A sudden increase in government borrowing rates across global markets is fueling fears among investors that central banks have run out of the tools and ideas needed to stimulate economies. Though central banks were successful in preventing a prolonged recession after the 2007-2008 financial crisis, their success has been offset by their failure to get growth and inflation rates back to pre-crisis levels.
Across the world, flat wages, over-inflated asset prices, and falling projected returns are causing frustrated citizens to question the presumed benefits of globalization and capitalism. Recent examples of growing public discord include Brexit, widespread support for populist policies and parties in Europe, and the US presidential election.
Many investors believe an overhaul of macroeconomic policymaking will result from these political quakes, and this may put hopes of more lenient central bank credit policies on hold while governments—including the Canadian government—consider possible solutions to weakening economies.
“There is an injection of uncertainty over whether monetary policymakers are at a turning point,” said Peter Chatwell, senior interest rate strategist for Mizuho International.
The possibility of a policy turning point—encouraged by signs of hesitation in the European and Japanese central banks as well as the US Federal Reserve’s recommendation to nudge interest rates higher for the second time in 12 months—has unnerved financial markets that have long received relentless central bank support.
“We’re about to see a reshaping of the world order that has dictated economics, politics, policy and asset prices from around 1980 to the present day,” noted Deutsche Bank’s annual report on world asset returns. “Extrapolation of the last 35 years could be the most dangerous mistake made by investors, politicians and central bankers.”
The Deutsche report further predicts that the next 35 years will be far from rosy for the world’s economies and financial markets: lower real growth, higher inflation, more controlled migration, diminished international trade, lower corporate profits as a share of gross domestic product, and negative real returns in bonds.
Global economic outlook “stable, but not secure”: PIMCO