Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 221

Goldilocks economy is keeping bears at bay

Pick up a newspaper today and it is hard to find many reasons to be cheery. North Korea and ISIS take turns in frightening us for our lives. Brexit and Trump take turns in frightening us for our livelihoods. Most financial commentators are fixated on predicting how soon it will be until the next bear market hits shares.

Recognise the synchronised upswing

It is unfortunate then, that one of the better good news stories of recent years has received less attention than it deserves. Since mid-2016, a string of consistently good economic data from around the world has shown the global economy is in a period of synchronised upswing. In the US, economic growth annualised at a rate of 3.1% in the second quarter of this year, well ahead of market expectations, while Europe and Japan both recorded annualised growth rates of 2.5% during the same period. For mature developed market economies, such growth rates are positively zippy.

An equally important driver of above-trend global growth has been developments in China. Not that Chinese growth rates have been accelerating, but rather Chinese growth has (once again) not slowed down as forecast. The Chinese economy grew by 6.9% in the second quarter of 2017, the same rate of growth as the first quarter and the equal fastest pace of expansion since September 2015. Chinese growth rates are considerably ahead of its government’s own 2017 growth forecast of ‘around 6.5%’. A year ago, markets (and the Chinese government) were predicting a meaningful slowdown during 2017 as the government tackled excess credit creation and forced closures in industries with excess capacity. So far, predictions that these actions would weigh heavily on economic activity have proven to be incorrect, or at least premature.

The IMF, in its most recent review of the global economic outlook, forecasts the global economy to expand by 3.5% in 2017 and 3.6% in 2018. This would represent the fastest pace for global growth since 2014 and 2011 respectively. It would also seem that there is room for meaningful upside to the IMF’s 2018 figures; as they are predicated on Chinese growth falling to 6.2%, a significant slowdown from the current rate of activity.

Where’s the inflation and unemployment?

What is remarkable about this upswing in global economic activity is that it is occurring at a time of both benign inflation and, on some measures, close to record low unemployment. The OECD average unemployment rate fell to 5.6% during June 2017, its lowest level since March 2008 (see chart below).

However, considerable spare capacity remains in the labour force. Workforce participation levels have fallen substantially in key economies like the US, with large swathes of potential workers falling out of the labour market following years of difficult economic conditions. This dynamic means that, despite the low headline unemployment rates, wage growth in developed market economies remains anaemic. The accelerating global economy is pulling workers back into the labour market instead of giving the existing workforce a pay rise. This lack of labour market pricing power is one of the key contributors to inflation remaining too low for most major economies. The three most important central banks, the Fed, ECB and BOJ, are all engaged in unprecedented monetary easing programs designed in large part to push inflation rates higher.

Strength feeding profitability

A combination of accelerating global growth, benign inflation and ultra-easy monetary conditions (real interest rates in the US, the Euro area and Japan all remain negative) has created a Goldilocks environment for equity markets. Corporate profitability is the chief beneficiary of accelerating growth in an environment of negative real interest rates and limited wage pressure.

Yet despite the positive economic backdrop, much of the commentary about equity markets today is anchored around one key worry – how long it has been since the last big correction, nearly a decade since the last. It is also true that share markets do not turn on some preordained cycle. They price in the market’s best estimate of future corporate earnings. In large part, the reason that share markets continue to make new highs today is that the global economy is in unusually rude health, and that, for now, corporate profitability stands to be the biggest beneficiary from this upswing.

While this is good news for investors, it is better news for large parts of the population removed from the workforce following years of sub-par economic growth. ‘Falling labour market slack’ is an economist’s way of saying that, nine years on from the crisis, many marginalised members of society are finally able to find work. Surely one of the better news stories of recent years.

 

Miles Staude is Portfolio Manager at the Global Value Fund (ASX:GVF), which he manages from London. This article is the opinion of the writer and does not consider the circumstances of any individual. The title of this piece apes a famous economic article written in 1992 by David Shulman, a senior economist at UCLA.


 

Leave a Comment:

RELATED ARTICLES

Checking in on the equity market's silent engine

Bear markets don't go paw-in-paw with recessions

Suddenly, the market cares if a company makes money (again)

banner

Most viewed in recent weeks

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Welcome to Firstlinks Edition 627 with weekend update

This week, I got the news that my mother has dementia. It came shortly after my father received the same diagnosis. This is a meditation on getting old and my regrets in not getting my parents’ affairs in order sooner.

  • 4 September 2025

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

Super crosses the retirement Rubicon

Australia's superannuation system faces a 'Rubicon' moment, a turning point where the focus is shifting from accumulation phase to retirement readiness, but unfortunately, many funds are not rising to the challenge.

Latest Updates

Investment strategies

Why I dislike dividend stocks

If you need income then buying dividend stocks makes perfect sense. But if you don’t then it makes little sense because it’s likely to limit building real wealth. Here’s what you should do instead.

Superannuation

Meg on SMSFs: Indexation of Division 296 tax isn't enough

Labor is reviewing the $3 million super tax's most contentious aspects: lack of indexation and the tax on unrealised gains. Those fighting for change shouldn’t just settle for indexation of the threshold.

Shares

Will ASX dividends rise over the next 12 months?

Market forecasts for ASX dividend yields are at a 30-year low amid fears about the economy and the capacity for banks and resource companies to pay higher dividends. This pessimism seems overdone.

Shares

Expensive market valuations may make sense

World share markets seem toppy at first glance, though digging deeper reveals important nuances. While the top 2% of stocks are pricey, they're also growing faster, and the remaining 98% are inexpensive versus history.

Fixed interest

The end of the strong US dollar cycle

The US dollar’s overvaluation, weaker fundamentals, and crowded positioning point to further downside. Diversifying into non-US equities and emerging market debt may offer opportunities for global investors.

Investment strategies

Today’s case for floating rate notes

Market volatility and uncertainty in 2025 prompt the need for a diversified portfolio. Floating Rate Notes offer stability, income, and protection against interest rate risks, making them a valuable investment option.

Strategy

Breaking down recent footy finals by the numbers

In a first, 2025 saw AFL and NRL minor premiers both go out in straight sets. AFL data suggests the pre-finals bye is weakening the stranglehold of top-4 sides more than ever before.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.