For the last five years, the primary driver of the growth in the developed market has been an increase of the liquidity and a very accommodative monetary policy for the most powerful Central bankers in the world.
This month, BOJ and the BCE gave a strong message to the market, but also to their governments. Monetary policy cannot solve all issues, and we are close to the best we can do. This does not mean a sharp change of the current strategies, but it means that very few munition are left to support the economy. We are far away from a normalisation of the world monetary policy but more at the beginning of an extended period of status co.
This situation will have profound and long implications for the fixed income market and some particular sector as the pension business.
Before the Brexit, BOE was on the verge to increase interest rate and to start to reverse five years of monetary expansion. The risk of recession forced Governor Carney to change plan and to adopt drastic measures to support the activity. The scale of these actions translates the level of risk of the Brexit for the UK economy, which at this stage has not been priced by the market.
In the US, as mentioned in previous articles, nothing is going to happen and at the best, we will have an increase in interest rates in December. The message attached to this move, will more important that the increase itself. But likely, regarding the current cycle of the US economy and the international situation, the FED will continue to be very accommodative.
Fundamentally, the situation of the developed economy remains quite fragile.
Brexit did not show all his implications yet, but it is going to be painful for the UK economy, and it is going to bring a lot of uncertainties for the Europeans.
In the US, the last data are concerning. In the first part of the year, the real annualised GDP growth has been disappointed at 1.2%. If a rebound is likely to materialise in the second part of the year, due to more investment momentum, manufacturing recovery, and positive inventory impact, growth will remain limited close to 2%, below the US economy growth potential. Job creation is still positive, but it is not growing at the same pace than previously. In average, the US economy created 175K jobs over the past six months against 250K the same period before.
Japan is facing structural issues (demographic, low level of women in the labour force, massive deficit …) and no specific plan is in place to fix these problems.
In Europe, growth remains too weak to absorb the high level of unemployment. A busy politic agenda complicates the situation. In Italy, the month of November will be crucial for the Renzi government with a risky referendum coming. In Spain, we do not have a clear majority with the risk of a new election, and the Catalogna case is going to pose issues.
In France, we will have a presidential election in May 2017. The extreme-right candidate Marine Lepen could create a surprise and shock a Europe still traumatised by the Brexit referendum.
In the all developed economy, we have a resurgence of populism with some common denominator: denunciation of establishment and a taste for the isolationism. The Brexit, the rise of the Front National in France or other movements in Austria, Germany and Scandinavia are the translation of this phenomena.
On the back, some serious issues are still not fixed. The Greek debt will come up soon on the agenda; the Europe Union house is still not in order, and the migrant’s crisis is miles away to have been fixed.
Geopolitically, the situation is more complicated than ever. We have an increase of political violence: in Ukraine, Turkey or China see for instance. The risk of terrorism also has significantly increased.
At the end of summer central bankers broke the dream, sending a strong signal to the political leaders: please, do the job.