Ageing's raging savings debate

• ? Demographic changes have played a crucial role in pushing savings rates up and real rates down in the advanced economies. Despite some voices to the contrary, we think such forces will remain in place for many years to come.
• ? For such a predictable process, it's amazing that the economic implications of ageing are so hotly debated. Ageing affects everyone's lifetime savings decisions and has an impact on macroeconomic variables through several direct and indirect channels, the strength of which varies over time.
• ? The impact of ageing on savings depends on interpreting two distinct long‐term drivers. On the one hand, aggregate savings may start to fall as the baby‐boomer “bulge” in advanced economies transitions from the peak period of saving to the phase of lower saving in retirement.
• ? On the other hand, rising life expectancy should lead individuals to save more during their working lives or wait longer to retire. Greater labour market participation by those close to the official retirement age suggests that rising life expectancy is already leading many to remain in the workforce for longer – a trend that is likely to continue.
• ? Accounting for ageing and rising life expectancy together, we find there will be no major decline in savings even as the elderly's share of the population rises further.
• ? The impact on future real interest rates will, if anything, be negative. Comprehensive studies have reached a similar conclusion, taking into account the impact of demographic changes on savings, investment and other factors affecting real interest rates.
• ? Ageing populations may be complicating the escape from low global inflation. Crosscountry evidence suggests older populations may prefer lower inflation. As societies in advanced economies continue age, there is a downside risk to the long‐term outlook for inflation and bond yields.

     

The economic cost of coronavirus lockdowns

• ▪ Widespread lockdowns and social distancing in economies affected by the coronavirus outbreak are set to cause a massive negative short-term impact on consumer spending and GDP.
• ▪ A large chunk of consumer spending is discretionary and so is very sensitive to being postponed or lost completely due to quarantines and social distancing.
• ▪ The early evidence from China supports the idea that up-front effects will be large, with retail sales down 20% y/y in January–February and industrial output over 13% lower, thanks to widespread factory closures.
• ▪ We estimate that a three-week lockdown affecting 50%–90% of a population would cut consumption in the three–month period featuring such a lockdown by 5%–8%, a six-week lockdown by 9%–16%, and a 12-week lockdown would slash it by 18%–32%.
• ▪ Full-year effects depend on how quickly postponed consumption revives as outbreaks come under control. But even quick recoveries imply big full-year losses: An initial 18% slump in consumption would still imply a full-year loss of 9%, even if spending recovered to pre-pandemic levels in four quarters. If recovery took eight quarters, the full-year loss would be an enormous 14%.

     

Fixed versus floating: vulnerability to rising interest rates

• ? Looking at different economies' exposure to fixed‐ and floating‐rate private‐sector debt reveals how vulnerable they could be to rising interest rates. Our analysis finds that Hong Kong, Sweden, China and Australia are potentially most exposed via floating rates to rising debt service costs. A 150bp rise in rates would also push several other countries' debt service ratios above the peaks of 2008. Less vulnerable economies include the US and Germany.
• ? High levels of floating‐rate debt imply a large and rapid pass‐through of rising interest rates to firms and households, with negative consequences. Exposure to floating‐rate debt as a share of GDP varies greatly: the highest levels are in Hong Kong, China, Sweden, Australia and Spain, with the lowest levels in the US, France and Germany.
• ? Growing shares of fixed‐rate housing debt in the US, Eurozone and UK mean the impact of higher interest rates may be less severe than a decade ago. Private deleveraging in countries such as the US, UK and Spain could also soften the impact.
• ? A rise of 100bp in short‐term interest rates would raise the debt service ratio after one year by around 2.5% of GDP in Hong Kong, with increases of 1.5–1.7% of GDP in Sweden, China and Australia. The smallest effects would be in the US and Germany.
• ? A 100–150bp rate rise would push debt service ratios in China, Hong Kong, Canada, France and the Netherlands well above their peaks of a decade ago. A similar rate rise would take debt service ratios in Sweden, South Korea and Australia close to, or above, previous peaks.
• ? The distribution of debt within economies, which our analysis does not cover, is also important. For example, there is some evidence that the US corporate sector has a high concentration of debt among borrowers with weak finances. Countries that are highly vulnerable to interest rate rises may see their central banks normalise policy rates more slowly than they otherwise would.

