US economy is bubbling nicely, a weaker world economy seems to help. Consumer confidence is improving, retail sales are positive, but the housing market rebound has stalled. Annualized economic growth is about 4%. But the overall outlook is tranquil, complacently so. Fed Chairman Janet Yellen testified before congress that she would stop using the word “patient” to describe her approach to rate increases. Stock markets took these comments bullishly. Volatility has disappeared from the economy and markets, raising the question whether this moderation has prompted the sort of risk taking that produced the crisis? The whiff of deflation is everywhere and that is not good.
The rich world’s economy, save that of the US and Canada, still looks disappointingly weak. Europe is flirting with recession. Euro area growth at 0.8% is only half of its expected pace. In Britain and Germany, growth has accelerated. Stagnation in in Italy and France is becoming entrenched. Government bonds, generally a measure of expectations for growth and interest rates, have fallen sharply. Europe lacks oomph. Loose monetary conditions have not produced the expected impact. Governments need to introduce programs to boost public investment in infrastructure. Borrowing at these low interest levels will support today’s growth, boost tomorrow’s and leave the recovery less dependent on private debt. Another solution is more of a supply side reform of free trade, lowering barriers and improving training systems for example. Improvements on these fronts would lead to stronger, stable growth and reduce the odds that the next recession begins with rates near zero. Politicians must be courageous to push through these unpopular reforms.