Monthly economic outlook
Our global economic activity indicator suggests that growth remains subdued, in line with the IMF’s latest outlook report. That said, we are witnessing early but encouraging signs of acceleration in recent months. Even with the low level of commodity prices in place, base effects will send headline inflation higher in the next couple of quarters. Underlying inflation remains modest and below target in most DM for the time being. This implies that monetary conditions will stay loose for now even though a second rate hike in the US is looming.
In earlier blogposts we talked about the need for more expansive budgetary policies. In a liquidity trap situation this will prove far more efficient to close the output gap, especially in Europe and Japan. If followed up by concrete and sizeable policy action this could translate in stronger economic activity and higher inflation prints. For now at least, statements still remain vague implying that actual implementation might take time and the amounts concerned limited. In general, consensus is building that monetary policy can only do so much in the current near zero interest rate environment. Moreover, monetary policymakers look set to attach more weight to the financial sector’s concerns. This is illustrated by the latest monetary policy action in Japan for example. On the other hand, all talk about the ECB going in tapering mode soon seems premature. As things stand, the ECB is positioned to announce an extension of its current asset purchase program (€80bn per month), perhaps until September next year.
For our more detailed regional economic outlook please click here.