Over the next year, a global growth rate of between 3% and 3.25% is part of the economic outlook for Luc de la Durantaye, head of asset allocation and currency management at CIBC Asset Management, and manager of the Renaissance Optimal Inflation Opportunities Portfolio.
“With that, we would have relatively tame inflation, but [also] core inflation that gradually rise[s], as we continue to eliminate […] slack in the global economy,” he says.
It’s a “benign” economic backdrop, notes de le Durantaye, but many central banks around the world are considering the question of how and when their monetary policies will have to change.
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For instance, stronger growth in the last few years in the U.S. has resulted in “a tight labour market, with unemployment at 4.5%,” says de le Durantaye. So, “the federal reserve is itching to continue with […] the removal of monetary policy accommodation,” and that requires a balancing act so that economic expansion is simultaneously maintained.
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“On top of that, the Federal Reserve has started to talk about how to shrink its balance sheet,” he says, noting its balance sheet “ballooned” from about US$1.5 trillion to US$4.5 trillion because of the central bank’s asset purchase program. Says de la Durantaye: “That’s going to have important market implication[s].”
The limelight will also fall on other central banks that trail the U.S. Take the European Central Bank and its move to start cutting back on accommodation, which could affect the euro versus the U.S. dollar, says de la Durantaye. The Bank of Japan, which has instated yield curve control, has also acknowledged it must eventually start removal.
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China, in contrast, has focused on fiscal accommodation, starting in 2016. The country has “stimulated [its] economy through various fiscal measures, and they will have to start to slow down that fiscal stimulation.”
Overall, “it’s going to be a balancing act of monetary policy and fiscal policy adjustment,” says de la Durantaye. “If [central banks] tighten too rapidly, that could slow down the economy too quickly. And if they’re too slow to remove accommodation, that might create inflationary pressure.”
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For this year, de la Durantaye expects the U.S. market to offer the least attractive value, whereas there’s a better outlook for Europe and Japan. He sees opportunity in emerging markets, which are just starting their economic cycle. He says, “It’s going to be an interesting year to monitor.”
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