Is it time for something new from the world's central bankers?

As is perhaps now a tradition, many financial market participants began 2014 expecting a global economic recovery and rising bond yields. The Bloomberg consensus forecast for the closely watched US 10-year Treasury bond yield at year end was 3.4%. As it transpired, though, while the UK economy did expand by an impressive 1.6% in real terms over the first six months of the year (although even much of this may have been due to special factors), Germany only managed 0.5%, the US managed only 0.4%, France saw no growth at all, while Italy and Japan suffered minus 0.3%.  Even in China, economic activity in the first half of 2014 seems to have been remarkably subdued – we suspect that annualised growth in Q1 was down to 3.5% and the rebound in the second quarter seems to have been quite modest. On a weighted average basis, we therefore estimate that G7 real GDP growth in the first half of 2014 was around 0.4%, while G7 nominal GDP growth in USD terms was only around 1.5% (at current exchange rates), although even some of that can be attributed to exchange rate movements rather than actual growth. Such weak rates of economic expansion – which have since been confirmed by a reported further slowdown in world trade growth – seem to resemble a global recession, rather than the much forecast and much hyped revival that was expected.

Quite simply, and contrary to the message offered by the ever buoyant but increasingly statistically flawed industrial surveys that companies have long since learnt to “game”, the global economy did not recover in the first half of 2014 and those investors who “bet” on no rate hikes/expanding liquidity seem to have performed better than those that adopted the presumed consensus strategy that was based on the premise of a global economic recovery. In fact, we might argue that against such a stagnant economic background, a US Treasury 10-year yield of 2.4% seems to make rather more “sense” than one at the 3.4% level that was expected. 

Unfortunately, we can argue that the consensus forecasting record fares even worse when we look at the forecasts on a country by country basis. It seems that even Germany’s first quarter growth that, initially at least, appeared quite robust, was in fact boosted by mild weather rather than by an “inflationary boom”, as was almost universally assumed. Consequently, Germany’s second quarter performance was notably tepid by comparison.

Elsewhere, although markets probably were not expecting very much for France, even we have been surprised by the weakness in Italy – it seems that the renewed fiscal austerity programme has trumped even the impact of resurgent capital inflows on the monetary system. Canada’s economy has been losing momentum of late as its housing boom has receded and although some of the weakness in the US during the first quarter can be explained by the weather (although the bad weather did lead to a very significant increase in energy production and consumption that will have boosted total GDP), the much talked-about rebound in the second quarter was very modest. Excluding inventories, US real domestic demand growth in the first half of the year was only 0.5% annualised.