Fading the extremes
As first-quarter performance comes into focus, the extreme outcomes becomeclearer. With the US now tracking a contraction last quarter, global GDP is onpace for a 1.2% annualized gain—the second weakest reading during an expansionover the past quarter century. At the same time, consumer price inflationfell to 0.4%, the lowest quarterly increase outside of the 2008-9 recessionover this period. Finally, last quarter’s global employment gain was the fastestof the expansion, pointing to a rare decline in global labor productivity withinan expansion. As these outcomes unfolded the related risks of deflation, secularstagnation, and declining potential growth rates became an important concerndriving market pricing and policy decisions. Some of the moves to extremepricing in financial markets last quarter—the generalized fall in bondyields, the drop in cyclically sensitive commodity prices, and the rise in thedollar’s value—relate to the ascendance of these risks.
First-quarter performance worries us on two of these fronts. As demand optimists,we fear that persistent and broad-based disappointment since the startof the year reflects secular impediments that will prevent global economicgrowth from rising above trend during 2015-16. As supply pessimists, weworry that last quarter’s productivity performance reflects a slide in potentialgrowth beyond our already downbeat estimates. However, while market pricingof inflation compensation fell sharply, we have not been particularly concernedabout deflation against the backdrop of a perceived positive globalsupply shock and the continued rise in global utilization rates.
If we are interpreting the news correctly, recent markets moves reflect a calmingof these fears, which should be linked to current-quarter performance.
Consistent with our strongest conviction, the clearest reversal relates to thedeflation threat. Headline inflation has moved materially higher over the pasttwo months, due to rising energy prices and a firming in core readings. Takentogether with clearer signs that wage inflation is rising in countries where labormarkets are tightest, this quarter’s swing to an anticipated 3% annualized
As first-quarter performance comes into focus, the extreme outcomes becomeclearer. With the US now tracking a contraction last quarter, global GDP is onpace for a 1.2% annualized gain—the second weakest reading during an expansionover the past quarter century. At the same time, consumer price inflationfell to 0.4%, the lowest quarterly increase outside of the 2008-9 recessionover this period. Finally, last quarter’s global employment gain was the fastestof the expansion, pointing to a rare decline in global labor productivity withinan expansion. As these outcomes unfolded the related risks of deflation, secularstagnation, and declining potential growth rates became an important concerndriving market pricing and policy decisions. Some of the moves to extremepricing in financial markets last quarter—the generalized fall in bondyields, the drop in cyclically sensitive commodity prices, and the rise in thedollar’s value—relate to the ascendance of these risks.
First-quarter performance worries us on two of these fronts. As demand optimists,we fear that persistent and broad-based disappointment since the startof the year reflects secular impediments that will prevent global economicgrowth from rising above trend during 2015-16. As supply pessimists, weworry that last quarter’s productivity performance reflects a slide in potentialgrowth beyond our already downbeat estimates. However, while market pricingof inflation compensation fell sharply, we have not been particularly concernedabout deflation against the backdrop of a perceived positive globalsupply shock and the continued rise in global utilization rates.
If we are interpreting the news correctly, recent markets moves reflect a calmingof these fears, which should be linked to current-quarter performance.
Consistent with our strongest conviction, the clearest reversal relates to thedeflation threat. Headline inflation has moved materially higher over the pasttwo months, due to rising energy prices and a firming in core readings. Takentogether with clearer signs that wage inflation is rising in countries where labormarkets are tightest, this quarter’s swing to an anticipated 3% annualized
