August 2016

• If we had to capture the mood at Jackson Hole (the meeting of central bankers) with just one word, it would be: anxiety. Despite participants putting on a brave face, there was a sense that central banks’ activism has run its course and is now increasingly provoking unwanted side effects (like market distortions, exacerbation of inequalities and so on). While monetary policy can to a certain extent fight deflation, it cannot create economic growth. Therefore, more central bankers are now calling for fiscal policy to act in symbiosis with monetary policy.
• New evidence from the Fed suggests that the probability of an interest rate hike may be lower than the markets assume. The reasons are twofold: (1) Participants on the Fed Open Market Committee have dramatically reduced their expectations of what the “natural rate of interest” (the one that is neither too “hot” nor too “cold”) should be – from 4.25% three years ago to 3% today; (2) A member of the Fed’s board of governors has asserted that a rate increase would have to be supported not only by the two prerequisites of strong growth in employment and inflation going back to 2% (as every market participant knows), but also by the absence of “global risk events”. The abundance of the latter suggests that a rate increase is further away than we think. In the foreseeable future, lower growth and very low interest rates are a given.
• Across the developed world, new data confirms that productivity growth remains worryingly weak: non-existent or even negative. In the US, nonfarm business productivity decreased by 0.5% in Q2 (Y-o-Y) – the third consecutive quarter of falling productivity and the longest declining streak in almost 40 years. Weak productivity corrodes living standards. Therefore, if this becomes a structural rather than a cyclical problem, the societal expectations of ever-rising prosperity will have to be ditched, stoking populism and making the politics of political economy fiendishly difficult.

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