Tightening our focus
The global economy continues to register stronger growth than in recent years. The United States appears to have recovered quickly from the hurricane-related disruption in late summer, the eurozone is growing well above trend, as is Japan, and China has seen an acceleration in growth, as witnessed by the pick-up in global trade.
As unemployment has declined to cycle lows across the board, companies have begun to ramp up capital expenditure, which should help improve the outlook for labour productivity in due course. Finally, measures of corporate and consumer confidence suggest that global growth will remain robust in coming quarters.
Since the global economy began its recovery in early 2016, fears of deflation have gradually dissipated and consumer prices have begun to register modest increases. However, despite the generally strong macro data, wage growth remains sluggish, as illustrated by the dip to 2.4% year-on-year in the US in October. And without the fuel of wage pressure, consumer price inflation has yet to show signs of sustained acceleration above central banks’ 2% targets. The exception to this trend is the devaluation-sparked spike to 3% in the United Kingdom (source: Datastream).
In this context, central banks have felt emboldened to embark on monetary policy normalisation. The example set by the US Federal Reserve follows three phases – initially, new asset purchases are scaled back to zero, then interest rates are hiked in small increments and finally holdings of securities are gradually wound down. Of the three other developed world central banks, only the Bank of England has embarked on phase two, with the first base rate hike in a decade. The European Central Bank recently announced a reduced pace of asset purchases for 2018, while the Bank of Japan remains wedded to an extremely accommodative policy mix.