Joye assumes the Recessionberg position

Nobody sells it like Chris Joye:

So what we are thinking right now? Three core states of nature occupy my mind. The first involves some “known unknowns” around the trade war and Brexit. For whatever reason, one or both of these events blow up in a manner that materially undermines global growth. The RBA is forced to continue cutting towards its effective lower bound (ELB), which is either 0.50 per cent or 0.25 per cent. The RBA might think it is 0.25 per cent, but good luck getting pass-through from the banks…In this grim scenario, we get quantitative easing (QE) – initially by buying government bonds and then extended to all the assets the RBA currently accepts as collateral with the two main goals of putting downward pressure on the currency and reducing lenders’ funding costs, and ultimately domestic interest rates. The government will also be compelled to drop its surplus target and loosen fiscal policy.

A much more positive scenario, which is my central case, is one where local and global growth surprise on the upside in the next year as trade tensions dissipate, Brexit is sorted, and a combination of rate cuts around the world coupled with QE from both the ECB and Fed inject considerable new stimulus. The RBA still cuts to 0.5 per cent to try to hit its inflation and employment targets, and probably launches a slim-line version of government bond QE. Finally, ScoMo and JFry look like rock stars as they deliver large surpluses.

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