As we head towards the end of 2017, the world economy is relatively strong. Growth is higher than in 2016, volatility in asset markets is low, and inflation is weak.
Also, major central banks are keeping monetary policy accommodative, and although there are fears that asset markets are becoming frothy, the rebound in economic growth and market performance is not being accompanied by a credit boom.
Therefore, given the structural issues facing the world, and the cyclical nature of the growth rebound, Standard Chartered’s latest Global Focus is raising a poser: Is this as good as it gets?
Complacency needs to be avoided. Productivity growth is weak, especially in the West. Geopolitical risk is high, and given the problematic nature of domestic politics in the U.S., there is the added risk of a trade war.
Debt levels are very high across developed and emerging economies, and they have increased since the global financial crisis. As a result, there is little space for fiscal policy to deal with shocks; with global interest rates low, the same is true for monetary policy.
There is a risk that markets may have become too negative, following the reflation euphoria after Donald Trump’s election. In particular, there is a possibility that Trump and Congress could agree on some type of tax reform, likely to be limited in scope, providing the economy with fiscal stimulus.
With a positive output gap, the US economy is operating at capacity and fiscal stimulus is more likely to push US rates and the dollar higher, but it will likely have very little impact on economic activity.
Source: G Business