The Rosy Global Economic Outlook Is At Risk Because Of Future Monetary Tightening And The Possibility Of New Global Shocks

There is no doubt that a series of major political and/or economic shocks could upset this somewhat rosy global outlook.

Indeed, monetary policy accommodation played a key role in supporting the global economy since the Great Recession ended in 2009. However, as of last year when economic growth picked up virtually everywhere, a shift towards a lessening monetary policy accommodation in the U.S, Canada and the ECB began. Clearly, we can expect further monetary tightening to emerge this year and next.

The obvious leader in the direction of monetary tightening is the U.S. central bank, but because of the turmoil and geopolitical risks around, it is still rather likely that the other central banks will lag behind the U.S. as it increases interest rates this year.

Finally, productivity growth on an international scale contributes to improvements in standards of living. The fact that productivity growth has been slowing across the globe is tied to the fact that global investment has also been unusually weak since 2010.

Nevertheless, excess industrial capacity seems to be diminishing rapidly in advanced economies, including the US. Also, the fact that labour markets have tightened in most advanced economies, although rather unevenly, should be an early indicator that stronger investment spending is just over the horizon.

U.S. Manufacturing Sector Productivity Growth

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