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New round of central bank liquidity injections worldwide
- The U.S. economy can’t do without Fed support
- The euro area is out of recession, but bank sector and sovereign issues remain
- The Fed, BoJ, BoE and ECB continue to nurse ailing economies
Continued low interest rates are not enough to dispel emerging risks
- The momentum driving global trade has been undermined for the foreseeable future
- China can no longer act as the global engine of growth
- Foreign exchange rate adjustments appear inevitable
Is inflation, end-point of the financial crisis, around the corner?
- New round of liquidity injections, currency crises, geopolitical tension, labor unrest…
- … Inflation remains the most likely scenario, but the path ahead is unclear
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Going it alone. The global economic picture is unquestionably looking brighter. Unlike previous recoveries, however, this one is fueled above all by consumer spending. The trend is especially noteworthy in Europe now that austerity policies have been scrapped. But it can also be observed in the United States—since the country has steered clear of the fiscal cliff dangers at the start of the year—and Japan, where the Abe administration’s first moves have lifted the spirits of local consumers. Even in China, sustained consumer spending is what has offset the negative impact of an end to export support. So on the whole, the environment is more encouraging. Yet the missing ingredient here is what proved to be one of the key drivers of global growth in the 1990s—world trade. This has two main implications:
- Global growth will be weaker than in the past, and will stay that way for some time.
- There will be greater risk for economies that are still too dependent on exports, i.e., the emerging economies in general and more specifically those suffering from structural imbalances—Brazil, India, and South Africa—and increasingly burdened by mounting current account deficits.
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The Gold Selloff as Warning Sign for Impending Deflation
Recent disappointment with a sluggish economy has altered perceptions about the risk of inflation. Since the beginning of March, ten-year inflation expectations in the U.S. bond market have shed 30 basis points, the sharpest decline in the past year. At the same time, plummeting gold prices bear witness to growing doubts about the reflationary policies pursued by central banks. Moreover, current global trends suggest that this sentiment won’t be changing any time soon:
- With inflation rates well below 2 percent and still receding, most industrialized countries are inching their way toward deflationary territory. High unemployment and low capacity utilization rates exert strong downward pressure on wages and producer prices, a trend accentuated by softer energy prices.
- The rising inflation observed in an increasing number of emerging economies is in fact limited to those with little global influence, primarily India, Russia, Brazil, and Argentina. Asia’s exporters of manufactured goods still show low inflation rates that are much closer to those in the advanced countries.
All these developments should therefore encourage central banks the world over to go further with monetary easing.