     

Are central banks really breaking the (policy) rules?

• ? Looking at the strength of the global economy, it's no surprise that simple policy rules suggest that interest rates in some advanced economies are much too low and/or that several rate hikes would be needed in 2018 to avoid falling further behind the curve. Nonetheless, we expect central banks to respond cautiously and we see a slower pace of tightening than the consensus view .
• ? Policy rules, such as the Taylor Rule, have long been considered a useful guide to the potential path for policy rates. But while it suggests that current US, Eurozone and Australian central bank rates are broadly appropriate, it signals that UK, Canadian, and Swedish rates should be substantially higher. Based on our economic forecasts, Taylor Rules suggest that the central banks in the US, Eurozone, Canada and Australia will all need to raise intertest rates by around 100bps by end‐2018.
• ? However, there are several reasons not to draw strong conclusions from such point estimates. First, the Taylor Rule requires estimates of two unobservable variables – the output gap and the natural rate of interest – which cannot be estimated precisely.
• ? Second, using models that were designed to predict US policy responses in the 1990s to forecast central banks' behaviour today is likely to be misleading. Meanwhile, inferring central banks' reaction functions from recent policy rate moves to assess the future policy path is fraught with difficulties. Not only have interest rates been broadly unchanged for the bulk of the post‐financial crisis period, but policymakers have provided other forms of policy support.
• ? Third, outside the US at least, Taylor Rules have historically pointed to persistently different policy rates from those observed, yet inflation has been well anchored.
• ? The upshot of all this is that we expect central banks in the advanced economies to err on the side of caution and anticipate interest rates rising less quickly than the consensus amongst economists.

     

The great rotation in global credit risks

• ? The pattern of global credit risks looks very different today than in 2007. Risks are now mostly centred in China and emerging markets. “Excess” private debt in China is as high as $3 trillion compared with $1.7 trillion in the US a decade ago. Yet some pockets of significant risk still exist in advanced economies, which not only implies vulnerability to rising interest rates, but also that the scope for rate rises may be limited.
• ? With policy normalisation underway in the US and the scaling back of asset purchases expected to start soon in the Eurozone, we focus on assessing vulnerabilities across global credit markets. This article explores the topic using a top‐down, cross‐country approach. We find that although private debt and debt service ratios look more benign in advanced economies than a decade ago, they have deteriorated markedly in many emerging markets in recent years.
• ? Based on a measure of excess private debt – comparing private credit‐to‐GDP ratios with their trend – China, Hong Kong and Canada are the riskiest. When comparing debt service ratios relative to their long‐term averages, risks are also mainly concentrated in emerging countries. But Canada, Australia and some smaller European countries also have high debt service ratios that have failed to drop since 2007, despite the slump in global interest rates.
• ? Overall, aggregate private debt indicators look less worrying than in 2007. We would also argue that the concentration of excess private debt levels in China reduces the risk of a sudden financial crisis based on massive credit losses, such as the one in 2007–2010. But with corporate debt levels in the US, Canada and some other G7 countries above their long‐term trend, investors need to be attentive to these considerable pockets of risk.

     

Housing slump could cut world growth to decade‐low

• ? A combined slump in house prices and housing investment in the major economies could cut world growth to a 10‐year low of 2.2% by 2020 – and to below 2% if it also triggered a tightening in global credit conditions.
• ? In such a scenario, inflation would remain well below target in the main economies, and US Fed rates would be up to 100 basis points lower than in our baseline by 2021.
• ? Signs of a global house price downturn are already visible, with around a third of our sample of economies seeing falling prices and world residential investment starting to decline. High house price valuations add to the risk that this downturn will deepen in the coming quarters, hitting consumer spending.
• ? Using the Oxford Global Economic Model, we find that a 10% fall in house prices and an 8% fall in housing investment both cut growth by around 0.3%‐0.4% across regions. Adding a sharp Chinese downturn, such as that seen in 2015, has a large additional impact on growth in Asia .

