July 2016

• The “risky trinity” (in the words of the BIS) of (1) unusually low productivity growth, (2) historically high global debt levels and (3) remarkably narrow room for policy manoeuver explains why ultra-low interest rates, a symptom of apprehension about the future, are likely to persist. This economic apprehension is exacerbated by a spate of non-economic fears about terrorism, resurgent nationalism, populism, a lawless world and so on. These dampen appetite for consumption and investment in a way that financial markets and economic models underestimate.
• The global recovery is tepid and sluggish, but unlikely to grind to a halt. In the economy that matters the most – the US – the downside economic risks are on the decline, with an improving labour market and inflation moving towards the 2% target. A Fed hike before the end of the year is now probable.
• Brexit is proving to be very disruptive for Britain, while having little impact on the rest of the world (for now). It will not scupper, as some feared, the tepid global recovery: the much trumpeted fears of contagion are constrained by the relative size of the UK economy (2.3% of the world). By contrast, most UK indicators are flashing red – both consumer confidence and business sentiment have fallen sharply since last month, while the composite PMI (output index) just dropped below 50 – the contraction level. Far from quelling discontent, the referendum has done just the opposite, heralding the beginning of a painful process of negotiations, economic reversal and political turmoil.

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