Ed Yardeni on Global Growth

by Marilou Long on April 5, 2016

in Economic Indicators,Energy,Fed policy,Foreign Markets

From this morning’s Yardeni Research Morning Briefing:

The pace of global economic growth remains subpar. That’s been so during most of the current economic expansion. It’s not getting better, though it hasn’t been getting much worse either. What’s changed recently is that the Fed is giving much more weight to overseas economic developments than in the past.

Indeed, in her most recent speech (3/29) on monetary policy, Fed Chair Janet Yellen focused on this issue near the beginning of her prepared remarks: “Looking forward however, we have to take into account the potential fallout from recent global economic and financial developments, which have been marked by bouts of turbulence since the turn of the year. … In particular, foreign economic growth now seems likely to be weaker this year than previously expected, and earnings expectations have declined. By themselves, these developments would tend to restrain U.S. economic activity. But those effects have been at least partially offset by downward revisions to market expectations for the federal funds rate that in turn have put downward pressure on longer-term interest rates, including mortgage rates, thereby helping to support spending. For these reasons, I anticipate that the overall fallout for the U.S. economy from global market developments since the start of the year will most likely be limited, although this assessment is subject to considerable uncertainty.”

It’s likely that overseas economic developments will continue to support a dovish stance by Yellen and her dovish allies on the FOMC. Yellen specifically mentioned her “concern” about China’s slowdown: “There is a consensus that China’s economy will slow in the coming years as it transitions away from investment toward consumption and from exports toward domestic sources of growth. There is much uncertainty, however, about how smoothly this transition will proceed and about the policy framework in place to manage any financial disruptions that might accompany it.”

That’s led some Fed watchers to conclude that US monetary policy should come with a “Made in China” label. Furthermore, Yellen said that her “second concern relates to the prospects for commodity prices, particularly oil.”

The IMF just released their outlook for global financial stability and growth that mirrors that of the Federal Reserve.  From the April 2016 report summary:

Chapter 2 finds that spillovers from emerging equity and foreign exchange markets have risen substantially, and now explain more than a third of the variation in asset returns in other countries. This underscores the importance for policymakers of taking account of economic and policy developments in emerging market economies when assessing domestic macrofinancial conditions. More than economic size and trade integration, the degree of financial integration matters for a country’s importance as receiver and emitter of financial spillovers. The level of integration explains, for example, why purely financial contagion from China remains less significant even as the impact of Chinese growth shocks is increasingly important for equity returns in both emerging market and advanced economies. As China’s role in the global financial system continues to grow, clear and timely communication of its policy decisions and transparency about its policy goals and strategies consistent with their achievement will be ever more important.

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