Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 221

Goldilocks economy is keeping bears at bay

Pick up a newspaper today and it is hard to find many reasons to be cheery. North Korea and ISIS take turns in frightening us for our lives. Brexit and Trump take turns in frightening us for our livelihoods. Most financial commentators are fixated on predicting how soon it will be until the next bear market hits shares.

Recognise the synchronised upswing

It is unfortunate then, that one of the better good news stories of recent years has received less attention than it deserves. Since mid-2016, a string of consistently good economic data from around the world has shown the global economy is in a period of synchronised upswing. In the US, economic growth annualised at a rate of 3.1% in the second quarter of this year, well ahead of market expectations, while Europe and Japan both recorded annualised growth rates of 2.5% during the same period. For mature developed market economies, such growth rates are positively zippy.

An equally important driver of above-trend global growth has been developments in China. Not that Chinese growth rates have been accelerating, but rather Chinese growth has (once again) not slowed down as forecast. The Chinese economy grew by 6.9% in the second quarter of 2017, the same rate of growth as the first quarter and the equal fastest pace of expansion since September 2015. Chinese growth rates are considerably ahead of its government’s own 2017 growth forecast of ‘around 6.5%’. A year ago, markets (and the Chinese government) were predicting a meaningful slowdown during 2017 as the government tackled excess credit creation and forced closures in industries with excess capacity. So far, predictions that these actions would weigh heavily on economic activity have proven to be incorrect, or at least premature.

The IMF, in its most recent review of the global economic outlook, forecasts the global economy to expand by 3.5% in 2017 and 3.6% in 2018. This would represent the fastest pace for global growth since 2014 and 2011 respectively. It would also seem that there is room for meaningful upside to the IMF’s 2018 figures; as they are predicated on Chinese growth falling to 6.2%, a significant slowdown from the current rate of activity.

Where’s the inflation and unemployment?

What is remarkable about this upswing in global economic activity is that it is occurring at a time of both benign inflation and, on some measures, close to record low unemployment. The OECD average unemployment rate fell to 5.6% during June 2017, its lowest level since March 2008 (see chart below).

However, considerable spare capacity remains in the labour force. Workforce participation levels have fallen substantially in key economies like the US, with large swathes of potential workers falling out of the labour market following years of difficult economic conditions. This dynamic means that, despite the low headline unemployment rates, wage growth in developed market economies remains anaemic. The accelerating global economy is pulling workers back into the labour market instead of giving the existing workforce a pay rise. This lack of labour market pricing power is one of the key contributors to inflation remaining too low for most major economies. The three most important central banks, the Fed, ECB and BOJ, are all engaged in unprecedented monetary easing programs designed in large part to push inflation rates higher.

Strength feeding profitability

A combination of accelerating global growth, benign inflation and ultra-easy monetary conditions (real interest rates in the US, the Euro area and Japan all remain negative) has created a Goldilocks environment for equity markets. Corporate profitability is the chief beneficiary of accelerating growth in an environment of negative real interest rates and limited wage pressure.

Yet despite the positive economic backdrop, much of the commentary about equity markets today is anchored around one key worry – how long it has been since the last big correction, nearly a decade since the last. It is also true that share markets do not turn on some preordained cycle. They price in the market’s best estimate of future corporate earnings. In large part, the reason that share markets continue to make new highs today is that the global economy is in unusually rude health, and that, for now, corporate profitability stands to be the biggest beneficiary from this upswing.

While this is good news for investors, it is better news for large parts of the population removed from the workforce following years of sub-par economic growth. ‘Falling labour market slack’ is an economist’s way of saying that, nine years on from the crisis, many marginalised members of society are finally able to find work. Surely one of the better news stories of recent years.

 

Miles Staude is Portfolio Manager at the Global Value Fund (ASX:GVF), which he manages from London. This article is the opinion of the writer and does not consider the circumstances of any individual. The title of this piece apes a famous economic article written in 1992 by David Shulman, a senior economist at UCLA.


 

Leave a Comment:

RELATED ARTICLES

Bear markets don't go paw-in-paw with recessions

Suddenly, the market cares if a company makes money (again)

Where is Australia’s future growth?

banner

Most viewed in recent weeks

Are term deposits attractive right now?

If you’re like me, you may have put money into term deposits over the past year and it’s time to decide whether to roll them over or look elsewhere. Here are the pros and cons of cash versus other assets right now.

Uncomfortable truths: The real cost of living in retirement

How useful are the retirement savings and spending targets put out by various groups such as ASFA? Not very, and it's reducing the ability of ordinary retirees to fully understand their retirement income options.

Is Australia ready for its population growth over the next decade?

Australia will have 3.7 million more people in a decade's time, though the growth won't be evenly distributed. Over 85s will see the fastest growth, while the number of younger people will barely rise. 

How retiree spending plummets as we age

There's been little debate on how spending changes as people progress through retirement. Yet, it's a critical issue as it can have a significant impact on the level of savings required at the point of retirement.

Where Baby Boomer wealth will end up

By 2028, all Baby Boomers will be eligible for retirement and the Baby Boomer bubble will have all but deflated. Where will this generation's money end up, and what are the implications for the wealth management industry?

20 US stocks to buy and hold forever

Recently, I compiled a list of ASX stocks that you could buy and hold forever. Here’s a follow-up list of US stocks that you could own indefinitely, including well-known names like Microsoft, as well as lesser-known gems.

Latest Updates

Property

Financial pathways to buying a home require planning

In the six months of my battle with brain cancer, one part of financial markets has fascinated me, and it’s probably not what you think. What's led the pages of my reading is real estate, especially residential.

Meg on SMSFs: $3 million super tax coming whether we’re ready or not

A Senate Committee reported back last week with a majority recommendation to pass the $3 million super tax unaltered. It seems that the tax is coming, and this is what those affected should be doing now to prepare for it.

Economy

Household spending falls as higher costs bite

Shoppers are cutting back spending at supermarkets, gyms, and bakeries to cope with soaring insurance and education costs as household spending continues to slump. Renters especially are feeling the pinch.

Shares

Who gets the gold stars this bank reporting season?

The recent bank reporting season saw all the major banks report solid results, large share buybacks, and very low bad debts. Here's a look at the main themes from the results, and the winners and losers.

Shares

Small caps v large caps: Don’t be penny wise but pound foolish

What is the catalyst for smalls caps to start outperforming their larger counterparts? Cheap relative valuation is bullish though it isn't a catalyst, so what else could drive a long-awaited turnaround?

Financial planning

Estate planning made simple, Part II

'Putting your affairs in order' is a term that is commonly used when people are approaching the end of their life. It is not as easy as it sounds, though it should not overwhelming, or consume all of your spare time.

Financial planning

Where Baby Boomer wealth will end up

By 2028, all Baby Boomers will be eligible for retirement and the Baby Boomer bubble will have all but deflated. Where will this generation's money end up, and what are the implications for the wealth management industry?

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.