Ravi Menon: The Goldilocks economy - will the three bears return?" Speech by Mr Ravi Menon, Managing Director of the Monetary Authority of Singapore, at the UBS Wealth Insights Conference, Singapore, 15 January 2018. * * * Mr Edmund Koh, UBS Head of Wealth Management Asia-Pacific, Ladies and gentlemen, good morning. Let me first wish everyone a happy 2018. And also thank UBS for the invitation to speak at this conference. Global growth about as good as it gets 2017 has been a good year for the global economy. World GDP is estimated to have grown by 3.8%, significantly higher than the 3.2% registered in 2016. This is the strongest pace of expansion since the rebound from the global financial crisis in 2010. All indications are that 2018 will be another good year. Most of the world’s major economies are expected to continue strengthening over the course of this year. The IMF expects growth in 2018 to be even better than 2017. There are good reasons for optimism. The most encouraging is investment. Investment expenditure, which had been largely missing from the GDP growth numbers since the global financial crisis, is coming back. Global fixed investments have rebounded by almost 6% in 2017, after contracting in the previous two years. Trade is another piece of good news. Growth in global trade has almost doubled to 4% in 2017, outpacing world GDP growth. This has arrested a worrying trend since 2011, with global trade growing slower than global GDP.
“Papa Bear” - Inflation Let me start with “papa bear” inflation. On conventional wisdom, he should be making an appearance by now. Historically, inflation comes from high wage growth in a tight labour market during the late stages of the business cycle – a relationship economists describe as the Phillips Curve. Cyclical conditions are now tight in major economies, especially in the US. US unemployment rate has fallen to 4.1%, well below the Fed’s estimated Non2/7  BIS central bankers' speeches  Accelerating Inflation Rate of Unemployment (NAIRU) of 4.6%. Yet, wage growth has remained at around 2.5%, below the pre-crisis average of 3.5%. Whenever central bankers gather these days, this phenomenon of “missing inflation” is often the main topic of discussion. Many wonder whether the Philips Curve has permanently flattened – meaning whether the negative relationship between the unemployment rate and wage growth has fundamentally weakened. Some even ask if the Philips Curve is dead – if the relationship no longer exists. Why has “papa bear” inflation been missing to-date? The first and simplest explanation is that the headline measure of unemployment may be understating the level of slack in the economy. In the US, the IMF estimates that the output gap between actual and potential GDP has only just closed. The output gaps in the EU and Japan are still some way off from closing. There may also be quite some slack in the labour market that may not be fully apparent.