05 May 2015 08:05

Nordic Outlook: Central bank-driven recovery with risks

This year began with new events confirming that the global growth train is not moving along a completely straight track. The world economy is now being driven almost entirely by the actions of central banks, in an environment of negative interest rates and bond yields as well as enormous asset purchases, write SEB’s economists in a new issue of Nordic Outlook.

Partly due to cold weather, growth in the United States – which is showing underlying economic strength – temporarily screeched to a halt. Meanwhile signs of weakness predominated in a generally fragmented picture for emerging market (EM) economies; China is acting purposefully to find a policy mix that will reduce excess capacity, stabilise asset markets and rebalance the economy. The euro zone has delivered upside surprises despite the problems of Greece.

“The European Central Bank (ECB)’s expansionary policies have had an unexpectedly rapid impact on optimism and rising inflation expectations, stabilising the outlook for all of Europe,” says Robert Bergqvist, Chief Economist at SEB.

He projects that despite complex shifts in leadership roles among global economic engines − and with Brent crude oil prices stabilising at 60-70 dollars per barrel – the global growth rate should continue to speed up.  GDP growth in the 34 mainly affluent countries of the Organisation for Economic Cooperation and Development (OECD) that constitute over 60 per cent of the world economy will accelerate from 1.9 per cent in 2014 to 2.7 per cent in 2016.

Håkan Frisén, head of Economic Forecasting at SEB and Editor-in-Chief of Nordic Outlook global monetary conditions will become more expansionary in 2015.

“Because of slower growth rates and low inflation in a number of EM economies, the key interest rates in these countries may also converge towards the lower levels prevailing in the West. Monetary policies are driving up asset prices and debts to new records and having a major impact on currencies,” Frisén says.

This is a growth-friendly policy and it is driving the global rebalancing process, with the euro zone and Japan getting help with growth and inflation, while China and the US can respond with new stimulus measures or more gentle interest rate hikes.

The low inflation environment will continue to predominate. OECD inflation will move downward towards zero this autumn. As earlier oil price declines vanish from the twelve-month figures, the inflation rate will rebound. A bit further ahead, the effectiveness of monetary policy and its impact on demand and global resource utilisation, as well as earnings growth, will determine the inflation trend.

Bergqvist says the shape of monetary policy poses risks and new questions.

“Increasingly aggressive policies pump up asset prices and outstanding debts, but are not really capable of boosting consumption and capital spending; the ‘financial cycle’ is showing strength while the economic cycle is somewhat sluggish,” he says.

Analyses by SEB and the International Monetary Fund (IMF) show that various factors are hampering (potential) growth, while global surplus capacity persists. Isolated monetary stimulus without support from complementary fiscal and macroprudential policies may contribute to exaggerated risk-taking and thus to mispricing that leads to misallocation of resources.