chinese economic policy pursues four, at times conflicting, goals: growth, financial stability,exchange stability and deleveraging. Albeit that this is not new, the context is now much more restrictive and although measures have been announced favouring growth and reforms, there is mounting concern that policymakers will have to make some hard choices.
We believe that the direction of economic policy will lean towards growth and financial stability while pausing the other two, although not fully abandoning these goals. This implies,
at least over the next two years, a gradual weakening of the RMB and a pause in the deleveraging process. We expect Chinese growth to gradually slow to around 5% in 2022.
Quarterly economic forecasts for the main developing and emerging countries.
Slower and less balanced expansion
The expansion under way since mid-2016 continues, but has lost momentum and, just like a bicycle moving at less speed, is now in greater danger of losing balance. Boosted by fiscal expansion, the US economy has resisted the headwinds of Fed tightening and political uncertainty, but activity in the euro area and China has slowed more markedly. We expect global growth to clock in at 3.7% in 2018 and to slow to 3.5% and 3.4% in 2019 and 2020 respectively.
Less synchronised growth, rising uncertainties
Global growth is expected to clock in at 3.8% in 2018 and slow to 3.6% in 2019; a rate of expansion that is still firm and comparable to that of 2017 (+ 3.7%). That said, growth is less synchronized. Activity in Europe remains above trend, but is softening in the wake of the deceleration of world trade, while fiscal stimulus measures are prolonging the expansion in the United States.
The dynamics of inequality: Is there a general pattern?
The world today is both more and less unequal than it was back in the 1970s. Inequality between countries has narrowed over the course of the last few decades, mainly due to the extraordinary growth of China, but inequality within countries, especially rich countries, which had declined between the 1930s and the 1970s, has risen substantially. A high level of inequality is problematic, as it can undercut social cohesion, lead to more instability, and, as research at the IMF and elsewhere has recently shown, undermine the sustainability of growth itself. Looking closely at inequality can provide us with an important key to understanding major political and economic events of the recent past.
Asia: growth jeopardised by the trade war
Trade tensions between China and the United States represent a major risk for the export-oriented Asian region. Economies can be affected via the global value chain, Chinese growth and competitive devaluation (although the latter is unlikely). Only India is less vulnerable to this risk.
Monetary Policy: back to normal?
The 2008 financial crisis witnessed unprecedented policy responses from the world’s major central banks. Main central banks cut their policy rate to near 0%, exhausting the conventional monetary options. Then, to further ease financial conditions, they started to design a variety of unorthodox monetary policy tools commonly labelled as “unconventional monetary policies”. These have included “lower-for-longer” forward guidance on the short-term rate, large-scale asset purchases, large-scale liquidity provis.
A deeper-dive into some of the more structural aspects of topical issues in the economic debate.
Italy’s Fiscal Multiplier Trap
The impact of discretionary fiscal policy on economic growth is an ongoing topic of debate, and not least these days between Brussels and Rome. Weighing up the different mechanisms at work, we find that the multiplier on fiscal expansion in Italy today is below the levels needed to bring down the debt-to-GDP ratio. Conversely, should the Italian government switch the fiscal lever to austerity, we are concerned that this too could prove self-defeating. In a nutshell, Italy seems caught in a “fiscal multiplier trap”. Breaking out of this requires a much stronger focus on growth boosting structural reforms.
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The Economic Research Department analyses, monitors and drafts forecasts/scenarios regarding global economic and financial developments on behalf of the Societe Generale group as a whole. Its experts share their vision through economic, financial and socio-political studies and articles.