Key Note Speech: Interpreting recent shifts in fiscal and monetary policy around the world – how stable is the global economy and where are the pressure points?

1. How stable is the global economy and where are we in the economic credit cycle?

The global economic recovery is becoming more fragile as international trade and manufacturing activity moderated, financing conditions are getting tighter, and several large emerging markets went through significant financial stress.

2. What is impacting markets more, economic factors or political will?

Economic risks to the downside have become more pronounced. Financial market pressures and trade tensions could escalate, denting activity and confidence in the economies involved and globally. Rising political uncertainty and polarization, geopolitical risks, and conflict could also depress sentiment and investment in the affected countries and globally. Model estimates suggest that a sustained 10 percent increase in a commonly used index of U.S. economic policy uncertainty could, after one year, reduce emerging market and developing economy (EMDE) output growth by 0.2 percentage points and EMDE investment growth by 0.6 percentage points.

3. What are the most likely drivers of global economic growth to emerge in 2019?

Global growth is projected to moderate from a downwardly revised 3 percent in 2018 to 2.9 percent in 2019 and 2.8 percent in 2020-21, as economic slack dissipates, monetary policy accommodation in advanced economies is removed, and global trade gradually slows. Growth in EMDEs is foreseen to increase to 4.5 percent in 2020, with a large part of this acceleration reflecting the projected dissipation of severe headwinds in a few large economies (e.g., Argentina, Iran, Turkey).

4. How can fixed income investors interpret recent fiscal and monetary policy and how should they adapt their targets accordingly?

Advanced-economy monetary policy is expected to be less stimulative, especially in the United States, where tightening has proceeded more quickly than elsewhere partly in response to pro-cyclical fiscal easing. To varying degrees, central banks in advanced economies have limited policy space to cut interest rates. While unconventional monetary policies could again be deployed, their effectiveness in returning inflation to target and supporting growth is subject to debate. The normalization of advanced-economy monetary policy will continue to pose challenges for EMDEs. In particular, U.S. tightening cycles spill over to EMDEs mainly through the availability of foreign credit, especially through portfolio bond flows. Moreover, the share of EMDEs hiking policy rates during U.S. tightening cycles is markedly higher than the share of EMDEs cutting rates during U.S. easing periods, suggesting that U.S. normalization may constrain the room for manoeuvring for many EMDE central banks.

End of Interview.