With average earnings trending higher and income growth at 4-5%, we could potentially see good consumption growth in the US and the UK, although not to the same extent in Europe, according to Rossi.
Lower prices will be beneficial so long as consumers use their increased spending power, according to Rossi. This is still absent, however.
“Clearly there’s been a price shock within the developed world. This is going to boost real incomes around the developed world at a time when employment growth has been very healthy, particularly in the US,” he said.
Evidence going back to the 1980’s shows that consumers do not instantly spend a windfall; they wait to see if it’s a permanent one, Rossi noted.
But, he said, there are other forces at work such as central bank rhetoric. “It’s important that central banks communicate a monetary policy that will sustain aggregate demand across the world,” explained Rossi.
That includes avoiding any communication errors that will put further upward pressure on the dollar, he said. In Rossi’s view, central banks need to reverse communication errors that have been made during the past two months in order for equities markets to stabilise.
Rossi concluded: “The third wave of deflation will pass, like the previous two. It’s in part a function of policy decisions and policy mistakes. If we can avoid errors, the bull market which we’ve seen in the developed world can continue. The US economy is far from likely to fall into recession. There’s no reason why the bull market doesn’t have multiple years ahead of it.”
