2018 Outlook: The synchronised economic expansion: How much further to run?

It’s unclear how global markets might react should interest rates rise and quantitative easing end faster than expected

Dec 1, 2017 | Nick Mustoe

The synchronised economic expansion that we’ve seen post the global financial crisis has helped stock markets rally and boosted the profits of many multi-nationals – creating what some might call a sweet spot for equities. The longer that global macro data continue to trend higher the longer that the globally synchronised earnings upturn will remain compelling. Moreover, the benign global inflation environment has allowed central banks to keep monetary policy very loose – for now.

However, we will not remain at that sweet spot forever, and there is reason for caution. Are we in for a period of stronger, more decisive change in monetary policy? It’s certainly possible. The US Federal Reserve (Fed) has said that it would stick with plans for further interest rate rises, and it has thrown its crisis-era stimulus programmed into reverse. Meanwhile, the Bank of England (BOE) raised UK interest rates in November, and the European Central Bank (ECB) announced that it was looking at how to reduce the amount of economic stimulus it is currently providing.

Everyone has been so used to the accommodative stance of the past 10 years, and markets have become complacent. But what if interest rates rise and central banks exit quantitative easing faster than expected? How would global financial markets react? This isn’t a scenario that’s priced in at the moment.

 

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