Late cycle for longer?

At more than nine years, the current US economic cycle is double the average length of the previous 33. This phenomenon is not limited to the US, with the UK similarly nine years into its recovery from the global financial crisis (GFC), while Australia is more than 27 years into its cycle.

_{Source: OECD, Knight Frank}

However, some economies are facing headwinds. H2 2018 saw Italy dip into a light recession, which Germany narrowly avoided. Then, in March 2019, the US yield curve inverted, a leading indicator of recession. However, previous inversions that led to recession lasted months. At five days, economists see this inversion as too short to prompt alarm.

"It’s far too early to predict a recession. But it’s not too early to worry about one."

_Ian Stewart, Chief Economist, Deloitte,

The inversion has prompted debate on when the next recession might be. The consensus is not yet, but no cycle lasts forever. Leading central banks are more dovish and some economic indicators have improved. Meanwhile, election campaigns in the US are rooted in supporting economic growth. Companies are holding cash and are under pressure to use it. Also, the digital revolution could gain momentum from 5G telecoms network roll-outs. These factors should comfortably extend the cycle through 2019 and 2020.

Lower growth for longer

While many mature economies are enjoying elongated cycles, their long-term average growth rates are moderating. Post-war, during cycle downturns fiscal policy has been loosened through tax cuts and/or government borrowing. Expansionary monetary policy tools such as interest rate cuts and quantitative easing (QE) have also been applied. These policies should be reversed, once the cycle improves.

However, with each cycle, in many economies, expansion has only seen limited reversals, boosting wealth for sections of society and effectively pulling forward future growth. Spending more now is at the expense of spending less later. This means that while innovation, employment and social change continue to support growth, there are fewer expansionary tools left. This is leading to softening GDP growth and lower returns.

Long term economic growth is slowing 

_{Source: World Bank, Knight Frank}

This lower growth is also feeding into lower average interest rates. The Bank of England’s interest rates are essentially the lowest in more than 300 years, reducing the risk free element of required returns. 

A new era of record low interest rates

_{Source: Bank of England, Knight Frank}