“Would I say there will never, ever be another financial crisis? … I hope that it will not be in our lifetimes and I don’t believe it will be”, Janet Yellen, Fed Chair.
With US equity prices at all-time highs and still more than 20% of the global government bond market yielding below 0%, it's remarkable that the Fed Chair suggested a financial crisis is unlikely in our lifetimes. In a similar vein, there's a lively discussion in progress about whether economic expansions die of old age.
Clearly a cyclical economic uptick is great news and should be welcomed. However, a long-lasting recovery is anything but assured. Many structural challenges remain: productivity growth is low and the debt overhang large. Furthermore, the long-term consequences of the combination of populism, demographics, technological change and the biggest monetary policy experiment in history remain to be seen.
For example, just consider that since 2009, the S&P 500 increased by almost 200% while US nominal GDP rose by only +30%, with US real median incomes even falling! Furthermore, we estimate that about 50% of European government bonds continue to show negative yields, while German 10year real yields are at -0.75%! Needless to say, financial and economic risk-taking are out of sync and have rendered financial markets more vulnerable through stretched asset valuations and exacerbated social inequalities. The road ahead certainly looks bumpier, particularly if inflation were to accelerate unexpectedly while central banks are gradually unwinding their extraordinary policies. And then, of course, there's the wildcard of (geo)politics where all bets would be off anyway. Still, it would be a mistake to think that today's strong economic momentum is more than just cyclical – it isn't. And perhaps more importantly, it would be a missed opportunity to not tackle the structural challenges especially given the potentially short window of opportunity.
Where do we go from here?
It's of utmost importance that structural challenges are tackled as soon as possible so that growth can become more resilient and sustainable, also in the longer-term. Potential "growth recipes" include the following: