If you think we’re on the cusp of a financial or economic disaster, rest assured: the facts are much less alarming than you think.
According to a note by AMP Capital chief economist Shane Oliver, we’re seeing “a higher level of hand wringing” about some aspects about the global economic outlook.
For instance, some of the concerns raised are that quantitative easing and unconventional monetary policies aren’t working; we’re facing the risk of asset bubbles; inequality is rising, sparking a backlash against “rationalist market-friendly economic policies of globalisation/free trade”; and the geopolitical tensions arising from other countries vying to fill the void left by US’ economic and military decline.
But Oliver isn’t fussed.
“All these developments point to the risk of slower global growth and investment returns ahead and may figure in the next major bear market. But there is always something to worry about (otherwise shares would offer no return advantage over cash) and trying to time the next downturn is hard,” he said.
He offers five reasons why we shouldn’t be worried:
1. Debt is more complex than just being at record levels
The next major crisis will involve debt no matter what, according to Oliver.
“Just because global debt is at record levels does not mean that a crisis is imminent.”
Here’s a summary of what we need to know:
Debt has been trending up since it was invented;
Don’t compare debt to income – compare it to assets instead. “Here the numbers are not so scary because debt and assets tend to rise together”;
Debt burdens are low, thanks to low interest rates; and
The risk of debt defaulting in developed countries is low.
“As long as a government borrows in its own currency and inflation is not a problem, it has more flexibility to provide stimulus than high public debt to GDP ratios suggest,” Oliver said.
2. Quantitative easing’s end point is not necessarily negative
A number of regions including Europe and the US are or were in the midst of quantitative easing, which is the practice of injecting money straight into the economy.
“As to how quantitative easing is eventually unwound there is no easy answer, but there is no reason to believe that it will end with a calamity,” Oliver said.
Central banks can reverse it gradually, and balance sheets may just stay high.
3. Inflation and interest rates are low
Focusing too much on low inflation as a reflection of low demand growth is how the sceptics are missing out on good returns, according to Oliver.
They’ve missed out on the positive price boosts to assets like shares or property provided by low inflation and low interest rates.
4. Technological innovation and middle-income growth in Asia continues
These two growth narratives have been well-known for quite a while, Oliver said.
“Suffice to say that there are still a lot of positives helping underpin the global outlook and these two remain big ones.”
5. Global growth will pick itself back up
Yes, we’ve seen a slowdown in global growth over the last 18 months – but it also doesn’t mean we’re heading for a recession, either: signs that were there before the GFC aren’t here now.
In fact, there are signs pointing to a cyclical pick-up in growth, said Oliver:
Bond yields are no longer at low levels and look to be trending up;
The US yield curve (typically a big warning sign of a recession) is largely positive, meaning what we saw earlier this year was a false signal;
European, Japanese and emerging share markets look healthier;
Cyclical sectors like consumer discretionary, industrials and banks also look healthier;
The US dollar looks like it’s peaked; and
Business condition indices for US, Europe and China look to be stabilising.
This doesn’t mean there aren’t headwinds: the US election poses a geopolitical risk, and the US-China tensions “look likely to be with us for years”, said Oliver.
However, we can look forward to some respite from geopolitical tensions in the short-term, according to Oliver.
Economic slowdowns in both China and the US is placing pressure on both superpowers to cool the tension, and US President Donald Trump will want to get re-elected next year and knows he won’t if recession or unemployment rises.
Trump also avoided retaliating after the Saudi oil strikes in mid-September, which is an indicator that the president doesn’t want to get into military stoushes in the Middle East.
The Brexit saga has put itself on the backburner for now, though it could come back next year, Oliver said.
The bottom line
There’s good reason to expect the global economy to pick itself back up next year, which will be good for share markets, according to Oliver.
“Finally, for those worried that more and more debt will trade at negative interest rates, our view is that this is unlikely: many countries have already sworn off using rates including the US, and RBA Governor Lowe says it’s extremely unlikely in Australia.
“And if growth picks up as we expect the proportion of global debt on negative rates will decline as it did after 2016.”
So there: the global outlook isn’t as dire as imagined, and you can sleep easy at night.
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