The global economy, as measured by Gross Domestic Product, has slowed from 3.6% in 2018 to a projected 3.3% this year. In response to the current economic environment, the central banks, led by the US Federal Reserve and European Central Bank, are taking a more dovish tone to monetary policy, i.e. looser monetary policy and lower interest rates. This could prolong the economic cycle and keep recession at bay. This provides a positive backdrop for the financial markets.
The main risk to the positive outlook is an escalation in geopolitical tensions, for example, a full scale US/China trade war or perhaps increased tensions between the US and Iran. With interest rates at extremely low levels, there is little or no ammunition for central bankers to boost their economy. For example, US interest rates are in the range 2.25%-2.5%, which leaves little room for the average 400 basis point cut the Fed has deployed in previous downturns. The question is what will happen at the next economic downturn?
Quantitative Easing (QE), where the central bank buys predetermined amounts of government bonds or other financial assets, is an option. After the 2008 financial crisis QE was employed by most of the developed economies and it was effective, but the more QE is employed the less effective it is.
After the 2008 financial crisis, monetary policy took all the strain to revive the global economy. When the next downturn arrives, monetary policy will be unable to do the same. We may see central banks use unorthodox monetary policies, but fiscal policy will have to take more of the strain.