In recent weeks economic data have come in
above expectations in the US, in the Eurozone and in the developing economies.
They represent the reaction to ongoing low interest rates, a recovery in oil
prices, a major and successful stimulus effort in China, country-specific
developments (e.g. in Brazil) and the expectation of fiscal expansion in the
US. The broad based nature of these developments should imply that better
momentum in one region would have a positive impact on others and vice versa.
As always, there are a lot of
uncertainties. One is a pick-up in inflation. Because of the rise in energy
prices, the increase in headline inflation should be a global phenomenon; the
key question will be to what extent it spills over into core inflation via higher
wages and sales prices. That in turn will depend on the gap between the
unemployment rate and the natural rate of unemployment. This gap has basically
disappeared in the US, so all eyes are turned towards the Federal Reserve. Its
decisions will also have to factor in the prospect of fiscal stimulus and the
question of whether a proactive or reactive stance when tightening policy is
appropriate.
Inflation
is also becoming a hot topic in the UK, following the decline of sterling after
the Brexit referendum, and in Germany because of its strong growth performance.
This in turn focuses the attention to the divergent inflation performance
amongst the Eurozone members and the challenge it creates for the ECB. Central
bank communication will continue to grab headlines this year. Amongst the other
uncertainties we have to mention mounting concern about policy measures
weighing on international trade and the many elections in Europe.
