Market Rout Aside, Global Economy Is Stable: Oxford's Sterne

  • Gauge shows impact of financial crisis has now dissipated
  • Wages pickup shouldn’t threaten trade, global economy
Photographer: Michael Nagle/Bloomberg

Financial markets may be in a spin, but volatility in the global economy is near all-time lows, according to Oxford Economics Ltd.

Oxford’s measure of macro-economic volatility -- which is based on five-year rolling averages of the standard deviations for year-over-year growth and inflation -- shows the impact of the global financial crisis a decade ago has completely dissipated.

The long-awaited pick-up in U.S. wages that triggered an equity market slump since Friday shouldn’t threaten a good year for trade and the global economy, said Gabriel Sterne, Oxford’s global head of macro research in London. U.S. equities rebounded on Tuesday amid more market turbulence.

“Low volatility in the world economy and the weak dollar are both ingredients to push momentum going forward,” he said. “And in that respect, we’re pretty optimistic about world trade and pretty optimistic about the world economy.”

Chinese data on production that serve as leading indicators for trade are flashing green, and even if China responds to the U.S. slapping tariffs on some goods early this year, the retaliation would remain muted, according to Oxford.

Weaker Dollar

The dollar’s slump this year and U.S. Treasury Secretary Steven Mnuchin jawboning toward a weaker currency is a further boon to exports the world over, said Sterne. He sees a 10 percent depreciation in the dollar contributing to a 6 percent rise in global trade over the long run.

Research from the Bank for International Settlements backs up the point. A report released in January argues that “paradoxically, a weaker currency against the dollar may actually serve to dampen trade volumes, rather than stimulate them.” That’s because about 80 percent of bank trade credit is denominated in dollars, and a weaker greenback flatters borrowers’ balance sheets, the research shows.

Financial market corrections are to be expected after a long rally, and are usually transitory as “bargain hunters” can be expected to jump in and reverse the dip, said Sterne.

“It doesn’t really lead us to change our central view that the main forces of stability are pretty strong at the moment,” he said. “What I don’t think people are expecting is if the small reversal turns into a sustained bear market.”

Inflation remains a risk to Oxford’s forecast for a calm year, Sterne said, outweighing the threat of a hard landing for the Chinese economy and any number of unconventional U.S. policy announcements around trade or geopolitical developments. Faster price growth could spur central banks across the world to accelerate the pace of monetary policy tightening.

“The big issue for us is inflation picking up, what will central banks do, and will that affect our benign view of the world,” he said.

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