In OECD economies, average inflation plunged from an average of 6.2 per cent in the 30 years to 2007 to just 1.9 per cent since 2008. On the other hand, the concept of a deflationary “new normal” is perfectly valid if we focus on inflation instead of economic growth. Robust and steady GDP growth has been reflected in growing global demand for commodities, energy and real goods and services, which in turn has translated into robust and steadily growing corporate profits. This calculation is not just a statistical oddity. For example, China’s GDP growth of 6.5 per cent last year, from a base of $14 trillion, contributed twice as much to the increase in global output as in 2007, when its economy grew by 14 per cent from a base of $3.5 trillion. Their increasing dominance creates a base effect that outweighs the slowdown in their national growth rates. How could this have happened, given that growth in Europe, the United States, and China has slowed since the crisis? The explanation is simple arithmetic: China and other emerging economies now make up a much larger share of the global economy than in previous decades. And there has not been a single year this decade in which global growth fell below 3 per cent. Global growth has averaged 3.7 per cent since the end of the recession in mid-2009, which is actually slightly faster than the 3.6 per cent average in the 30 years to 2008. “Secular stagnation”, at least as a description of global economic activity, is simply wrong. Both have proved misleading and confusing.

This benign outlook may seem at odds with two concepts that have dominated economic commentary since the financial crisis: “secular stagnation” and the “deflationary new normal”. The fundamental reason is that the combination of very low inflation and decently strong economic activity that has characterised the world economy since the 2008 financial crisis shows no sign of ending. The US economic expansion will also break historic records when it enters its eleventh year in June. In my view, the bull market will continue, despite the fact that it has already broken records for longevity. The question now is whether this rebound will lead to a resumption of the bull market or turn out to be only a temporary bounce.

With all of these problems receding, the surge in equity prices from January onward was understandable, and even predictable. By the end of the year, however, all of these risks had subsided: the US Federal Reserve executed a dovish U-turn, the US-China trade war moved towards a ceasefire, oil prices fell and Italy resolved its fiscal clash with the European Commission in a fairly innocuous truce. Investors were understandably worried by four risks last year: overly aggressive US monetary tightening escalation of the US-China trade conflict soaring oil prices, possibly returning to $100 per barrel or higher and another euro crisis, precipitated by the unprecedented left-right populist coalition that emerged from Italy’s election. The market’s rollercoaster behaviour is easy to explain, at least in hindsight. Fears of recession have been completely refuted, and investors who shared the view expressed here in early January, that markets were just going through a bout of irrational panic, have enjoyed the strongest start to a year since 1998. LONDON - With Wall Street hitting all-time highs and the US economy certain to set a new record next month, it seems a lifetime since the despondency in financial markets at the end of last year.

Goldilocks economy pdf