“Global economy neither too hot nor too cold” says Deutsche AWM’s Wöhrmann

The global economy is growing at a healthy pace with no sign of either overheating argues Asoka Wöhrmann, co-chief investment officer at Deutsche Asset and Wealth Management (Deutsche AWM).

The “Goldilocks economy”-this is a magic phrase for the markets. In the fairy tale Goldilocks samples three bowls of porridge and determines that one is too hot, one is too cold and the third one is just right.

In the real world, this means that the economy is neither too hot so that neither inflation nor recession poses a risk.We have eased down our 2014 global economic growth forecast by 30 basis points to 3.4 %. This is due in part to the impact of severe weather earlier in the year in the United States, which is now forecast to grow by 2.3 % this year.

But U.S. growth in the coming quarters is likely to be strong and we have slightly raised our 2014 growth forecast for the Eurozone to 1.0 %. In addition, we expect that inflation will remain low in all the major economic regions this year.

The upswing is being led by the United States, followed by Japan. The Eurozone is still catching up. These differing stages of economic recovery will impact monetary policy, among other things. While the U.S. Federal Reserve Board (the Fed) is slowly but surely taking its foot off the monetary accelerator by reducing bond purchases, the Bank of Japan (BOJ) is putting the monetary pedal to the metal.

What’s more, the European Central Bank (ECB) signaled in June that it intends to pursue a more expansionary monetary policy. While we doubt that the ECB and the BOJ will raise interest rates next year, the Fed could start doing this as early as the third quarter of 2015. 

As a result, monetary-policy divergence will intensify in the future-impacting foreign-exchange markets as well. In light of improved economic growth, higher interest rates and more restrictive monetary policy in the United States, many signs are pointing to a strengthening of the U.S. dollar.

However,as last year showed, a somewhat less expansionary monetary policy in the United States can cause bond yields to spike. We would suggest staying cautious on the bond market. 

The chances are good that the Goldilocks economy is not just a fairy tale. Accelerating global economic growth combined with moderate inflation-these are arguably the two key factors likely to drive up corporate earnings and help equities. So we expect stock markets to continue their upward climb.

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