     

Thrifty firms and thriftless households are risks to growth

• ? Structural changes in savings behaviour by households and especially firms in advanced economies in recent years pose threats to global growth. Household savings may have been compressed by high wealth levels, pointing to the risk of a sharp rise in saving and fall in spending if asset prices correct. One positive compared to a decade ago, however, is that US personal saving is less depressed than then.
• ? The bigger risk is arguably on the corporate side, where firms' net savings have risen on average by 2–3 percentage points of GDP since the early 1990s. This has been accompanied by weakening investment, especially in net terms. The reasons behind this are varied – post‐crisis caution, demographic factors and a shift to R&D intensive industry may all have played a role. But a key factor is likely to have been changes in incentives facing executives, leading them to prioritise stock buybacks over investment. This risks creating a long‐term low‐growth feedback loop.

     

Don't rely on public investment to save the day

• ▀ We think public investment in the advanced economies should be increased, but we're also sceptical that, on its own, it can save economies from recession in the event of further negative shocks.
• ▀ Deteriorating infrastructure and low bond yields make a compelling case for sustained increases in public investment. And given the shortage of safe assets and the global savings glut, higher government borrowing seems unlikely to have big negative repercussions for private sector borrowers.
• ▀ But the scope for a sustained and aggressive rise in public investment to counter shocks is limited. Even when funds are plentiful, governments often struggle to meet capital spending targets due to other constraints.
• ▀ Spikes in public investment during downturns typically dry up the capital pipeline, leading to falling investment further ahead. As a result, it's harder to sustain increases in investment, compared to other government spending.

     

Soaring corporate debt is a risk to global growth

• ▀ Corporate borrowing is accelerating as a result of the coronavirus crisis. In part, this is a healthy development as firms look to ride out a period of low or even zero sales. But it also brings potential risks to growth, especially in the longer term, including via lengthy balance sheet restructuring that hurts investment and productivity growth.
• ▀ In the advanced economies, we estimate the aggregate corporate debt/GDP ratio could rise as much as 10ppts in 2020, to 95% of GDP - well above the 2009 peak. Debt service ratios may also rise into risky territory despite low interest rates. Risks look especially elevated in France and Canada.
• ▀ Evidence for both advanced and emerging economies suggests high corporate debt levels can damage growth. Highly indebted firms tend to invest less in both the near and medium terms, and some estimates suggest the rise in aggregate debt this year could cut GDP growth by up to 0.2% per year.
• ▀ The coronavirus crisis may also crystallise some pre-existing risks in corporate debt. Despite government assistance, defaults by low-rated firms have started to rise and commercial real estate prices are falling.
• ▀ Sectoral concentrations of risk may also be intensified and new ones created in industries hit hard by the virus like energy and consumer discretionary sectors.
• ▀ Emerging market corporate debt is also on the rise - sharply in some cases. In some economies, this mostly reflects exchange rate effects. But negative balance sheet effects of this kind are also a risk to growth.

