Balancing the risks
Although the recovery could suffer some setbacks along the way, we’re confident that the global economy will be resilient and continue to expand. There’s also the potential for pent-up demand to come through more strongly than expected, leading to periods of even stronger growth. China’s regulatory tightening is a potential headwind, but it’s mostly a China-specific factor at this stage rather than a global one.

Covid-19 remains a risk although the rate of new infections has stabilised. Reopening and increases in mobility are the dominant trends in most regions. Vaccination rates are high around the world, with those countries that were slow to start their programmes catching up. While the impact of virus variants looks manageable and strict lockdowns are less likely, more cautious consumers and workers could translate into slower spending and additional supply bottlenecks.

Although the pace of global economic growth has probably passed its peak, we’re maintaining our risk-on positioning by overweighting selected equity and credit asset classes over higher-quality bonds. There are three reasons:

• Growth is likely to remain higher than its long-term average, which should support decent returns for risky assets.
• Although central banks are considering when to scale back their support, monetary policy is still very easy for now, and likely to change only gradually.
• We still see support from momentum and corporate earnings – two indicators we are monitoring closely at this stage of the cycle.

After picking up rapidly when the lockdowns receded, it’s almost inevitable that the pace of economic growth would fall back. Although activity is moderating, it’s still above average, pointing to ongoing expansion. We expect this moderation to be gradual for two reasons. First, some of the causes are transitory (the Delta variant and supply bottlenecks). Second, we don’t expect monetary and fiscal policies to tighten abruptly in the near term.

As the global economy moves further away from the pandemic-related recession, it will have to learn to live with less support from the central banks’ monetary policies and governments’ fiscal stimulus measures that have propelled it forward. All eyes are on the Fed, which is likely to announce later this year that it will begin to taper its asset purchase programme. Treasury bond yields might feel some upward pressure when this happens.

The US Federal Reserve (Fed) announced last year that it would allow inflation to run hotter than normal in order to support the labour market and the broader economy. The unemployment rate has been falling steadily and inflation may have already peaked, which means the need to stimulate is fading. Although the US created fewer jobs than expected recently, we continue to believe the Fed will begin to taper its asset purchase programme later this year.

What a difference a year makes. Just 12 months ago many countries were beginning to struggle with a surge of the coronavirus and lockdown measures were imminent. The outlook for this autumn and winter is more positive now that the link between Covid-19 infections and hospitalisation appears to have weakened. We’re learning how to live with the virus, and any measures to slow the spread are unlikely to involve shutting down large parts of our economy.

Septembers are for fresh starts, new beginnings and renewed purpose. Celebrated journalist Lucy Kellaway knows this all too well. A few years ago, she changed course and became a trainee teacher at the age of 58. We talked to Lucy as the new school year starts, to find out why she has a spring in her step this September, and you can read the interview here.

The global economy is settling down into a pace of growth that’s more consistent with its long-term average, and appears to be on solid foundations

That normal feeling

COUNTERPOINT OCTOBER 2021