"It's hard to tell where we are in the economic cycle at the moment. The crisis is partly cyclical and partly structural. That doesn't mean that we are no longer able to navigate the global economy, but we do have to assume that changes in the rate of global growth are here to stay", explains Mathilde Lemoine.
The chief economist at Edmond de Rothschild Group was speaking at a conference in Geneva with "Friends of The Country Side", a Europe-wide association of landowners and entrepreneurs.
After eight years of crisis, she sees a return to "the way things were" as being highly unlikely. For example, the slump in investment has resulted in aging capital stock worldwide. There are simply not enough profitable projects around to stimulate a rapid recovery in investment. This is the secular stagnation hypothesis.
The "new normal"
Mathilde Lemoine stated that the 2008 crisis should be considered a major break from the past and that it should serve as a new reference point, with its consequences constituting the "new normal".
As she sees it, the global economy is suffering from a chronic case of sluggish growth. "Every year, investors, governments and international institutions hope for a recovery, but end up being disappointed", she explained.
"The pre-crisis world is gone forever. Productivity is declining and the potential for growth has been slashed" she added, citing in particular the paying down of debt, the effect of the digital revolution on consumption patterns and China's change of model. Corporate earnings are locked into the same downward trend.
Forecasts revised downward
As evidence of excessively optimistic forecasts, the International Monetary Fund (IMF) has been constantly revising its forecasts downwards since 2010. Just this week, the organisation indicated that it is now projecting global growth of between 3.1% and 3.2% in 2016, as compared to 3.4% in January.
"Even the US Federal Reserve has been disappointed by GDP growth, both worldwide and in the USA", she added. It is also concerned by the dollar's extreme sensitivity to its interest rate adjustments. This explains its prudent approach and preference for a gradual tightening of monetary policy, which it began in December last year.
Mathilde Lemoine pointed out that the negative interest rates currently applied by several central banks, especially in the euro zone, Japan and Switzerland, were exacerbating the impression that we had lost our bearings.
Lemoine reckons that this situation, which is the result of an investment deficit, slowing productivity and consistently sluggish nominal growth, is making it hard to value assets. Assets are valued using the future cash flows associated with these assets, using a discounting rate. "We are no longer able to accurately price financial assets", she said. "Furthermore, central banks are now the driving force in the bond markets, and thus significantly alter the relative prices of assets", she warned.
Mathilde Lemoine believes that unorthodox monetary policies also risk producing the opposite effect to the desired result, by encouraging households to save more to make up for poor investment returns, with a knock-on effect on consumer spending: "Central bankers have absolutely no certainty as to the results and the outcome of this new type of policy".
Similarly, the ECB's policy could encourage governments to put off structural reforms that they ought to be tackling head-on in order to boost productivity, thereby bringing about a lasting improvement to the growth outlook in the medium term.
If monetary policy results in greater volatility as a result of a substantial inflow of cash, assets should nevertheless continue to be influenced by central bankers, reckons Lemoine. Among other things, the Group Chief Economist expects property and farmland prices to rise as a result of "re-accelerating" credit in Europe and the USA.
In this context, Mathilde Lemoine nevertheless recommends being highly selective, focusing on governments' capacity to boost productivity through structural reforms and on companies' capacity to be a price maker through innovation and investing in human capital.
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