The UK’s momentous decision to leave the European Union brings long-lasting political and economic consequences. It is expected that European leaders will focus on fending off domestic populist movements emboldened by the British exit and on preventing the entire EU edifice from falling apart. This points to a tough negotiating stance toward the UK and less focus on much-needed structural reforms. It is expected attitudes on immigration to harden, and the risk of a protracted standoff feeding uncertainty.
Continue reading belowMonthly-Notes-July-20161.pdf
US economic data has been surprising to the upside over the last couple of months. However, none of the structural headwinds that seem to have plagued the global economy in recent years (a mix of excessive indebtedness, deteriorating demographics, rising political uncertainty as well as the end of the China growth miracle and the commodity supercycle) have been resolved. According to Citibank, the following are some reasons to be concerned for global growth:
1.The Chinese stabilisation could be even more short-lived than currently expected. Much of China’s growth has been reliant on increasing debt.
2.One contributor to the potential stabilisation in China’s and emerging market activity has been the weaker US dollar and receding expectations of a US rate hike. The market may be under-pricing Fed rate hikes over the next two years.
3.A US downturn could threaten. While most US data has been decent recently, it has not been very strong. This leads to some caution, especially if there is more economic weakness to come.
4.Political risks in Europe are high and rising. This includes, Brexit, the refugee crisis, elections in Spain and extremist parties in a variety of European countries.
Continue reading below
The emerging view is that the world has relied on monetary policy for too long and governments will have to embark on fiscal stimulus to boost their economies. Some central banks have pushed interest rates into negative territory, and it is now debatable whether further reducing already negative interest rates would further stimulate the economy. Low and negative interest rates are harming savers and reducing their capacity to spend, and this is contractionary for the economy. The next step in policy would have to target spenders, rather than investors and savers, through measures that may include sending money to people directly or other fiscal measures.
Continue reading belowNewell Palmer - Monthly Economic Notes May 2016