This year has kicked off with one of the best economic and market outlooks for years, and policy makers throughout the world need to ensure that the green saplings of recovery are not cut down by an inappropriately early policy tightening.

The signs are that such a mistake is unlikely with policy makers generally ramping up stimulatory policy in the quest for growth rather than working to try to 'normalise' policy settings.

One aspect of this policy imperative is that monetary policy will remain very easy through the course of the year, particularly in the US, the eurozone, the UK, Japan and Canada, where unemployment is high and growth and inflation are low. The central banks in these countries will be happy to keep policy easy to see growth kicking towards or even above trend. They will do so confident in the knowledge that inflation will be contained given the huge amounts of spare capacity in their economies.

In this scenario, it is easy to be bullish about stock prices due to the reflation efforts of global central banks and the boost to the real economy that can come with that.

One consequence of the global financial crisis and why the current unfolding good news globally is welcome, is the still chronically high level of unemployment. The consequence of this is falling real wages and an ability for growth to accelerate to above trend before inflation pressures loom.

For fiscal policy, the debate is less clear. There is the trade-off between keeping policy settings consistent with a decent level of growth versus repairing the fiscal position to return budgets towards balance and capping the explosion in government debt.

In the US, the trade-off between dealing with the difficult fiscal and government debt position and sustaining growth has been high profile with the fiscal cliff debate and the debt ceiling issues. On current projections, post the fiscal cliff compromises, the US government financial position is slowly improving. Indeed, the fiscal position will sharply improve without the need for further policy change if the economy out-performs the current projections.

In the eurozone, many countries are condemning themselves to economic weakness or under-performance through fiscal austerity. While conditions in the eurozone appear to be improving, there is no doubt that fiscal austerity will act to lessen the pace of recovery, particularly if further spending cuts are delivered on top of the raft of measures seen in the last few years.

That said, there is an aspect which suggests some relative upside for Europe in that the bulk of the fiscal austerity measures have already been implemented. Indeed, the main problem countries – Greece, Spain, Ireland, Italy and Portugal – have implemented a range of policies that have debt reduction in place. As a result, there seems to be little pressure or need for government’s in these countries to further tighten fiscal settings.

In terms of monetary policy, the US Federal Reserve has the right idea under chairman Ben Bernanke by explicitly targeting unemployment. This new, innovative and unconventional approach has seen the Fed say that it will keep interest rates exceptional low and will continue its quantitative easing until the unemployment rate falls towards 6.5 per cent. Later this week, the US unemployment rate is likely to be confirmed at around 7.8 per cent, down from the recessionary high of 10.0 per cent. Clearly, easy monetary policy will be in place in the US for some time to come.

In the eurozone, where the unemployment rate is still rising, having hit a record 11.9 per cent in December, the European Central Bank is also committed to keep policy very easy. Although it has not given an explicit target for unemployment, it would be safe to say that any thought of starting to reverse easy policy will not occur until the unemployment rate falls below 10 per cent.

In Japan, the new Abe administration has revamped the inflation target and the Bank of Japan has signalled its plans to finally kick start its economy, including the implementation of a 2 per cent inflation target as it strives to end 15 years of deflation.

It is a similar pro-growth stance in much of the rest of the industrialised world – have easy policy until a growth and jobs recovery is locked in.

Stock and bond markets are certainly positioning themselves for a recovery and easy policy remaining in place for some time. These market trends appear to be sustainable as the sensible policy makers have thrown their text books and ideologies out of the window and are willing to have policy settings that have, in broad terms, averted economic depression and are working to support economic growth.

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The risks now are not on the side of cooling too early. Instead, they are on the side of pending worldwide inflation. In the new competitive loosing monetary policies internationally (at least in major western industrialised countries including the US and EU, and now Japan has joined), would any stimulating policies of such type have any effect on the real economies in those countries and the world as a whole? (Don't cool the world growth jets too early, January 29.)
The effects of loosing monetary policy in all the countries when they already face the liquidity trap are likely to be no effects on real outputs of those economies.
In the short run, they may boost assets prices such as the stock markets and cause hot money to flow to the major emerging economies to cause headaches to their economies. In return, the authorities in those countries will have to respond by taking measures to keep their exchange rates not rising too much.
In the longer term, international inflations are likely to rise significantly, causing policy makers headaches and forcing costly adjusts.
The world economy is having a wild run in the near future. In such a worldwide monetary policy game to compete with each other, who will be the winners and who will be the losers are unclear.
The game started with the Fed.
The skills for relatively good policies in a country to win the game eventually are required not only for this stage of monetary easing, but also for the period in its wake to combat inflation and to continually stay internationally competitive.
In that sense, your concluding sentence is very insightful: “These market trends appear to be sustainable as the sensible policy makers have thrown their text books and ideologies out of the window and are willing to have policy settings that have, in broad terms, averted economic depression and are working to support economic growth.”
Australian authorities have to and must be ready for this.
The US Bureau of Labour Statistics provide 6 different numbers for unemployment , and this Spectator [SK] has chosen the U3 number where a person having one hour of work per week is counted as employed, and those of employable age that have given up looking for work are not counted as unemployed (Don't cool the world growth jets too early, January 29).
A more realistic statistic is the U6 number where the people mentioned above are counted as unemployed.
U6 unemployment has dropped from 17.1% in April 2010 to 14.4% in December 2012.
One can only wonder that the US BLS provide these statistics so that economists working for the government can quote the smaller number U3 and those looking for the actual truth of the situation can use the more realistic number U6.
Stock markets have rallied to far and something needs to be done tp bring them into check, otherwise they will eventually simply crash again causing the same problema sll over again (Don't cool the world growth jets too early, January 29).