The economic environment for Italy remains challenging. The fundamental problem is the low economic growth. Although the composition of the future government is still unclear, the party programs imply a persistent reform deadlock.
The 4th BBVA Latin American Local Markets Conference in London gave me the chance to speak in detail with some local Latin American representatives. In the following, I would like to share some of the insights I gained from these conversations and the narratives that may affect 2018.
There are many factors that may affect inflation. Also, the weights of certain factors may vary across countries. Take the development of the exchange rate, for example.
Equity indices have undergone a global correction in the past days. The Dow Jones index has shed more than 10% from its January high. What is the macro-economic reason for the correction?
The current environment is very positive for the capital markets: strong growth, low inflation, supportive monetary policies, good earnings growth, and low volatilities, i.e. fluctuations. Also, the numerous risks have not had a significantly negative impact on prices. However, the phase of rising prices started as early as March 2009. This environment implies that any change in the relevant parameters such as growth, inflation, and monetary policy would be tantamount to deterioration, given that improvement is not possible anymore. The most important question asked by investors at the outset of 2018 is therefore whether this positive environment is still here to stay.
The Council of the European Central Bank pulled an impressive stunt at the monetary policy meeting on 26 October. ECB President Mario Draghi announced to reduce the extremely supportive monetary policy in the near future while sounding very cautious (dovish) with regard to the process at the same time.
Economic growth has increased significantly on a global scale and is broadly supported. According to our preliminary estimate, global GDP recorded a growth rate of 3.7% from Q1 to Q2 (annualised). While the developed economies have presumably grown by 2.7%, the emerging economies posted a growth rate of 5.2%. In this article, we would like to take a closer look at the emerging markets on the basis of classic economic indicators.
Some ten years after the outbreak of the Great Recession, global economic growth is positive and broadly based, inflation is low in the developed economies and falling in important emerging economies, and monetary policies are very supportive, cautious, and predictable. At the same time, company earnings growth has increased significantly, and the volatilities of many asset prices are low. This environment is generally positive for risky asset classes.
Making sense of it all
I will be upfront about it: to me, the Taylor rule is still a helpful tool to assess the future monetary policy of the US central bank. However, it should not be used as blueprint without thinking it through. Instead, it should be seen as heuristic tool that helps structure one’s analysis.
Taylor Rule – precise formula, vague Inputs
Since 2008, the key-lending rates in the USA seem to have been significantly too low as measured by the Taylor rule. With some economists blaming Alan Greenspan’s loose monetary policy as partially responsible for the financial crisis of 2008, the question is whether we are in for a déjà-vu.