Three questions on the global economic cycle


  • ​Where are we in the global economic cycle? Since the recovery from the Global Financial Crisis, the global economy has been stuck in a post-crisis malaise characterized by low economic growth, deflationary pressures in some regions and ultra-low interest rates in the context of very accommodative monetary policies in advanced economies. We believe that we are gradually moving away from this “too slow for too long” phase and are entering a stronger cyclical development where output growth is improving, deflationary fears are dissipating and interest rates are about to normalize.

  • How long can we go? We argue that the current economic cycle still has legs for another year of expansion. Fiscal policies will support growth in China and the United States. In Japan and the eurozone, a burgeoning positive credit cycle helps to sustain the improvement. Emerging markets are in a sweet spot with supportive macro-policies and positive investor sentiment supporting growth. Sources of macroeconomic and financial instability have declined with stronger financial regulation and a reduction in macro-imbalances. Yet overall improvement will likely be lower than previous cycles due to unfavorable demographics, and modest productivity growth.

  • What could possibly go wrong? Three economic risks could jeopardize the cyclical uptick. First, the high leverage in some emerging markets (e.g. China) could become a deterrent for demand growth and trigger default in case of capital withdrawal. Second, a negative shock to already high financial asset prices (US e.g.) and real estate prices (Malaysia, Thailand, Canada, Australia and South Korea, e.g.) could create negative wealth effects. Third, higher (geo) political risks (e.g. North Korea) could alter confidence.