A number of key developments could trigger a significant near-term impact on the markets or pull them in new directions. These include the Fed and the implications of any US rate hike or, like last summer, a further delay. But even if the Fed hikes this summer, which is how they appear to be guiding market expectations, rates stay low. Other key developments also includes forthcoming event risks, the closest being the UK Referendum. While the Fed and Brexit may dominate much attention, the other key focus remains the state of the world economy.
Hence this week's release from the OECD of their latest economic outlook is interesting. There is always the danger of groupthink in official projections, with the IMF, OECD and others being very consensus driven. The OECD cautioned that global growth is weak, investment low and emerging economies are less of a locomotive than they were just a few years ago. But there were two other elements of this OECD analysis that warrant closer attention.
One is a warning regarding trade. Only five times in the last fifty years, they inform us, has world trade grown at a slower pace than the rate of growth of the world economy, and that according to the OECD is happening now. What we have to determine is what this means? Thankfully the slowdown in trade was probably more evident last year than this. Then, imports by emerging economies fell sharply - because of China slowing and commodity prices falling sharply. And imports by western economies slowed - not helped by the euro zone's poor performance. Now both may be seeing more growth. It doesn't mean we should be jumping with joy but it keeps at bay for now the fear of a global recession. But we need to watch this space carefully, as the OECD points out world trade seems likely to grow in line with global GDP growth this year, when only a few years ago it was rising at twice the pace.
The other element was regarding fiscal policy. Here it is indicative of a slow, glacial like drift in favour of a more activist policy stance. Monetary policy can't lift global growth all by itself so government spending needs to do more. The OECD isn't yet saying governments should spend more. Instead the words are more politically and economically acceptable in the form of saying "more fiscal space" is needed, with a focus on directing funds towards infrastructure. Whether it is that easy to redirect money is a debatable point.
Fiscal policies may need to be relaxed further. But with inflation and interest rates low (even if the Fed hikes this summer) bond markets may take this in their stride. Equites would like it too. But before then, there are those matters of the Fed and the Referendum!
The final note is that the OECD thinks that with the UK remaining in the EU, the UK will slow this year from 2.2 per cent to 1.7 per cent growth. This reflects a weaker economic trend. UK rates will have to stay low.