Trying to predict what the global economy is going to do is not always easy, of for Carl Astorri, the global Head of Economics and Asset Strategy at private bank Coutts, it is his job. In a revealing interview with Asha Tanna he sets out the way he thinks things are going for the financial markets and the global economy in the remainder of this year.
Astorri does not mince his words when it comes to his overall state of the world economy. he sees it very much as still reeling from the financial crisis of 2008 – with a fragile banking system, deleveraging consumers and governments tightening fiscal policy. All of these factors will conspire to keep growth low, Astorri believes.
Not only will growth be low, but it seems likely that the patterns of growth that we will see will be different to those that were typical prior to the financial crisis. Neither governments nor consumers will be able to drive growth, as both will be focused on paying down debt.
“We’re going to have to look to the lower leverage parts of the global economy to drive growth forward”
What Astorri is talking about here are the consumers of Asia and emerging countries elsewhere, and in addition to the corporate sector. There seems to be some lending growth in the United States. The hope is that this will mean that there will be able to be an uptick in small business hiring, with this feeding into consumer sentiment, and ultimately the housing market.
The subject of fiscal tightening is one of the most vexed questions of the age. The analysis of Astorri is that the picture of how well this is going is varying widely from country to country.
As far as the UK goes, fiscal tightening seems to be progressing as the markets would hope. This is in stark contrast to the so called ‘peripheral’ Eurozone countries where austerity measures are becoming a political and electoral liability. It is the US however which is most worrying in this regard.
“US contrasts with the UK I think, and Europe, in that it doesn’t even have a plan to stick with at the moment”
Astorri perceives the US to be attempting to resolve their fiscal problems though “growing its way out of them via loose monetary policy” but also by allowing its exchange rate to weaken.
The thinking behind allowing the US exchange rate weaken is that it could mitigate some of the debt. It can do this in two ways, according to Astorri. The strategist believes that one way is by it being what he calls a “covert way of defaulting on obligations to overseas debt holders”. The other is that it may cause inflation, which amounts a way of “subtly defaulting…on domestic debt holders”.
One very live issue that was not addressed by the interview was what will happen if the US fails to raise the debt ceiling. This is a developing situation of course, and history shows that it has been raised without incident before.
Another hot topic in finance at the moment is the question of rate rises. Astorri seems to be very much of the opinion that monetary policy is going to continue to favour low rates. The exception to this, apparently is likely to be the emerging and Asian economies. Also, on the topic of rate rises the economics expert finishes by setting out how different asset classes would respond to higher interest rates “equities come a bit more to the fore, commodities not doing quite as well as they did and the asset class that gets hit the hardest is bond”.
Coutts and Co., for whom Carl Astorri works are a private bank specialising in private wealth management.