May 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.

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