Global
North-Korea is a risk factor
Judging from core employment and broader measures of
unemployment, it can be argued that there’s still a fair amount of
hidden labour market slack in place. At the same time, other factors
including globalization, technological change and digitization, the
ageing of the population, insufficient labour union power, lower
anchored inflation expectations and sluggish productivity growth
seem to be playing a role as well.
From this point of view, central banks around are in no hurry to
tighten monetary policy. The world economy is still dependent on
loose financial conditions. On the other hand, policymakers are
cautiously looking to gradually move away from the zero interest
rate environment in order to create space for manoeuvre further
down the road and to prevent stretched valuations in certain asset
Underlying inflation still modest for now
Unsurprisingly, how fast central banks will act is largely dependent
on economic activity, inflation and market volatility. Financial
market volatility has been very low over the past few years but
looks set to go up from time to time, perhaps significantly. Indeed,
scaling down the amount of central bank asset purchases is a
relatively easy process from a technical point of view but it is
clearly more difficult to factor in market psychology.
North Korea is clearly adding to geopolitical uncertainty and as
things stand a swift cooling of tensions seems unlikely. A fullblown
war between North Korea and the US is not our base case
scenario as diplomatic options are still available. Moreover, both
human losses and economic costs would prove gigantic.
Unfortunately, however, history is full of similar examples that
have played out otherwise.