Global Interest Rates Likely to Rise
There are two big questions hanging over the global economy at the moment: will Janet Yellen remain as Chair of the Federal Reserve and if she does will she put interest rates up.
There are rumours that President Trump wants to replace Yellen with Gary Cohn the Chairman of his Council of Economic Advisers, Cohn is the former CEO of Goldman Sachs and is likely to be more reluctant to tighten monetary policy than Dr Yellen.
Ms Yellen has warned that inflationary pressures are building and has penciled a rate rise for later this year.
The Fed will on July 25 and it will be interesting to read the statement they put out after that meeting.
The concern in business circles is that the adjustment process that started with the Global Financial Crisis has not been completed yet.
There are a range of companies, including some new high tech corporations which are highly geared because of the low interest loans.
If interest rates rise then a number of these enterprises will go under.
They are now being described as ‘zombie’ companies because they are yet to establish a viable business models without low interest loans and subsidies.
A number of big renewable energy companies are in this boat.
On the other hand all the major OECD economies are showing signs of recovery with business earnings growing and major companies balance sheets becoming stronger.
“We expect all the major markets to report healthy EPS growth in 2017.
That’s the first synchronized upturn since 2010,” wrote Robert Buckland, chief global equity strategist at Citi Research, in a note Tuesday.
“That’s a big change compared to recent years, when we had various regions and countries moving in and out of EPS recessions,” he added.
Along with earnings growth, the major markets will see decent economic growth this year as well that will carry over into next year, Citi estimates.
The research analysts forecast global GDP growth of 3.1 percent this year and 3.3 percent next year.
Dr Yellen is more restrained, she has said on a number of occasions that there will not be another financial crisis in our lifetimes.
This means that she believes that global debt reduction can be successfully managed and that an increase in interest rates will not cause unnecessary disruption.
Any increase in global interest rates is likely to have an impact in Australia.
The Government, the banks and the big corporates are all in hock to the international debt market.
When interest rates go up the cost of funds will increase which will lead to an increase in commercial and household debt rates domestically.
This will in turn seep through into the cost of living.
When these additional charges are added to substantial increases in the cost of energy then this will have a dampening effect on the Australian economy.
On the other hand this may be counteracted by stronger growth in the global economy.
The Australian Reserve Bank will probably hold rates steady and allow other forces change around them.
The Governor, Dr Phillip Lowe, has said that it is up to the Government to stimulate the economy.
Government spending is probably at its limit at the moment so the next move will probably be tax cuts.
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