G3: Towards negative real interest rates, for a long time!
The latest inflation forecasts of central banks in the United States (Federal Reserve), the Eurozone (European Central Bank) and Japan (Bank of Japan) have been revised downwards over the recent period for 2019 and beyond. With an inflation at 1.9% in the United States, 1.6% in the Eurozone and 0.3% in Japan, the G3 weighted annual inflation rate for 2019 is forecasted around 1.6%. Thus, the real interest rates would be negative, and for a long time according to these latest forecasts. The public debt might not be as catastrophic as announced if used for investments that support growth: infrastructure, low-carbon transition, modernisation of public services, education for all, modernisation of care systems, fighting climate change, etc. Moreover, the intention is also to increase households’ and businesses’ debt.
In this unique economic cycle, more debt does not lead to higher inflation, even in full employment, nor does it imply a rate hike or visible rise in risk! More debt produces just a little more growth without detonating inflation or the risks of borrowers. Even better, with a long-term nominal interest rate lower than growth and with good investment choices, the ratio of public debt to GDP could fall over time!
If the endogenous risks linked to the theory of economic cycles (mainly monetary policy) gradually disappear and could be at the centre of the definition of secular stagnation, the exogenous risks are very present. Exogenous risks are therefore the key to better understanding the current economic cycle and thus how it will end…
Julien Moussavi, Head of Economic Research
Source: Beyond Ratings