Rising risks to the status quo

08 December 2017 | Markets and Economy


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Leo Schulz
Vanguard Europe – Moderator

Peter Westaway
Vanguard Europe – Chief Economist and Head of Investment Strategy

Alexis Gray
Vanguard Europe – Senior Economist

Leo Schulz: Rising risks to the status quo. That is the title of the Vanguard economic and market outlook 2018. My name is Leo Schulz. I have with me Peter Westaway, chief economist and head of investment Strategy at Vanguard Europe, and senior economist Alexis Gray.

Peter, in a nutshell, what's the key message of the 2018 outlook?

Peter Westaway: Well, really we’re at a pretty fascinating stage for the global economy at the moment. We’re in a synchronised upswing in terms of growth. Those growth rates are stronger than they have been for some time and unemployment is really plumbing ever-lower depths.

Leo Schulz: So a positive environment.

Peter Westaway: It is in some respects, but there are a few puzzles that we talk about in our outlook. First of all, inflation is still stuck below target in many countries and reluctant to respond to policy stimulus. Secondly, it’s important to note that growth rates are lower than they have been maybe historically, and against all of that, it’s interesting that market valuations are actually at very high levels.

Leo Schulz: So, Alexis, how would you see policymakers responding in this environment?

Alexis Gray: Well, Leo, we’re at the beginning of the end of a regime of extremely easy money, so in the US and the UK we have monetary tightening. The Federal Reserve is raising interest rates and allowing the asset purchases they made post-crisis to roll off, and the Bank of England has raised interest rates once, which in effect reversed the post-Brexit vote cut. By contrast, we still have monetary loosening in other parts of the world, like Japan and the Euro area. So the ECB is still using quantitative easing, they may raise interest rates, but probably not until mid-2019 or even later. And the Bank of Japan, I think, won't raise interest rates much further into the future than that.

Leo Schulz: So how would you describe in a few words the risk that we’re talking about in the title of the outlook?

Alexis Gray: Well, the risk really is that this low inflation environment that we have had for a number of years, there is an assumption that that will continue. So we have had easy money, stable growth and stable inflation. Now, history would tell us that as unemployment falls and spare capacity shrinks, at some point that will trigger higher inflation.

Leo Schulz: Peter, if that were to happen, what would be the consequences?

Peter Westaway: What policymakers are trying to do, as Alexis said, is gradually remove this policy stimulus, but the risk is that they do this too quickly, and if they do it too quickly, it could trigger a market collapse. One of the reasons that that risk is particularly heightened, at the moment, is that in many respects we’re in unchartered territory, because policymakers have never used these quantitative easing instruments before and so quite how the economy and how markets will respond as they unwind them is very uncertain.

Leo Schulz: A positive outlook but one with risks as conditions change and as policymakers, as Peter puts it, move into unchartered territory. Peter, Alexis, thank you both very much.

Please remember that past performance is not a good indicator of future returns. The value of investments and the income from them can fall as well as rise and investors may not get back the amount that they originally invested.

Find out more about Vanguard's economic and market outlook for 2018.

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