The first few months of 2018 have brought confirmation of continued synchronised above-trend global economic growth, lifting the long shadow cast by the Great Financial Crisis (GFC) of 2008/09, dissipating the deflationary risks that have weighed on developed economies in recent years and putting central banks on the path towards interest-rate normalisation.
In this environment, there is no longer a need for the European Central Bank’s (ECB) ultra-accommodative monetary policy. Maintaining non-conventional policy measures entails significant risks. The US economy put the crisis behind it several years ago and is now confronted with the appearance of bubbles in some asset classes.
As economic growth picked up in the US, excess liquidity and ultra-low interest rates have led to the mis-allocation of capital and excessive debt burdens in areas such as commercial real estate. In this context, companies have taken on debt to the extent that the ratio of their debt burden relative to their market capitalisation has risen from 75% pre-crisis to almost 100% today.
On account of an uncertain outlook, the Federal Reserve has so far been cautious in winding down its exceptional policy measures. However, the rise in capital expenditure by US companies since last summer (see Exhibit 1 below), supported by a favourable outlook for earnings, now suggests economic growth is sustainable.
Capital expenditure by US companies has risen since the summer of 2017 (the graph shows changes in non-residential fixed investment from 2008 to March 2018)
Note: saar = seasonally adjusted annual rate (%), y/y = year-on-year. Source: BNP Paribas Asset Management, as of 14/03/18
ECB key interest rates (%)
Source: Bloomberg, BNP Paribas Asset Management, as of 15/03/2018
In this environment, central banks should be winding down their non-conventional policy measures, but not embarking on a new cycle of policy rate increases as inflation remains under control. On this basis, the ECB should envisage a rapid end to its asset purchase programme and steer its deposit rate back into positive territory.