     

World Economic Prospects Monthly

Overview: Outlook darkens as coronavirus spreads

• ▀ What began as a supply shock in China has morphed into something much more serious. The effects of financial market weakness and the disruption to daily life around the world will trigger lower consumer spending and investment on top of the disruptions to the global supply chain. We now expect global GDP growth to slow to 2.0% this year from 2.6% in 2019, before picking up to 3.0% in 2021. But a global pandemic would lead to a far bigger slowdown this year.
• ▀ China seems to have made progress in containing the spread of the coronavirus, but the slow return to business as normal has prompted us to cut year-on-year GDP growth in Q1 from 3.8% to 2.3%, the weakest in decades. But we expect a healthy growth rebound in Q2 which will also provide Asian economies with a lift.
• ▀ It is isolation policies not infection rates that determine the economic impact. Outbreaks around the world are leading authorities to announce a growing list of measures to curb the virus spread. At a global level any Q2 rebound will thus be small at best. We expect investment in the advanced economies as a whole to contract on a year-on-year basis in Q2 for the first time since the global financial crisis, while annual household spending growth may slow to its lowest since the eurozone crisis.
• ▀ Our baseline assumes that the global economy will return to business as usual in Q3 and that some catch-up will result in robust H2 GDP growth. Combined with favourable base effects in early-2021, this is expected to result in world GDP growth averaging about 3% in 2021.
• ▀ Since January, we have cut our 2020 global GDP growth forecast by a hefty 0.5pp. But larger revisions may be required if the disruption triggered by shutdowns and other responses to coronavirus proves longer than we assume currently or if more draconian actions are needed in the event of a global pandemic. Our scenarios suggest that the latter could push the global economy into a deep recession.

     

Higher interest rates should not unduly faze consumers

• ? Though the MPC has signalled a more aggressive pace of interest hikes than previously anticipated, we still expect the impact on the consumer sector in aggregate to be modest. We estimate that household debt servicing costs will rise from the current level of 4.1% of household income to 5.0% by the end of 2019. This would still be only a little over half the pre‐crisis peak.
• ? We expect the MPC to hike interest rates twice in both 2018 and 2019, taking Bank Rate to 1.5% by the end of next year. Higher interest rates will impact on consumer spending by increasing debt servicing costs and reducing the attractiveness of credit (including mortgages), but savers will benefit from higher returns on their deposits.
• ? Mortgages account for 77% of loans to UK households and full pass through of a 100bp rise in Bank Rate to variable rate loans, implying an increase from 2.78% to 3.78%, would add £100 a month to the cost of servicing an average mortgage. But only two‐fifths of borrowers have a variable rate deal, so for many homeowners the adjustment to higher interest rates will not be immediate. And the proportion of houses which are owned via a mortgage has fallen over the past decade, suggesting that the household sector as a whole will be less sensitive to higher mortgage interest rates.
• ? Historically the relationship between Bank Rate and interest rates on unsecured lending has been weak and rates on credit cards and personal loans have not yet risen following November's rate hike. The link to deposit rates has been stronger and higher returns on savings will mitigate some of the damage to household income from higher debt servicing costs, although uneven distribution of debt and savings means that there will be winners and losers at a more disaggregated level.
• ? We have used the Oxford Economics Global Economic Model to run a counterfactual scenario where Bank Rate is kept at 0.5% throughout 2018 and 2019. The results suggest that the pace of rate hikes assumed in our baseline forecast would reduce the level of consumer spending by 0.2 percentage points by the end of 2019.

     

Why the UK saving ratio is unlikely to flip anytime soon

• ? With inflation down and wages rising, the outlook for consumer spending in the UK is brightening. But should households opt to boost savings, the mood could darken.
• ? We think a meaningful rise in the saving ratio from its recent record lows is unlikely, though. Austerity may be easing, but the drag from fiscal policy is still set to limit households’ savings resources, while the durability of the current expansion may reduce the motivation for precautionary saving.
• ? What's more, any rise in interest rates on savings accounts will probably be even slower than the modest pace we expect for Bank Rate. And with the demographic shift toward an older, less thrifty, population, the appetite of households to save looks set to remain subdued.

