In the last few years, it has become widely accepted that the global economy has been mired in a depressed condition that Lawrence Summers has called secular stagnation. Although this term was widely deemed to be too pessimistic when Summers first used it in 2013, it soon gained traction among central bankers, whether or not they chose to admit it. The equilibrium real interest rate, r*, was revised downwards almost everywhere. As a result, policy rates were held “lower for longer”, and global central bank balance sheets continued to expand rapidly.
Furthermore, the financial markets responded accordingly. The exceptionally low levels of bond yields and, to a lesser extent, the bull market in equities have both been driven by the increasing conviction that r* has fallen on a permanent basis, so the risk of hostile central banks has dropped considerably.
The question is whether this era is now beginning to change. The latest Fulcrum nowcasts for the global economy confirm what every investor now knows – that the economic upswing that started almost two years ago has maintained its strong momentum in recent weeks, with no weak spots among the major economies. But what we do not yet know is whether this marks the end of secular stagnation. Perhaps it is just a strong cyclical boom that will soon peter out.