Summary, % real growth rates

The global economic outlook of a continued synchronized upswing has supported markets, along with expectations of a slow pace of monetary policy normalisation in advanced economies on restrained inflation. Equity markets have reached new highs, with volatility subdued, and global risk-on remains a feature as the lengthy bull market persists. Emerging markets (EM) have seen strong foreign portfolio inflows on meaningful interest rate differentials, while low bond yields (and volatility) in Advanced Economies (AE) have supported global bourses. The risk of a financial crisis is being debated, not least due to the growing time-period since the last one (we ascribe a 19% probability to a severe global financial crisis over the next five years, with lower immediate probability but rising to 19% by 2022 - see “Risk update” of 8th September 2017, website address below), while household debt levels are climbing along with those of non-financial corporates. Indeed, the Bank of International Settlements (BIS) highlights that the “number of companies rated A or better has fallen especially sharply, while the share of worst-rated (C or lower) companies has increased.” A higher interest rate environment (higher debt service payments) risks increased corporate stress, particularly if economic growth slows following monetary tightening. Under such a scenario, expectations of weaker global economic growth would likely follow, and so market risk-off could ensue. 

Real GDP Growth and FOMC interest rate expectations
Figure 3: Monetary Sector