     

A long dollar fall: likelihood and consequences

• ? The dollar has tended to move in long swings over the last forty years, raising the risk that the recent decline could extend considerably further. This is not our base case, but risks do look skewed towards additional dollar weakness. Our modelling work suggests that a large further dollar slide would have significant effects on the pattern of world growth – the US and some emerging markets would gain, with other advanced economies the main losers.
• ? There have been several large multi‐year swings in the dollar over the last four decades. We identify seven such episodes since 1971 including three long declines averaging 31%, the last being in 2002‐08. Since 2017 the dollar has fallen 10%, implying a possible further considerable drop.
• ? Our dollar strength indicator, which covers a range of economic variables associated with dollar moves in the past, does not currently point to a re‐run of the dollar weakness of the 2000s. But we do expect some further near‐term dollar losses and risks to our baseline forecast look skewed to the downside, especially given the emergence of large twin deficits in the US.
• ? Should a further large dollar slump nevertheless occur, our modelling suggests large effects on the pattern of world growth. The main gainers would be commodity‐producing emerging markets (EM) benefitting from improved terms of trade, positive balance sheet and external liquidity effects and scope to ease local interest rates. Rising US yields would erode some of these gains in later years.
• ? The main initial losers would be advanced economies outside the US which would lose competitiveness. In the case of the Eurozone and Japan, undershoots of inflation targets would be likely. There could also be some other negative consequences such as stoking protectionism and creating financial bubbles in some EMs.

     

Deciphering the UK's business investment performance

• ? Absent June 2016's Brexit vote, growth in business investment would have been much faster and the UK would be sharing in a global “investment boom”. Or so the Bank of England claims. But the reality is more complicated. What is striking is just how subdued investment growth has been across countries.
• ? Survey evidence presented by the Bank suggests that recent business investment growth has been less than a third of what might have been achieved absent Brexit. The UK has also been highlighted as an investment laggard among major economies.
• ? Headline investment growth has certainly been relatively weak since 2016. Uncertainty around future UK‐EU trading arrangements may have resulted in some investment being deferred or cancelled. And the Brexit‐related fall in sterling will have pushed up the cost of imported capital equipment, cutting demand.
• ? But a collapse in investment in the North Sea sector has had a significant effect on headline investment growth. On an excluding‐extraction basis, UK business investment rose at the same pace as the US (ex‐extraction) and faster than Japan in 2016 and 2017, while average annual growth rises from 1.0% to 2.4%.
• ? What is striking about the recent performance of business investment in the UK and other G7 members is how subdued growth has been across economies. Despite a favourable environment, no major advanced economy has seen investment rise at the type of rates that the Bank predicts the UK, but for Brexit, should be now enjoying.
• ? Sectoral shifts, the rise of intangible investment and the consequences of technooptimism offer some reasons as to why measured investment may have become less sensitive to economic upswings. These same factors suggest that 1990s‐style growth in private investment is unlikely in the UK (or elsewhere) even once Brexit uncertainty has cleared. Indeed, our own medium‐term forecasts see business investment growth across major economies continuing to run at a relatively subdued pace.

     

World Economic Prospects Monthly

Overview: Growth resilient to protectionist concerns

• ? Despite the mounting threat of more protectionist trade measures, we expect the impact on global growth and trade to be mild. Given this, and the still fairly solid underlying economic picture, we have left our global GDP growth forecasts for 2018 and 2019 unchanged at 3.2% and 3.0% respectively.
• ? Although economic data in Q1 painted a pretty solid picture, there are signs that the global expansion may lose momentum in Q2. Most notably, the global PMI fell sharply in March, more than offsetting the gains of the previous three quarters or so. Some of the decline may reflect an over‐reaction to recent trade threats and could be reversed in April and despite the drop, the surveys still point to strong growth. But the fall highlights the risk that lingering trade tensions could damage confidence and prompt firms and consumers to delay investment and major spending plans.
• ? On a more positive note, China's economic growth picked up markedly in early 2018, which could provide a fillip to global trade growth in the near term. Given the betterthan‐expected start to the year, we have made no change to our 2018 China GDP growth forecast (of 6.4%) despite the probable negative effects of trade measures.
• ? Meanwhile, most advanced economies remain in the late expansionary stage of the cycle. And those that show signs of slowing, such as the Eurozone, are doing so from multi‐year highs. While we have nudged down our 2018 Eurozone GDP growth forecast slightly to 2.2%, the pace is expected to remain well above trend. We judge the impact of US tariffs and counter‐measures on the US economy to be subdued and have lowered our GDP growth forecasts for 2018 and 2019 by just 0.1pp.
• ? For now, we see further solid growth for the world economy this year even in the environment of rising protectionism. While there is a risk that a further escalation of trade tensions could trigger a sharper slowdown in global GDP growth, we still see the risks of a full‐blown and damaging trade war as limited and the chances of protectionism leading to recessions as smaller still.

