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:



Where is Australia’s future growth?


Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

Three all-time best tables for every adviser and investor

It's a remarkable statistic. In any year since 1875, if you had invested in the Australian stock index, turned away and come back eight years later, your average return would be 120% with no negative periods.

The looming excess of housing and why prices will fall

Never stand between Australian households and an uncapped government programme with $3 billion in ‘free money’ to build or renovate their homes. But excess supply is coming with an absence of net migration.

Five stocks that have worked well in our portfolios

Picking macro trends is difficult. What may seem logical and compelling one minute may completely change a few months later. There are better rewards from focussing on identifying the best companies at good prices.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

Let's make this clear again ... franking credits are fair

Critics of franking credits are missing the main point. The taxable income of shareholders/taxpayers must also include the company tax previously paid to the ATO before the dividend was distributed. It is fair.

Latest Updates

Investment strategies

Joe Hockey on the big investment influences on Australia

Former Treasurer Joe Hockey became Australia's Ambassador to the US and he now runs an office in Washington, giving him a unique perspective on geopolitical issues. They have never been so important for investors.

Investment strategies

The tipping point for investing in decarbonisation

Throughout time, transformative technology has changed the course of human history, but it is easy to be lulled into believing new technology will also transform investment returns. Where's the tipping point?

Exchange traded products

The options to gain equity exposure with less risk

Equity investing pays off over long terms but comes with risks in the short term that many people cannot tolerate, especially retirees preserving capital. There are ways to invest in stocks with little downside.

Exchange traded products

8 ways LIC bonus options can benefit investors

Bonus options issued by Listed Investment Companies (LICs) deliver many advantages but there is a potential dilutionary impact if options are exercised well below the share price. This must be factored in.


Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

Investment strategies

Three demographic themes shaping investments for the future

Focussing on companies that will benefit from slow moving, long duration and highly predictable demographic trends can help investors predict future opportunities. Three main themes stand out.

Fixed interest

It's not high return/risk equities versus low return/risk bonds

High-yield bonds carry more risk than investment grade but they offer higher income returns. An allocation to high-yield bonds in a portfolio - alongside equities and other bonds – is worth considering.



© 2021 Morningstar, Inc. All rights reserved.

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. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). 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.

Website Development by Master Publisher.