Sitemap

Feature

Is the Outlook For the Global Economy Still Bullish?

With the latest monthly inflation data in the eurozone, the United Kingdom, and the United States coming in higher than expected, markets are nervous and analysts are considering whether, and how, to revise their forecasts. But, despite much uncertainty, the evidence still supports cautious optimism

There are many risks, which is why the forecasting community is hedging its projections with sensible caveats about various “known unknowns.” Chief among these are the ongoing conflicts in the Middle East and Ukraine, the uncertainty about China, and looming elections in Europe, the United States, and elsewhere.

With respect to inflation, recent reports shows that many underlying indicators appeared to be moving in a promising direction. Since then, however, the latest monthly inflation data (for December) in the eurozone, the United Kingdom, and the US have surprised on the upside. That has given pause to many policymakers, investors, and analysts after weeks of markets pricing in large interest-rate cuts this year.

Finally, it would be a pleasant surprise if wage gains in many countries persisted, despite the improving inflation outlook, without contributing to a fresh, more sustained rise in prices. Of course, most economists and central bankers would put little store in this scenario unless there was clear evidence of a much-needed uptick in productivity across the Western world (and beyond). Without additional productivity, they would warn, real (inflation- adjusted) wage gains cannot be sustained without becoming inflationary.

After all, productivity data arrive with a lag, so it would be quite risky for central bankers to react too strongly to continued wage gains, such as by declaring that they will maintain a more restrictive monetary policy than they otherwise would have done.

Specifically, there are three good reasons to adopt a wait-and-see posture. First, although forecasters failed to anticipate the persistent weakness in productivity over the past two decades, it is only recently that they seem to have given up signaling an expectation that it will start to recover. Second, there are obvious reasons for thinking that productivity will eventually improve, even if most have given up hope. Just look at the big developments in artificial intelligence, the shift to alternative energies, the change in working patterns since the start of the pandemic, and policymakers’ renewed focus on initiatives explicitly designed to boost productivity. True, the data have yet to show that these developments are bearing fruit; but, again, the gains from new technologies often take time to work their way through the economy – and into official statistics.

It would be a pleasant surprise if wage gains in many countries persisted, despite the improving inflation outlook, without contributing to a fresh, more sustained rise in prices

The third reason to hold off on monetary tightening concerns the social and human aspects of the wages and productivity issue. As we know from debates about the sources of growing anxiety and economic insecurity across many democracies, median real wages have performed poorly in recent decades. This trend has clearly played a big role in the public’s growing disillusionment with “capitalism” and “globalization,” and in the rising support for more radical and populist political parties and movements. It follows that an increase in real wages would help to moderate political attitudes. Repressing wages simply because of a belief that they are unjustified would be dangerous.

Will the improvement in inflation be sustained? Though the December inflation figures came in higher than expected, the preceding months had shown sharper-than-expected declines. If one examines the smoother underlying measures of trend inflation, as well as surveys of inflation expectations, the outlook remains quite promising.

As for the other cyclical factors, three things stand out as we approach the end of January. First, Chinese economic data and financial-market performance remain generally disappointing despite stronger efforts by the authorities to support a robust recovery.

Second, in the US, most (though not all) economic indicators continue to come in stronger than expected. That is a relief, even if it isn’t alleviating the uncertainty among many commentators who worry that the recent positive trends may not be sustainable. Markets, too, have had a jittery start to the year. According to the so-called five-day rule (whereby a net gain for the S&P 500 in the first five trading days of January bodes well for the next 12 months), there is only a 50% chance that this will be a positive year for stocks. Yes, this is far from a scientific truth. But, as I have noted previously, a positive start has predicted a positive year more than 85% of the time, going back decades.

Lastly, despite the worrying issues in the Middle East and Ukraine, commodity- price volatility has remained remarkably subdued. Perhaps there are some odd technical supply-demand factors that account for this. But whatever the case, the relative stability is discernible across many markets. Most key commodities, as well as the recognized major commodity indices, are down compared to a year ago. That, too, is slightly reassuring.

