It’s not difficult to come to the conclusion that, economically speaking, we are living in very turbulent times. China’s great slowdown. Europe’s persistent woes. Brexit.
Yet, on a bigger scale, all that’s just noise blocking the signal that the global economy is less volatile than any period in the modern era. This is the conclusion of new research led by David Hensley, director of global economics at JPMorgan Chase & Co. in New York.
Hensley’s work measures standard deviations of quarterly, annualized GDP growth for major developed and emerging markets, plus a selection of regions. The sample compares the middle of the business cycle leading up to the Great Recession with the middle of the next cycle, i.e., 2013 to 2016.
The findings show that whereas some big economies—like the United States and Japan—are marginally more volatile now than they were during the admittedly very calm “Great Moderation,” others are much less so. The net effect is a global growth pattern less bumpy than any time since 1970.
Hensley says the fact that emerging markets and developed ones now march less in lockstep than in the past helps “cancel out” some of the signals coming from individual economies. But there’s another calming factor: central banks. The US Federal Reserve, the European Central Bank and the Bank of Japan have all found themselves shifting policy in response to risks coming from abroad. From once being purely domestic inflation targeters, they’re now global risk managers.
“The mind-set is that the level of activity is so far below what they desire, so they’re more mindful of risks of all sorts,” Hensley said. “Central-bank policy has helped generate this outcome.”
Meanwhile, the United Kingdom economy may be heading for its first recession since 2009, with economists slashing their forecasts in the wake of the Brexit vote and now seeing two quarters of contraction this year.
While the 0.1-percent decline in GDP anticipated in each of the third and fourth quarters is modest, it will mark the end of more than three years of unbroken growth. The projections in the Bloomberg survey compare with a 0.6-percent expansion predicted for those periods before the June 23 referendum.
The changed outlook since the UK voted to leave the European Union has the Bank of England (BOE)—which had been on a slow track toward interest-rate increases—now contemplating expanding stimulus for the first time since 2012. While the impact is only showing up so far in measures of consumer and business confidence, that could ultimately spill over into key drivers of growth in the coming months, stymieing the economy.
Even with some predicted BOE stimulus, the probability of Britain sliding into its first recession since 2009 stands at 40 percent, up from 18 percent in June, according to the survey, which was conducted after the central bank’s July 14 policy announcement. That’s the highest since Bloomberg started tracking the likelihood in 2012.
“We expect to see a recession around the turn of the year, based on the idea that there will be quite a large uncertainty shock which will lead to corporate retrenchment,” said Nick Kounis, head of macroeconomic research at ABN Amro Bank NV in Amsterdam. BOE policy-makers “need to wait for a little bit of evidence, but they can’t wait until it has already happened because monetary policy works with a lag.”
Rate cut
Governor Mark Carney has indicated that some easing may be required, and the majority of economists surveyed predict the BOE will respond to the slowdown with one interest-rate cut of 25 basis points before the end of the year, taking the already record-low rate to 0.25 percent. The central bank will also boost its quantitative-easing program, currently £375 billion ($494 billion), by £10 billion in August, according to the median estimate.
The BOE’s next policy announcement is on August 4, when the Monetary Policy Committee will also publish new growth and inflation forecasts. Officials have said sterling’s sharp drop will put upward pressure on short-term price growth, though they have differing views on the medium term, which will play a part in their debate on whether to loosen policy.
While the UK voted to quit the EU, the actual implications of that decision remain unclear, an additional uncertainty for households and companies trying to plan. Prime Minister Theresa May, who replaced David Cameron, has said repeatedly that “Brexit means Brexit,” and doesn’t intend to invoke Article 50 and kick off the formal exit negotiations before the end of this year.
Increase in uncertainty
This lack of surety is not helping matters. Citing its network of economic agents, the BOE said on Wednesday that, while it’s currently “business as usual” for most firms, around a third of contacts thought there would be “some negative impact” over the next 12 months.
Howden Joinery Group, a London-based maker of kitchens, said on Thursday that the referendum result means there is “clearly a heightened degree of uncertainty as to how demand in the rest of the year will pan out.” Airline EasyJet Plc. said that Brexit-related currency volatility was impacting consumer confidence.
The International Monetary Fund slashed its UK outlook on Tuesday, as well as its global forecasts, saying Brexit implies a “substantial increase in economic, political and institutional uncertainty.”
Economists in the Bloomberg survey cut their 2016 growth projection to 1.5 percent, from 1.8 percent and 2017, to 0.6 percent, from 2.1 percent. The latter would be the weakest since 2009, when the economy last suffered a full-year contraction. Inflation is seen averaging 2.2 percent next year, just above the BOE’s 2-percent target, and up from 1.7-percent forecast in June.