The unconventional becomes the norm

It started with an unconventional recession following a near collapse in the financial system but which, in a number of larger economies, resulted in a comparatively modest increase in unemployment.

Then we had unconventional monetary policy, encompassing a mix of huge injections of liquidity into the world monetary system and an extended period of exceptionally low interest rates.

And now we seem to be in the era of unconventional political consequences.

The connection between the financial crisis and the subsequent policy reaction is obvious and is still reverberating.

While the link connecting economic (and policy) developments to more recent political trends may seem less obvious, we believe it is just as strong.

Whether it be in the outcome of the United Kingdom referendum on European Union membership, in the results of elections in the United States, France and the UK, or in the more general increase in support for antiestablishment political parties, it is evident that electorates in many western countries are questioning the established order.

Behind recent voting patterns seems to be a growing frustration that although economies have been recovering, the benefits of growth have not been feeding through to real incomes.

In the immediate aftermath of the recession, it was not too hard to convince voters that some tough policy medicine would have to be swallowed.

But entering the eighth consecutive year of growth, it is becoming increasingly hard to get people to accept the ongoing stagnation in living standards – the current pressure the prime Minister Theresa May is facing on public sector pay is a case in point.

The cause of this stagnation is not too hard to determine. There is a feature of the recovery that has been and remains common to most advanced economies – unconventionally low productivity growth.

Behind this, there has been a pervasive and persistent lack of productivityenhancing capital spending. Instead, companies have preferred to employ more people when raising output levels.

So the paradox has been that although unemployment has fallen very quickly in relation to achieved growth rates, the incomes of average working people have been almost static in real terms.

So when politicians come along claiming that it does

Eventually, we believe that the Brexit process will encourage capital spending

not have to be like this, they have an automatic and deeply interested audience.

Furthermore, in this scenario, younger people are likely to feel greater dissatisfaction with the established order than older people who are probably more sceptical about promises of change and more likely to vote for the devil they know.

The challenge facing advanced economies for the next phase of the recovery cycle is to move onto a stronger investmentproductivity path.

Implicit within forecasts for the US economy for the past three years has been the assumption that this was imminent.

Such hopes were disappointed in both 2015 and 2016, and it would seem that 2017 is set to be another year of high expectations dashed by reality.

For the EU, prospects are slightly better when compared to the past, with momentum gradually picking up.

However, this has yet to become an investment-led recovery even in normally higher productivity economies such as Germany.

The UK is facing additional challenges. Eventually, we believe that the Brexit process will encourage capital spending as companies with less easy access to the EU pool of labour prepare to expand into new markets.

However, it may take more time for this to come through, particularly against the backdrop of increased political uncertainty.

This is also true of the positive trade impacts that should eventually result from the post-referendum drop in the pound.

More obviously, fuelled by higher import costs, a loss of momentum in household spending is coming to the fore.

These contrasting forces on economic activity make the likely growth rates for the UK over the next two years difficult to assess.

While the hazards are obvious, we believe that many commentators are understating the more positive influences that could come through.

With Japan still struggling to engender stronger core growth, the implications of current trends for advanced economies as a whole are clear: growth is set to remain dull and is unlikely to breach the 2 per cent level for the foreseeable future.