MAS chief sounds caution over Goldilocks economy and its three bears

THE current Goldilocks economy comes alongside three "bears" of risk that investors should watch, said Ravi Menon, managing director of the Monetary Authority of Singapore, on Monday.

Speaking at a UBS event, Mr Menon pointed to the current configuration of healthy growth, low inflation, and easy financial conditions, as creating a Goldilocks scenario - a global economy that is chugging along, not too hot, not too cold. Indeed, world GDP is estimated to have grown by 3.8 per cent in 2017 - the strongest pace of expansion since the rebound from the global financial crisis in 2010, said Mr Menon.

But the three "grumpy bears" may not be far away, he noted. The "papa bear" of inflation may be missing now given the structural factors of an understated slack in the economy, the impact of globalisation on the pricing power of labour, and the downward pressure on wages caused by technology.

But he argued that such structural factors may have created a "one-off" effect on prices, in part as the world is facing populist pressures, and as the trend of globalisation has run on considerably over the last two decades.

"Technological change may still have some legs to run and its disinflationary effects may persist for a while longer. But will they be strong enough to offset the short-term inflationary pressures from tightening cyclical conditions?" said Mr Menon.

"For investors, inflation is the biggest bear to watch because monetary policy could tighten at a quicker pace than expected by the markets."

He noted that markets are currently pricing in only about three Fed rate hikes to end-2019, suggesting that it would not take much to unsettle the markets. Equities could be sold off in a hurry, as well.

The "mama bear" of protectionism remains a risk, said Mr Menon, though noting that this risk did not materialise sufficiently to threaten the global economy or financial markets in 2017.

"Let us not take a hibernating bear for a dead one. This is a bear that may not wake up for a very long time, maybe never. But if it does, it could be ferocious," said Mr Menon.

The "baby bear" of financial instability can also introduce risks due to the high leverage that has built up in both the G-7 economies and in emerging Asia, he added.

"The financial stability risks in the US and China warrant close monitoring, simply given the size of their economies and financial markets, not to mention the build-up of leverage," said the MAS chief.