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Forward Thinking Magazine : August 2010
20 Looking at the global business cycle it is expected that the steady emergence of a three-speed global economy will continue to characterise conditions over the remainder of this year. This broadening dispersion in the relative positions of economies has emerged rapidly and reinforces our underlying view that we are seeing a return to shorter, sharper business cycles, similar to those experienced in the 1970s and 1980s. During this period it was not uncommon to see the duration of the peak to peak span just 24 months. This gave rise to expressions such as ‘cycle within a cycle’ and boomlets and mini-cycles. Nevertheless, it marked a period of much greater oscillation in the business and investment cycles and more volatile behaviour in asset markets, including sovereign debt markets. The current three-speed phenomenon can be classified in terms of the relative performance of economies in respect to potential rates of GDP growth. Therefore the three groups are defined as: (a) economies experiencing above-potential growth, (b) economies experiencing potential growth and (c) economies experiencing below-potential growth. The first group, the leaders in the global business cycle consists of those economies that have already experienced a strong cyclical upswing, and are starting to experience capacity constraints or inflationary pressures. The peak rate of growth both in activity and asset prices has likely passed in these economies, although this does not preclude growth continuing as later-cycle sectors come to the fore. Macquarie Adviser Services The emergence of the three-speed global economy The scale and breadth of the latest upheaval in global financial markets and the inevitable upsurge in investor risk aversion means that economies all around the globe are experiencing a dramatic change in fortunes. In the Euro area, which has been at the epicentre of these financial ructions, there are clear signs of greater differentiation in actual and prospective economic performance. Indeed, flagging confidence in the Euro exchange rate and the resurgence in sovereign risk aversion is set to widen the disparities between Euro economies. Read this story to receive CPD points. Simply log on to macquarie.com.au /ftmagazine