Economic and Strategy Viewpoint
In this month's Viewpoint: Low inflation bewitches central banks, The Rocky Horror Euro Show, China: No tricks up their sleeve, no treats on offer, and Views at a glance.
• Central banks have soothed financial markets with talk of further easing, pushing down interest rate expectations. Low inflation allows policymakers to remain dovish without jeopardising their credibility. Nonetheless, the fall in inflation has been driven by lower commodity prices which in turn reflect supply side developments as much as weaker demand.
• From this perspective, low inflation should be seen as a support to spending and growth in coming months, rather than a leading indicator of deflation. Faced with an asymmetric trade-off between the consequences of deflation and inflation, policymaker caution is understandable, but low inflation has been a misleading guide in the past and markets will reappraise the path of rates if growth concerns are spirited away.
The Rocky Horror Euro Show
• The horror show in Europe continues. Weak growth with a raised risk of recession in the near-term is not helped by very low inflation. Support from monetary policy is ongoing, but fiscal policy continues to make matters worse, despite there being room for the stronger member states to take advantage of near-record low borrowing rates. Hopefully the awakening of the zombie banks can spark the economy back to life in 2015.
China: No tricks up their sleeve, no treats on offer
• China appears to be moving backwards on reforms while President Xi extends his power base. While China should still be able to navigate a property slowdown and potential financial crisis, the political climate makes us gloomier about its long term future.
Views at a glance
• A short summary of our main macro views and where we see the risks to the world economy.