The combination of extremely loose monetary policy, relatively low commodity prices and neutral fiscal policy has come to fruition. So far, however, this is only modestly translating into rising wage and inflation readings.
28.03.2018 | 09:41 Uhr
Economic indicators remain solid for now, even though some leading indicators suggest that the pace of the recovery is slowing. Trade volumes are growing, corporate profits are on the rise and unemployment is falling. The combination of extremely loose monetary policy, relatively low commodity prices (though industrial metal and energy prices have rallied more recently) and neutral fiscal policy has come to fruition. So far, however, this is only modestly translating into rising wage and inflation readings.
There has been a lot of talk about the death of the Phillips curve but it might be premature to confirm that message. Indeed, the absence of evidence is not the evidence of absence. Inflationary pressures are firming and we expect this to continue. 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 suggest that the negative relationship is weaker than before. Financial conditions look set to become tighter from here eventually biting into economic activity, perhaps already later this year. Future equilibrium interest rates (and therefore real policy rates) are expected to remain lower compared to pre-crisis standards.
A key risk to the outlook remains a rise in global protectionism, which has regained attention after Trump caused transatlantic tensions to rise with a proposal for import tariffs on steel and aluminium.
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