In this month's Viewpoint we discuss the options available to policymakers in a world of low growth, the consequences of negative interest rates and emerging market reform progress.
29 April 2016
Global: here we go again (page 2)
- In what has become an annual ritual the International Monetary Fund (IMF) has downgraded its forecasts for global growth. Markets have been unmoved as growth expectations had already been marked down and, if anything, the outlook has brightened with commodity prices and business surveys perking up.
- However, whilst the IMF may have turned gloomy at the wrong moment there is no escaping that this is the sixth consecutive year in which economists have had to downgrade their forecasts for global growth. Hopes that the financial crisis would only have a temporary effect have been dashed. The IMF calls for more fiscal policy, but for countries with high public debts such as Japan the only option may be monetisation. Is it time to start the helicopters?
Negative interest rates: opening Pandora’s box (page 7)
- As growth and inflation continue to disappoint, central banks are under increasing pressure to add further stimulus. Negative interest rate policy (NIRP) is in fashion and so we discuss the benefits and costs of such unorthodox policy.
- NIRP should in theory incentivise less savings and more consumption and investment and is being heralded as a solution to secular stagnation where fiscal policy has been exhausted. However, NIRP has its costs including creating perverse incentives and hurting the profitability of banks. Its use to deter excess foreign capital is legitimate, but to boost activity is highly questionable.
- Our main concern is the removal of the zero lower bound with NIRP. If investors become concerned about an economic or financial shock, they could cause yield curves to invert, assuming central banks will cut interest rates further. This could cause many to question the viability of banks, and potentially trigger a financial crisis.
Emerging markets: Running the reform marathon (page 14)
- Reforms can help drive idiosyncratic equity performance in emerging markets, but the process is a marathon, not a sprint. We look at where four different countries find themselves in the race.
Views at a glance (page 18)
- A short summary of our main macro views and where we see the risks to the world economy.
Important Information: The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.