Pedal to the metal
Kevin Gardiner and Victor Balfour, Global Investment Strategists
Economies can still grow when we let them.
Global output has likely regained its pre-crisis levels, and is expanding fast – perhaps with enough momentum to start backfilling some of 2020’s losses in 2022.
Employment hasn’t yet regained its starting point, but as it has lagged, productivity – output per person – has surged, led by the US.
That surge shows the supply side of the global economy to be more elastic than feared. There are some very visible bottlenecks and pinchpoints (in semiconductors, for example – see below), but they – and the April/May consumer price indices – are exaggerating the aggregate shortage of capacity.
Still, resurgent demand is in the driving seat. With today’s policy settings, it seems set to remain there.
Central banks and finance ministries understandably worry that covid closures have done lasting economic damage, and that this is best treated by continuing to stimulate spending. But their forecasts may still be too pessimistic, and as employment catches up, that productivity surge will slow. Localised bottlenecks and the April/May CPIs are likely a rehearsal for the main inflation event further on up the road.
Monetary policy in particular is still pedal to the metal. Investors should therefore expect central banks to taper securities purchases and raise policy rates faster than they have been saying. They have mostly been buying bonds, and bond prices are also most directly and inversely linked to expected interest rates.
Stocks will be vulnerable too. But forecasts of corporate earnings are probably still too low (the G7’s taxation accord, discussed below, notwithstanding). At today’s levels of real yields, the shadow over bonds looks strategic. The threat to stocks, when it arrives, may be more tactical.
This month’s Market Perspective is a largely crypto-free zone.