The global
economy is rebooting for “Great Moderation 2.0.”
Barely five years after the worst financial turmoil and
recession since the Great Depression, the U.S. and fellow advanced nations are
showing a stability in output growth and hiring last witnessed in the two
decades prior to the crisis, in an era dubbed the “Great Moderation.” The lull
points to a worldwide economic expansion that will endure longer than most.
Volatility
in growth among the main industrial countries is the lowest since 2007 and half
that of the 20 years starting in 1987, according to Bloomberg calculations
based on International Monetary Fund data.
Such calm
finally is providing a support for equities over bonds and giving companies and
consumers long-sought clarity to spend.
“That’s
why I call it the Great Moderation 2.0,” said John Normand, head of
foreign-exchange and international-rates strategy at JPMorgan Chase & Co.
in London. “It
looks, sounds and feels a whole lot like that last time we had reason to use
that label.”
GDP Growth
The IMF’s latest forecasts suggest output volatility in the
Group of Seven nations will ease to 0.4 percent this year compared with almost
3 percent in 2010 and a 0.8 percent average in the two decades ending 2007,
according to the Bloomberg calculations, which measure the standard deviation
in gross-domestic-product growth over rolling four-year periods.
Professors James Stock at Harvard University and Mark Watson at Princeton University are credited with coining the phrase
“Great Moderation” in a 2002 paper titled “Has the Business Cycle Changed
and Why?” They found “strong evidence of a decline” in the volatility of U.S.
economic activity, attributing between 10 percent and 25 percent of the shift
to the Federal Reserve’scrackdown on inflation.
Prophetically, they warned “the past 15 years could well be a hiatus
before a return to more turbulent economic times.”
Striking
Development
The analysis resonated among policy makers, with then-Fed
Governor Ben S. Bernanke calling the apparent quiescence a
“striking economic development” in a 2004 speech.
Stronger Regulation
Goldman Sachs sees another explanation: stronger regulation of
bank and consumer debt following the crisis means economic growth will be less
amplified by easier lending than before. In the euro area, for example, loans
to companies and households shrank 2.2 percent in March from a year earlier,
according to the European Central Bank.
Property Surge
The lack of volatility also could feed complacency among
investors, pushing them as it did before to take on more risk, which later
proves foolhardy for them and the economy. Financial-stability concerns already
are building within central banks, with U.K. residential property, which is
gaining in value by about 10 percent a year, as well as technology stocks and junk bonds in the U.S. among the assets drawing
attention.
‘Old Normal’
In what he
calls an ‘‘old normal’’ scenario, interest rates would rise gradually along with the
economy, encouraging investors to seek out risky assets such as equities. Dutta
estimated in an April 21 report that the U.S. economy is 57 months into its expansion,
implying another 38 months just to get back to the 95-month average upswing in the previous period of
moderation.
The same outlook holds for the world economy, according to
Joachim Fels, co-chief global economist at Morgan Stanley in London. Starting
in 1970, he identifies six global expansions: 1970-1974, 1976-1979, 1983-1990,
1994-2000, 2002-2008 and since 2010. That’s an average of 5.8 years.
Fels says the current pickup will last because slow recoveries
leave lots of room for hiring and investment to increase. Low inflation means
monetary policy can stay easy, while the lack of a synchronized acceleration
lowers the risk of a joint overheating.
‘‘This global expansion could become the longest in postwar
history,’’ Fels said.
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