The return of moderation – Sea of tranquillity
Volatility has disappeared from the economy and markets. That could be a problem.
A DECADE ago, the business cycle was an endangered species. Recessions in the rich world had become rare, shallow and short; inflation was predictably low and boring. Economists dubbed this the “Great Moderation” and gave credit for it to deft macroeconomic management by central banks. Such talk, naturally, ended abruptly with the financial crisis.
But obituaries of the Great Moderation may have been premature. Since America emerged from recession in 2009, its growth, although low, has been as stable as during the Great Moderation’s heyday, from the early 1980s to 2007, judging by the volatility of quarterly gross domestic product (see chart) and monthly job creation. That, in turn, has pushed the gyrations of stock and bond prices to their lowest levels since 2007. The trend is less pronounced outside America, but economists at Goldman Sachs nonetheless find that pre-crisis levels of tranquillity have returned in Germany, Japan and Britain.
It is the absolute level of growth that has been disappointing. In America it has averaged a little over 2% for the past four years, and fell almost to zero in the first quarter of this year. This looks like a temporary setback due to bad weather, but the Federal Reserve’s hopes for an acceleration to nearly 3% seem likely to be dashed once again. The euro zone, meanwhile, grew by just 0.8% in the first quarter (on an annualised basis), half the pace economists had predicted, but perfectly in line with the average of the previous nine months.
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