Tailwinds Turn To Headwinds

• Helped by a ceasefire in the US/China trade war, market perceptions of the economic outlook have improved. But there are reasons for caution: the recovery in manufacturing remains fragile, asset price gains continue to outpace fundamentals and the secular outlook is challenging. Against this backdrop, unforecastable events, like the coronavirus outbreak, could have a disproportionate negative impact.
• Beyond these near-term considerations, structural factors are key. And their importance is still under-recognized. Prior to the global financial crisis (GFC), the global economy was supported by four secular tailwinds: a positive supply shock from demographics, a monetary framework geared towards rapid debt accumulation, government policies that favored capital over labor and a period of unprecedented international cooperation. All four are now moving into reverse.
• The result is likely to be much lower growth and interest rates than we’ve been used to—and, eventually, higher inflation. Can economic policy break the global economy out of this rut? For overburdened monetary policy, the answer is almost certainly no. We have higher hopes for fiscal policy, but it faces a tough battle against the secular forces weighing on the outlook.