> The world economy’s slightly chaotic showings reflect the likely end to a world balance dominated by the US, as well as the hunt for a new world order. This multi-faceted balance would include the US, China and Europe.
> This quest for a new equilibrium can be witnessed first and foremost in the current less coordinated and cooperative context, where each country seeks to get the most out of a situation where the rules are changing. Border tariffs are just one example of this.
> In the short term, this leads to uncertainty that drags down economic activity, as well as investment. Growth is slightly more sluggish across the board, while inflation remains contained and is still a far cry from the central bank’s target, especially in the euro area.
> There is a tendency towards continued accommodative monetary policy. Going too fast when all the risks for the economy have not fully emerged means taking the risk of having an insufficient impact and running out of options when the situation becomes more tricky.
> This would be the case for the US, where interest rate cuts being made too quickly would mean a fresh surge in liquidity, promoting more real estate lending and corporate credit from non-banking institutions, so excesses already seen would become even more severe. This would also heighten risks on these markets and curb the Fed’s ability to act in the event of a future crisis.
> Another key point is that long-term rates are set to remain very low for a very long time, until such times as this new world balance emerges: this will force the financial sector to reinvent itself.
The document is available here Macro 5 Pager – Macroeconomic Momentum – 8 July 2019