20140829-NATIXIS-The_most_significant_development_for_financial_markets__The_decline_in_potential_forgrowth_12页_1mb

FLASH MARKETS: Economic Research Summary

Document Overview

This economic research report, dated 29 August 2014 (No. 630), authored by Patrick Artus, discusses the significant impact of the decline in potential growth on financial markets. It emphasizes that this decline, both real and nominal, has had profound effects across OECD countries, particularly in terms of interest rates, fiscal solvency, commodity prices, inflation, and equity valuations.

Core Content

1. Decline in Potential Growth

• Real and Nominal Potential Growth: The decline in real and nominal potential growth has been a consistent trend since the early 1990s in all OECD countries.
• Country-Specific Trends:
  • United States: Remains the only OECD country where real potential growth is still above 1%.
  • Euro Zone: Nominal potential growth is below 2%.
  • United Kingdom: Real potential growth is lower than in the past.
  • Japan: Nominal potential growth is negative, and real potential growth is also significantly lower than in previous decades.

Main Effects on Financial Markets

2. Interest Rates

• Nominal Interest Rates: Move in line with nominal potential growth in the medium term.

  • The decline in potential growth has led to a general decrease in nominal interest rates, including short-term and long-term rates.
  • Correlation Table (1990–2014):
    • United States: 0.86 (10-year bonds), 0.68 (central bank rate)
    • United Kingdom: 0.96 (10-year bonds), 0.88 (central bank rate)
    • Euro Zone: 0.94 (10-year bonds), 0.84 (central bank rate)
    • Japan: 0.90 (10-year bonds), 0.80 (central bank rate)
    • OECD: 0.96 (10-year bonds), 0.90 (central bank rate)

• Real Interest Rates: Move in line with real potential growth.

  • The decline in real potential growth has pushed down real interest rates.
  • In the United States, the fall in real interest rates has been abnormally sharp compared to the decline in potential growth.

3. Fiscal Solvency and Sovereign Debt Risk

• Public Debt Ratios: A decline in potential growth leads to a divergence in public debt ratios.
• Fiscal Imbalance: Lower growth reduces tax revenues, creating structural imbalances if government spending remains unchanged.
• Risk of Sovereign Debt Crisis: The risk of a resurgence of sovereign debt crises is not currently priced in by financial markets.
• Chart 7: Fiscal deficit as a percentage of nominal GDP highlights the increasing fiscal pressure.

4. Commodity Prices and Inflation

• Commodity Consumption: The decline in real potential growth has slowed the rate of consumption of growth-related commodities such as oil and non-precious metals.
• Commodity Price Trend: This has led to a reversal of the commodity price trend since 2008.
• Inflation: The slowdown in commodity prices has resulted in a decline in inflation.

5. Equity Valuations

• Equity Valuations: A decline in nominal potential growth should lead to a fall in equity valuations, unless long-term interest rates fall at the same rate as potential growth.
• Interest Rate Differential: The differential between long-term interest rates and nominal potential growth has:
  • Decreased in the United States
  • Remained stable in the euro zone, the United Kingdom, and the OECD
  • Increased in Japan
• PER Stability: PERs (Price-to-Earnings ratios) have remained stable in the medium term, except in Japan where they have declined.

Key Findings

• The decline in potential growth is more significant than previously thought.

• Investors must consider the current lower levels of potential growth when predicting future trends in:

  • Interest rates
  • Sovereign risk
  • Commodity prices
  • Inflation
  • Equity valuations

• Historical Comparison (as % per year):

  • United States: 1.8% (now) vs 2.8% (2000)
  • United Kingdom: 0.7% (now) vs 2.6% (2000)
  • Euro Zone: 0.3% (now) vs 2.0% (2000)
  • Japan: 0.2% (now) vs 0.2% (2000)
  • OECD: 1% (now) vs 2.2% (2000)

Disclaimer and Legal Notes

• The document is confidential and intended for the exclusive use of the addressee.

• It is not an independent investment research report and is prepared by Natixis economists.

• No liability is accepted by Natixis or its affiliates for any decisions made based on the information in this document.

• The document is not a recommendation but is provided for informational purposes only.

• No offer or solicitation is made in relation to the purchase, sale, or subscription of any financial instrument.

• The document is subject to regulatory requirements in various jurisdictions, including France, the UK, Germany, Spain, and Italy.

• Distribution Restrictions: The document may be restricted or prohibited in certain jurisdictions, and recipients are advised to comply with local laws.

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• Independent Advice: Recipients are advised to seek independent advice from financial, legal, and tax professionals to ensure the investment meets their specific needs and objectives.