     

World Economic Prospects Monthly

Overview: Financial turmoil will not derail expansion

• ? The further run of broadly positive economic news has been overshadowed by the recent financial market turmoil. We do not expect the latter to be the catalyst for any notable economic slowdown and have left our world GDP growth forecast for 2018 unchanged at 3.2%, which would be the strongest result since 2011, up from an estimated 3.0% in 2017.
• ? January survey data continued to strike a positive tone. Indeed, the global composite PMI rose to its highest level during the current upswing and points to a further acceleration in global GDP growth. Meanwhile, less timely world trade data showed strong growth in November after a weaker performance in September and October.
• ? Of course, these developments predate recent financial market developments. The key issue is whether the equity market sell‐off triggers significant spillovers to the wider economy. If the market reversal is to have notable repercussions, it will need to morph from a tantrum into a full‐blown crisis. For now, we still expect interest rates generally to edge higher, with three rate hikes still seen in the US this year.
• ? Despite the recent fall, equity prices are still up sharply compared with a few months ago and earnings growth remains solid. Against this backdrop, further weakness would probably require an additional trigger, such as a sustained rise in bond yields in response to a reassessment of the inflation and monetary policy outlook. Although inflation concerns have risen recently, our view remains that price pressures will rise only gradually in the advanced economies and that the upside risks to both inflation and bond yields remain well contained.
• ? The upshot is that recent events have not prompted us to reassess the outlook for this year or beyond. We continue to expect world GDP growth to pick up to 3.2% this year, reflecting strong growth in both the advanced economies and the emerging markets. And our forecast for 2019 is also unchanged at 2.9%. In turn, world trade growth remains quite strong, helped by the weaker US$, but is seen slowing to 5% this year from just over 6% in 2017, with a further modest easing to 4.3% in 2019.

     

The global impact of a sharper US‐China slowdown

• ? We forecast a moderate global slowdown through 2020, but risks are looming of a sharper downturn in China and the US. If these were to materialise, our simulations suggest global GDP growth would hit a post‐crisis low, with the level of GDP dropping by 0.6% and growth slowing by 0.4 ppt in 2019/20.
• ? Economies with strong trade linkages to China and the US – Korea, Taiwan and Mexico – would suffer most. Conversely, a weaker dollar, lower oil prices and relatively smaller trade flows with the US and China would offset the blow in Europe and for some EMs, including Turkey, Argentina and India.
• ? Since 2010, Chinese activity has been a powerful leading indicator of every major economy's exports, proving stronger than similar indicators for US or eurozone activity. This is even the case for non‐Asian economies such as Canada, Mexico, Italy, Germany, France and the UK. This may reflect deepening trading relationships and the relatively high volatility of Chinese cyclical indicators over the period.
• ? Over the past decade, global macro stability has been supported by the US and Chinese cycles moving counter to each other. But this could reverse if the ongoing Chinese policy stimulus fails to gain traction and the weakness gains momentum.

