Market Perspective
Mass unemployment to labour shortages
Kevin Gardiner and Victor Balfour, Global Investment Strategists
Foreword
In just 18 months, fears of mass unemployment have been replaced by worries about labour shortages. We are now in one of those periodical episodes when economists warn us loudly that the growth they didn’t predict is slowing down.
The slowing need not be alarming. It mostly reflects simple arithmetic (the big reopenings are behind us); supply bottlenecks that may not last (there is actually plenty of US spare capacity); and rising covid contagion, which is leading to some renewed suppression.
The latter could be worrying, but the last year has demonstrated clearly that economies can indeed resume growing when we let them. Many businesses are continuing to adapt to more distanced ways of operating.
Meanwhile, although fiscal support is now being withdrawn – the UK unusually leading the way – the process of monetary normalisation will be slower. The immediate debate is still about when the Federal Reserve (Fed) and European Central Bank (ECB) will slow their ongoing injections of even more support. With the exception of a few mostly emerging and idiosyncratic central banks, official interest rates seem pegged firmly to the floor.
Even as growth slows, then, corporate earnings – still being underestimated by analysts – may stay ahead for a while yet in their ongoing race with interest rates. Even cyclically adjusted PE ratios may ‘normalise’ faster than feared.
Stocks have done remarkably well. Some short-term setback may be overdue (that phrase again!). But even from here they might still beat inflation on a long-term view – even if, as we think likely, inflation pressure outlasts the spring’s ‘transitory’ surge. That surge, largely unnoticed, has now pushed the annualised five-year rate for the Fed’s preferred measure back above target.