The global economy’s reflationary regime recently turned a year old. We see this slow yet sustainable acceleration of global growth and profitability as primarily the result of the end of private sector deleveraging in the developed markets. Indeed, we have witnessed a rise in confidence, consumption, investment, labor markets, and profitability. Early cycle reflation of volumes within GDP seem to be chipping away at the lingering excess supply that has plagued markets with deflationary forces and sapped investment appetite.
Extraordinary monetary and fiscal policy stimulus also helped the global economy exit stall speed. Now policy support is churning, not being yanked. After the 19th plenum, China will likely take another bite out of the excess supply apple by shutting inefficient, pollution-intensive capacity. While the Federal Reserve is slowly normalizing monetary policy, the combined balance sheet growth by the European Central Bank (ECB) and the Bank of Japan (BOJ) in 2018 will still swamp the minor shrinkage of the Federal Reserve’s.
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