Michala Marcussen, Global Head of Economics at Societe Generale, suggests that the deteriorating financial conditions initially appeared driven by concerns on the global economy.
Key Quotes
“As highlighted by President Draghi in his recent testimony before the European Parliament, “Over time however, market sentiment has become more volatile and susceptible to rapid change. In this environment, stock prices significantly declined and bank equity prices were particularly hit, both globally and in Europe” . Now, it’s the significant deterioration in financial conditions that is exerting a drag on the real economy and we have revised our forecast for global growth from 3.4% to 3.1% for 2016 and from 3.7% to 3.5% for 2017 to take account of.
Central banks sit in the balance of this two-way causality between financial conditions and the real economy. This balancing act was already visible in the FOMC’s decisions last year and 2016 looks set to become a replay of that. We now look for just one Fed hike by year-end and forecast further easing from the ECB, PBoC and potentially also the BoJ.
That monetary pol icy multipliers with respect to economic activity are much lower post crisis than pre-crisis has been a key assumption in our forecasts for several years now. Financial markets have, however, taken considerable comfort from the liquidity aspects of unorthodox monetary policy; that is until recently.
Sentiment now appears unnerved by the dark side of low and negative yields, leaving risks to the real economy tilted towards recession. We recently revised the odds of a global recession up to 20% from 10%. The game changer today could come from a more determined use of the fiscal tool underpinned by financial repress ion. For that to happen, however, we believe that policymakers will need first to look into a much deeper abyss that thankfully is not visible at the current juncture.”
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