The (re-)turn of the normal

The short term outlook for the global economy is rather favorable. Confidence indicators went up in the last few months, while unemployment rate decreased in the most countries. Eurozone inflation hit the 2% threshold for the first time in than four years and financial markets have rallied to pre-crisis highs. Fed is expected to raise rates faster than previously anticipated. These developments prompt one to ask: are we returning to normal economic conditions of the ‘Great Moderation’? Unfortunately to ask the question is to answer it. The disconnect between financial markets and the real economy driven by extreme loose monetary policy, elevated debt levels across the globe, political uncertainty combined with low productivity growth are few aspects to name which do not resemble the ‘old normal’.

 However, we might have entered a new normal. And this can be considered good news for the following reason. Just last month the World Happiness Report, publication on subjective wellbeing, received more media attention than the OECD interim forecast, suggesting that we have finally realized that GDP forecasts might not be our biggest worry. This is not to say economic growth is not important for our prosperity. There are clearly benefits of economic growth, but it is no longer the only determinant of our wellbeing, especially not in the advanced economies. Health, social contacts and trust are maybe even more important for subjective wellbeing in advanced countries. This calls for a renewed macroeconomic and investment policy directed at maximizing happiness. This is what we would like to define as the new normal.

The apparent return of old normal

With the anemic recovery from the Global Financial Crisis (GFC) fresh in our memory, all the signs of the return to ‘normal’ are welcomed by policy-makers. Admittedly, there are a couple of bright spots which cannot be overlooked. Firstly, economic growth is slightly accelerating in both advanced and emerging countries (figure 1). Eurozone growth is projected to hover around 1.6% this and coming year and the US growth is expected to pick up modestly to an average of 2.5% according to major forecasters. Although GDP growth in China is expected to edge down over the next two years, Asia is projected to remain world’s major growth engine. The modest pick-up in global growth reflects the effect of ongoing and projected fiscal initiatives, notably in China and the United States, together with an easier monetary stance in the euro area and initiatives in other economies such as Canada. These are expected to catalyse private economic activity and push up global demand. The favorable economic climate has been reflected in almost every economic sentiment indicator.