Decoupling between financial asset prices and the real economy – Natixis

In OECD countries, financial markets are set to decouple from the real economy as while the economic recovery is vigorous in the short-term, potential growth will be reduced by a number of mechanisms. If inflation normalises, central banks will continue their yield curve control, and  persistently negative real long-term interest rates will lead to a sharp rise in asset prices, analysts at Natixis informs.

Key quotes

“The economic recovery in OECD countries is vigorous in the short-term, thanks in particular to an upturn in consumption on the back of public transfer payments and catch-up consumption.  But potential growth can be expected to be lower in the wake of the recession, due to the loss of productive capital and human capital, high corporate debt and the growing number of zombie firms. This means that post-recession GDP will never return to the level it would have been at without the recession.”

“We believe that inflation will normalise in OECD countries given the recovery in demand , rising commodity prices and, more structurally, population ageing and the comeback of regional value chains, bearing in mind the high production costs in OECD countries. We also believe that to ensure the solvency of governments in the face of mounting public debt ratios, central banks will continue to use yield curve control. If inflation normalises and nominal long-term interest rates are controlled, real long-term interest rates should be expected to remain persistently negative in the OECD.”

“If real long-term interest rates are persistently negative, the valuation of long-term assets will be increased and investors will rotate into risky assets in search of decent returns. So one should expect a sharp rise in equity valuation and in equity market indices, a sharp rise in real estate prices and a tightening of credit spreads.”