     

Tighter labour markets to finally lift global wages

• Wage growth has been relatively slow since 2007 in advanced economies, but an upturn may be in sight. Slow productivity growth remains an issue but tighter labour markets make a positive response by wages to rising inflation more likely and there are signs that compositional and crisis‐related effects that dragged wage growth down are fading – though Japan may be an exception.
• Overall, our forecasts are for a moderate improvement in wage growth in the major economies in 2017–18, with the pace of growth rising by 0.5–1% per year relative to its 2016 level by 2018 – enough to keep consumer spending reasonably solid.
• Few countries have maintained their pre‐crisis pace of wage growth since 2007. In part this reflects a mixture of low inflation and weak productivity growth, but other factors have also been in play: in the US and Japan wage growth has run as much as 0.5–1% per year lower than conventional models would suggest.
• The link with productivity seems to have weakened since 2007 and Phillips curves – which relate wages to unemployment – have become flatter. A notable exception is Germany, where the labour market has behaved in a much more ‘normal’ fashion over recent years with wage growth responding to diminishing slack.
• ‘Compositional’ factors related to shifts in the structure of the workforce may have had an important influence in holding down wage growth, cutting it by as much as 2% per year in the US and 1% per year in the UK. There are some signs that the impact of these effects in the UK and US are fading, but not in Japan.
• The forecast rise in inflation over the next year as energy price base effects turn positive is a potential risk to real wages. But the decline in measures of labour market slack in the US, UK and Germany suggests wages are more likely to move up with inflation than was the case in 2010–11 when oil prices spiked and real wages fell.

     

World Economic Prospects Monthly

Overview: Reflation enthusiasm is tempered

• ? We have kept our world GDP growth forecasts unchanged this month, at 2.6% for 2017 and 2.9% in 2018. But our outlook for inflation has been lowered to 3.0% this year (from 3.3% last month) as inflation is close to a peak in several economies and oil prices have fallen recently.
• ? Global indicators continue to point to buoyant activity, driven by manufacturing. The global manufacturing PMI rose to its highest level in almost six years in February, which in turn is boosting world trade. Despite the exuberance shown by the surveys, we remain cautious. We continue to expect a slowdown in consumer spending as households are squeezed by higher prices.
• ? Although we still see GDP growth in the US accelerating this year, we have lowered our forecast to 2.1% as economic data have been weaker than expected at the start of the year. Large uncertainties around our central forecast persist given the unpredictability of President Trump's policies, and markets have tempered their initial enthusiasm regarding the success of ‘Trumponomics’.
• ? With the Federal Reserve now close to meeting its dual mandate, the pace of policy normalisation will accelerate. We now expect the Fed to raise interest rates this month and three times overall this year. This means that US bond yields are likely to continue to rise and the euro will remain under pressure due to the widening interest rate differential between the US and the Eurozone.
• ? The Eurozone economy remains resilient ahead of key elections in France, the Netherlands and Germany. Our view remains that populist fears are overstated and that Emmanuel Macron is still favourite to become the next French president.
• ? Many emerging markets have started 2017 with positive momentum, but caution remains the name of the game as the Fed prepares to raise rates faster than previously expected and the future of US trade policy remains uncertain.

     

Risk‐weighting debt implies more fiscal space

• ? Markets are more tolerant of fiscal expansion than governments typically fear. The composition of major economies' government debt has become safer and this is reflected in our estimates of a new indicator – risk‐weighted debt (RWD). Using RWD to measure debt provides a relatively benign indication of risks to sustainability in the major economies since 2004.
• ? Our RWD measures consist of six categories of debt holders, with weights allocated to their risk‐to‐flight potential. Debt holders range from riskier foreign banks and non‐banks (highly weighted), which would be most inclined to sell when times get tough, to safer entities such as central banks (zero weight).
• ? RWD looks less alarming than unweighted measures. Major economies' total public debt rose by 10% of GDP on average since 2011; RWD was up by just 1% of GDP.
• ? Japan and Italy show the biggest relative improvements when the focus shifts to RWD from debt‐to‐GDP. The two countries' RWD has fallen significantly since 2011.
• ? RWD improvements limit the extent to which indebtedness threatens sustainability.