German economist Rudiger Dornbusch said: “In economics, things take longer to happen than you think they will and then happen faster than you thought they could.”
In keeping with this, Bank of America Merrill Lynch (BofA ML) examines very long-term trends in its ‘The Longest Pictures’ report, offering up graphs and charts looking at market over multi-decade and multi-century time frames.
In this article, we take a look at some of the macroeconomic charts that the bank thinks could offer some valuable insight into current conditions – including one suggesting that the Federal Reserve’s tightening cycle could already be through and another showing the sheer pace of technological innovation.
Is the Fed tightening cycle already over?
Source: BofA Merrill Lynch Global Investment Strategy, Global Financial Data
The Federal Reserve’s move to lift interest rates by 25 basis points in December 2015 was the first rate hike in a decade and brought to an end the longest run in unchanged policy since the central bank was founded in 1913.
However, there is speculation that the Fed could be finished with its plans to normalise rates, especially as many of the recent delays have been cited to external events such as the economic slowdown in China. The recent vote for the UK to leave the European Union could add to this unwillingness to move interest rates.
BofA ML said: “The chart shows Fed tightening cycles end with ‘events’. Recent history (Japan, Sweden, euro area, New Zealand, Australia, Norway, Iceland) shows how monetary tightening attempts have been quickly punished, aborted and reversed in a deflationary backdrop. Note asset prices respond very well to ‘one & done’ Fed hiking cycles (there have been seven since 1926).”
The real oil price per barrel since 1874
Source: BofA Merrill Lynch Global Investment Strategy, Global Financial Data
The price of oil has been under close watch during the past couple of years after a 75 per cent plunge from $115 to $28 slump prompted fears of slowing global growth and deflationary pressures.
There has been a sharp recovery in the oil price since the start of 2016, but its current level of around $50 a barrel is far off what it traded at in the recent past.
But the analysts at BofA ML said: “Viewed in inflation-adjusted terms, the oil price decile since 2014 looks like a reversion to long-term average levels rather than a market overreaction.”
As the graph shows, today’s oil price is around where the commodity spent most of the 1980s, in real terms, and is higher than where it stood before the foundation of intergovernmental organisation OPEC in 1960.
An era of deflation
Source: BofA Merrill Lynch Global Investment Strategy, Global Financial Data
The above graph shows US consumer prices inflation going back to 1891 and BofA ML says it illustrates how today’s central bankers have struggled in their battle against deflationary forces.
“The secular deflationary forces of excess debt, deleveraging, technological disruption and ageing demographics help explain why,” its analysts add.
Over the past five years, US consumer price inflation has averaged 1.7 per cent, which is “well below” the post-World War Two average of 3.6 per cent. US inflation has turned negative on two occasions in the past eight years.
Population growth in emerging and developed countries
Source: BofA Merrill Lynch Global Investment Strategy, UN Population Database, Haver
“Between now and 2099, populations in emerging markets are forecast to grow by 3,800,000,000 – or 63 per cent. By contrast, populations in developed markets will grow by just 26,000,000 – or 2 per cent,” BofA ML said.
“By 2099, almost 90 per cent of the world will live in an emerging market.”
However, the US is expected to be one of the few developed nations that will witness population growth over this time frame. By 2099, the US population is forecast to grow by 128 million; in contrast, Germany’s population will fall by 17 million and Japan’s by 43 million.
Rapid technological innovation
Source: BofA Merrill Lynch Global Investment Strategy, RobertFogel, University of Chicago
By 2023, the average $1,000 laptop will be able to communicate at the speed of the human brain, BofA ML says. Within 25 years, the laptop is expected to have the processing power of the entire human race.
Other signs of technological innovation include the number of connected devices increasing from 7.2 billion in 2015 to 21 billion in 2020 and an expected increase in the number of robots across the globe from 1 million in 2010 to 2.5 million in 2020.
“Technological innovation is transformational and many innovations today are in the field of information technology,” the bank said. “The greater speed and connectivity of technology is extremely disruptive to numerous industries and profoundly deflationary in operation.”
Weakest Chinese nominal growth in more than 20 years
Source: BofA Merrill Lynch Global Investment Strategy, Global Financial Data
The Chinese economy became one of the fastest growing economies in the world after it started to implement economic reforms and open itself up to foreign trade and investment in 1979. It is now the world’s second biggest economy and a driver of global growth.
“When China joined the World Trade Organization in December 2001, its five-year average nominal growth was 9 per cent; by 2008, growth was averaging an all-time high of 23 per cent,” BofA ML said.
“But Chinese growth has been slowing ever since the 2008 global financial crisis and subsequent unwind of the commodities supercycle. In fact, China’s nominal GDP growth in 2015 is the slowest in more than 20 years.”