Global expansion sustainable believes BNY Mellon’s Hoey
Richard Hoey, BNY Mellon chief economist, says in his latest Economic Update that new patters in the global economy are to be expected, but that global growth is sustainable.
We continue to expect a sustained global economic expansion along with two subcycle patterns: a subcycle slowdown in economic activity and a subcycle peak in reported inflation (including food and energy). We expect the subcycle peak in reported inflation to occur in the context of a gradual upward drift in core inflation in many countries.
Economic growth should tend to be slow in countries suffering from a debt hangover and stronger in those countries without a debt hangover. We assume that the financial stresses in peripheral Europe will not disrupt the economic expansion in core Europe. We expect that the US can avoid a serious disruption to its economy from the debt ceiling struggle by adopting a relatively loose mini-deal on future fiscal policy without major near-term fiscal tightening that might restrain the economic expansion.
Why should global growth be sustained? The main reason is the lagged impact of two years of stimulative macroeconomic policy. Except in peripheral Europe, current levels for the natural rate of interest (the interest rate relative to nominal GDP growth) and the real interest rate (the interest rate relative to inflation) are stimulative in most countries. One consequence of two years of stimulative macroeconomic policy has been the reliquification of the corporate sector.
Balance sheets have strengthened as profits have rebounded strongly and refinancing opportunities have been available on favorable terms. Food and energy prices are already elevated and we now expect a subcycle peak in most countries in the reported rate of inflation as the pace of food and energy inflation slows (inflation is a rate of change in prices, not a price level).
In most developed countries, we expect a “normalization” of inflation rates over the next two years, with the center of gravity in inflation rates moving closer to the target inflation rates of the central banks.
In those emerging countries where capacity utilization is tight, the upward drift in core inflation could prove a longer-term challenge. If the subcycle peak we expect in reported inflation leads to a pause in central bank policy tightening in these emerging market countries, underlying inflation pressures could continue to drift higher over time.
We expect that the combination of somewhat slower growth in economic activity and a subcycle peak in reported inflation should motivate a “policy rate pause” in central bank interest rates in many emerging countries in late 2011 and early 2012.