There is a widespread view that this is going to produce bumpy times for financial markets. And that is because super-loose policy injected not just exceptional amounts of cash into the system but an exceptional amount of certainty about how long the loose policy would remain.
Some of that certainty is starting to diminish, with both the Bank of England and the Fed insisting they will be “data-dependent” from here on in.
In its latest report on the economy, the BoE repeated that it expected rates to rise more slowly and peak at a lower level than in the past, but it made clear that was “an expectation, not a promise”.
There is nothing scary about being data-dependent. In fact, it is perfectly healthy.
The problem is that the ‘data’ we are looking at is quite a lot weaker than it was 10 to 15 years ago, not just in the UK but globally.
In the past few years, JP Morgan has repeatedly revised down its forecasts for global potential growth – from 3%-plus rates before the crisis, to not much more than 2.5% a year growth today.
What is to blame for the slowdown?
There are a lot of competing explanations but probably the two most important are falling labour force growth in many economies – especially continental European economies such as Germany and Italy – and reduced capital investment around the world, which has translated into lower growth in productivity or output per head.
This could not be more important for households and companies but also for investors, because low interest rates and low inflation can only take the markets so far. Equity markets are not cheap any more.
To justify significant further growth from these levels we need to see organic growth in corporate earnings on the back of sustained growth in real wages and national output.
We are not going to see that, on either side of the Atlantic, without higher growth in productivity: namely, increasing output with the same number of people.
That is why it is so encouraging to see productivity in the UK finally picking up in the first half of 2015.
In its latest forecasts, the BoE assumes that at least some of this improvement is here to stay. It would be very good news if it were.
But after so many years of disappointment, that is definitely not a promise either.
