Financial Hangover and Fiscal Drag Fading for US, UK and Europe Says BNY Mellon's Richard Hoey

London and New York - 25 April 2014

Increased Wage Inflation Likely to be Welcomed by Obama Administration and General Public 

Global growth should accelerate in 2014, 2015 and 2016 due to a fading of past financial stresses and fiscal drags in the US, UK and Europe according to BNY Mellon Chief Economist Richard Hoey in his most recent Economic Update. 

"The midcycle phase of economic expansion tends to occur after much of the financial hangover from the prior crisis has faded but before central banks are motivated to restrain economic expansion in order to suppress excessive inflation," Hoey says.  "Many central banks in advanced countries are indeed worried about inflation today, but they are worried that inflation is too low rather than that inflation is too high.  This is having a profound impact on monetary policy." 

Hoey says that monetary policy in many advanced countries is aggressively stimulative, only partially offset by "growth-hostile regulation."  As core inflation is below target in many major countries, Hoey believes that the overall stance of monetary policy in advanced countries should remain supportive of economic expansion.

"Within the advanced countries, the financial hangover of the last crisis is fading," Hoey says, stating that  financing costs for peripheral European sovereigns and for high-risk corporate borrowers in the US, UK and Europe have dropped sharply and that fiscal drags are fading in key countries.

Other Economic Update findings include:

EXPECTED SLOW GROWTH IN CHINA – Due to the sluggish outlook for Chinese real estate, Hoey expects slow growth in China at about a 7% pace near term and a 6% pace long term, rather than a "hard landing."

THE EURO – SINGLE CURRENCY – 18 DIFFERENT CURRENCIES  – Hoey says that while the euro is labeled the "single currency," sometimes it is helpful to think of it as "18 different currencies locked together at a fixed exchange rate."

INCREASED WAGE INFLATION WELCOMED IN US – The labor share of national income is the lowest in many decades, and Hoey believes that increased wage inflation is likely to be welcomed by both the Obama administration and the general public, and first welcomed and then later tolerated by the Federal Reserve. 

"A well-tolerated gradual upward drift in wage inflation would be consistent both with our expectation of about 3% real GDP growth for the three years 2014, 2015 and 2016 and with the likelihood of an upward spike in interest rates in 2017 and 2018," Hoey concludes.

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