By Jim O’Neill, former chairman of Goldman Sachs Asset Management, former UK treasury minister, member of the Pan-European Commission on Health and Sustainable Development.

CorD Recommends

More...

Slađana Prica, retired ambassador, member of the Forum for International Relations and honorary president of the UNA of Serbia

Diplomatic Response Overdue

The issue of the so-called ‘self-proclaimed’ Kosovo joining Europe’s oldest political organisation has long been an open question. Attempts have been made and lobbying...

Slobodan G. Markovich, Institute for European Studies and Faculty of Political Science

U.S. Elections More Critical for EU Future than EP Elections

While the EU’s right-wing parties are expected to make gains, these gains shouldn’t be expected to substantially alter the composition of the Parliament or...

Ivana Radić Milosavljević, Assistant Professor in European Studies at the University of Belgrade - Faculty of Political Sciences

Not all Right-Wing Parties are Likeminded

The outcome of the European Parliament election is unlikely to cause a dramatic shift in EU policy, particularly foreign policy, but it could hamper...

Rajko Petrović, Research Associate at the Institute of European Studies

The EU Idea is Stronger than the Outcome of Less Important Elections

The electorate’s shift to the right won’t change the nature and essence of the idea of the European Union, and thus neither will it...

News

DM Celebrates 20 Years of Business in Serbia

On the occasion of its significant anniversary, two decades of successful operations in Serbia, dm drogerie markt organised a...

New Joint Venture Forms to Revolutionize Balkan Logistics

In a strategic move to enhance logistics operations in the Western Balkans, Transfera, a leading logistics company in the...

Concept Mercedes-AMG PureSpeed

Exciting, energising and breathtaking – the Mercedes‑AMG PureSpeed concept is the highlight in the run-up to the Formula 1™...

Western Balkans Chambers of Commerce Sign Tourism Cooperation Memorandum in US Congress

A landmark Memorandum of Cooperation has been signed at the US Congress, uniting the Chambers of Commerce of the...

Serbia Ascends as Key Trade Partner for Germany

Serbia is set to become a net exporter to Germany by 2025, overtaking its imports from the economic powerhouse,...

Concept Mercedes-AMG PureSpeed

Exciting, energising and breathtaking – the Mercedes‑AMG PureSpeed concept is the highlight in the run-up to the Formula 1™...

Western Balkans Chambers of Commerce Sign Tourism Cooperation Memorandum in US Congress

A landmark Memorandum of Cooperation has been signed at the US Congress, uniting the Chambers of Commerce of the...

EU Sets Global Standard with World’s First Artificial Intelligence Act

The European Union has taken a pioneering step by adopting the world's first Artificial Intelligence Act, setting a potential...

Montenegro’s Independence Day Celebrated

Celebrating Montenegro's Independence Day with an Exhibition on Montenegrin Cyrillic Printing from the 15th and 16th Centuries. In commemoration of...

Business Event Hosts Serbian Employment Service Presentation

In Belgrade on the 15th of May, the Slovenian Business Club, in collaboration with the National Employment Service of...

Concept Mercedes-AMG PureSpeed

Exciting, energising and breathtaking – the Mercedes‑AMG PureSpeed concept is the highlight in the run-up to the Formula 1™...

Western Balkans Chambers of Commerce Sign Tourism Cooperation Memorandum in US Congress

A landmark Memorandum of Cooperation has been signed at the US Congress, uniting the Chambers of Commerce of the...

EU Sets Global Standard with World’s First Artificial Intelligence Act

The European Union has taken a pioneering step by adopting the world's first Artificial Intelligence Act, setting a potential...

Montenegro’s Independence Day Celebrated

Celebrating Montenegro's Independence Day with an Exhibition on Montenegrin Cyrillic Printing from the 15th and 16th Centuries. In commemoration of...

Business Event Hosts Serbian Employment Service Presentation

In Belgrade on the 15th of May, the Slovenian Business Club, in collaboration with the National Employment Service of...