It’s been an interesting – and somewhat surprising – year so far. We’ve seen an excessive focus on external factors like trade wars and geopolitics and not enough on striving economic growth. While these external factors garner headlines, they don’t have anything to do with fundamentals.
So it helps to focus on what matters. Take output gaps, which are the difference between the actual growth rate and the theoretical constant growth rate of an economy. During a recession, economic growth contracts and falls well below that theoretical rate. During a recovery, eventually you need to get to a level where the increased capitalization in the economy reboots investment as a growth driver, allowing the output gap to get closer to zero. That’s exactly what we saw in 2017, and that is still the main macro story running through 2018.
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