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Structural reforms key to restoring interest rates

By Killian Plastow
 — 1 minute read

Global asset manager Standard Life Investments says growth and interest rates are unlikely to move significantly higher without reforms to rectify ‘worrying’ structural trends.

Easy monetary conditions have helped limit stress, but this alone is “not sufficient” to encourage private investment or government infrastructure projects, Standard Life Investments’ chief economist Jeremy Lawson says.

“Investors are yet to be convinced that growth and inflation will move significantly higher or that markets and economies have become any less dependent on low interest rates,” Mr Lawson said.


The economist said the only “realistic trigger” for an improvement in interest rates will be “a shift in firms’ willingness to invest in productive capita”, which he believes looks unlikely at the moment.

“There is little sign of that in the data, political uncertainty makes that less likely and it is beyond the ability of central banks alone to deliver,” Mr Lawson said.

In a note to investors, AMP Capital head of investment strategy and chief economist, Shane Oliver, similarly remarked that reforms in Australia are improbable due to a “messy election result” and “difficult Senate”.

Mr Oliver did, however, note the number of worries weighing on investors in the past 12 months have not been vastly different from previous years, adding that there are multiple reasons for “optimism”.

“While the worry list may seem high, that has been the story of the last few years now. For example, 2014-15 saw worries about the end of the US Fed’s quantitative easing program, Ukraine, the IS terror threat, Ebola, deflation, a soft start to 2015 for US growth, worries about China, soft eurozone growth and ongoing noise about a property crash/ recession in Australia,” he observed.

Mr Lawson also noted that the recent drop in confidence around global growth has been primarily driven by Brexit anxieties, with many of other global risk factors seeming to subside.

 “The main factors that have been weighing on US growth – declining energy investment, inventory destocking, tighter financial conditions and the stronger dollar – were expected to fade. Though China’s monetary policy is unsustainable over the longer term, the recent credit stimulus has helped activity, while Japan should benefit as the Abe administration has put off raising consumption taxes and is set to loosen fiscal policy” he said.

Consequentially, Mr Lawson said the key to returning growth and interest rates to “historic norms” is “coordinated loosening of fiscal and monetary policy amidst widespread structural reforms”.

“Economists have been recommending such action for some time but governments have yet to receive the message. We can only hope that global growth does not need to decelerate much further before political pressures force policymakers to listen,” he said. 


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Structural reforms key to restoring interest rates

Global asset manager Standard Life Investments says growth and interest rates are unlikely to move significantly higher without reforms to rectify ‘worrying’ structural trends.

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