Judging from core employment and broader measures of unemployment, it can be argued that there’s still a fair amount of hidden labour market slack in place. At the same time, other factors including globalization, technological change and digitization, the ageing of the population, insufficient labour union power, lower anchored inflation expectations and sluggish productivity growth seem to be playing a role as well.
26.09.2017 | 13:23 Uhr
From this point of view, central banks around are in no hurry to tighten monetary policy. The world economy is still dependent on loose financial conditions. On the other hand, policymakers are cautiously looking to gradually move away from the zero interest rate environment in order to create space for manoeuvre further down the road and to prevent stretched valuations in certain asset classes from turning into bubble-like valuations.
Unsurprisingly, how fast central banks will act is largely dependent on economic activity, inflation and market volatility. Financial market volatility has been very low over the past few years but looks set to go up from time to time, perhaps significantly. Indeed, scaling down the amount of central bank asset purchases is a relatively easy process from a technical point of view but it is clearly more difficult to factor in market psychology.
North Korea is clearly adding to geopolitical uncertainty and as things stand a swift cooling of tensions seems unlikely. A full- blown war between North Korea and the US is not our base case scenario as diplomatic options are still available. Moreover, both human losses and economic costs would prove gigantic. Unfortunately, however, history is full of similar examples that have played out otherwise.
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