GLOBAL MACRO OUTLOOK

Benchmarking reflation

19 mai 2017
por Jean Boivin , Rick Rieder

Global reflation has more room to play out. We believe this US-led economic cycle has been unusually long and slow. Yet based on our assessment of previous cycles, its remaining lifespan can likely be measured in years, not quarters.

Highlights

  • Reflation has legs because economic slack is being eroded so slowly. U.S. wage growth has room to pick up based on where we are in the cycle compared with previous cycles. Stronger corporate investment would reinforce growth rates, though we see a risk that the ongoing US political drama could keep businesses cautious.
  • The anxiety about wage growth comes after the biggest effort by U.S. households to cut debt in the post-war period. That goes a long way towards explaining why the recovery has been so sluggish.
  • Once a U.S.-led phenomenon, reflation is now global. More than 80% of the countries making up the Markit global composite PMI – combining manufacturing and services – posted stronger readings from a year earlier in April, one of the highest shares since the immediate recovery from the crisis.
  • We see the Fed pressing ahead with a gradual policy normalisation. Our BlackRock GPS points to reflation broadening beyond the US. We are negative on government debt and positive on reflation beneficiaries: European, Japanese and EM equities, as well as cyclicals and factors such as value.

The chart below shows US gross domestic product (GDP) cycles since 1953, but instead of basing the chart on time we base it on where it is in the cycle relative the different stages of a cycle. Each dot on a line depicting a calendar quarter. What stands out? This looks like a completely normal cycle and is tracking the previous two cycles closely.

Long reflationary road
Comparing U.S. economic GDP cycles, 1953-2017

Comparing U.S. economic GDP cycles, 1953-2017

Sources: BlackRock Investment Institute, U.S. BEA, Congressional Budget Office, National Bureau of Economic Research (NBER), May 2017.
Notes: This chart shows the level of real U.S. GDP compared against other cycles since 1953, excluding the short 1980-81 one. Each line begins at 100 with the peak of the previous business cycle, as determined by the NBER. We fix different economic cycles at key points to align each based on their peaks, troughs and the point when potential output is reached. This allows us to compare cycles of varying lengths. The cycles above vary from 11 to 42 quarters, with the current at 39 quarters. Potential output is reached when the economy is operating at full capacity, having used up all the slack created by the previous downturn. We use CBO measures of the output gap, or the difference between actual and potential output. Each dot on a line represents a calendar-year quarter. Each cycle peak is set at 100. All cycles since 1953 are represented.

 

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Jean Boivin
Head of Economic and Market Research
Jean Boivin, PhD, Managing Director, is Head of Economic and Markets Research at the Blackrock Investment Institute.
Rick Rieder
Chief Investment Officer and Co-Head of Global Fixed Income
Rick is also a member of BlackRock's Global Operating Committee and Chairman of the BlackRock firm-wide Investment Council.