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After such an unusual and unprecedented period in our lives, what’s going to happen to the global economy in the coming months and years? J K Galbraith, one of the most well-known economists of the twentieth century, once famously said that economic forecasting exists to make astrology look respectable. At a Fed Listens event last year, Jerome Powell quoted him in his opening comments and elaborated further by saying ‘we are now experiencing a whole new level of uncertainty, as questions only the virus can answer complicate the outlook’. What does the latest economic forecasting look like and how convincing is it?
In theory, in normal circumstances and over the longer term, monetary policy is to set interest rates at a neutral level with a view to supporting full employment/maximum output while keeping inflation under control. This tends to reflect the nominal growth rate of the economy and over the last couple of decades in the UK this has been around 2.5%. Looking at the Bank of England’s recently published Monetary Policy Report, they’ve indicated that rates may have to rise to 0.35% by the end of 2022 to meet the inflation target of 2.0% with another 0.5% potentially needed by the end of 2024, but all that depends on what happens next. Will inflation be transitory, or will it gain traction?
Nearly 14 months on from the first UK lockdown and the uncertainty seems to be receding at quite a pace. The Bank of England has now forecast that in 2021, the economy will grow by 7.3% which, if it comes to fruition, would represent one of the strongest years of growth in history. This forecast is nearly 50% higher than the previous forecast published only three months ago, but the concept is gaining traction with other forecasters now predicting growth numbers in the same ballpark. As a result, implications for inflation seem more clearly defined. Janet Yellen, the US Treasury Secretary, who was previously unconcerned about inflation, has suggested that modest increases in interest rates may now be needed to cool down the US economy.
This bullish sentiment is reflected in markets with commentators suggesting a boom in metals and oil and gas. With dislocation in the supply industry causing prices to go up, some are even talking about a commodities supercycle. In the UK, some mining stocks and energy giants such as BP, have seen a huge recovery in their share prices over the last few months. Shares of the big property developers – Land Securities and British Land – have also benefitted from the anticipated return to normality and International Consolidated Airlines Group (IAG), owner of British Airways and Whitbread, who operate Premier Inns, are also coming out smiling. Investors seem to be less interested in the major beneficiaries of the pandemic and more engrossed in risk right now. After more than a year of lockdown restrictions, this behaviour shift is hardly surprising and probably reflects our desire to find freedom again and to forge our own unconstrained path.
The suggestion in the UK market is that interest rates won’t rise until next year. The markets are pricing in growth but potentially not the inflation that may well come afterwards. Bond yields might go up faster than markets are anticipating, and this could have a significant impact on equities, causing damage, particularly to growth stocks. With the bull market we’re now in, moving into value stocks could be a savvy short-term move but what about longer-term prospects? By 2050, it’s anticipated that power-station spaceships in fixed orbit with vast solar mirrors will capture the sun’s rays 24/7 and turn them into microwaves that will be beamed to solar panels on Earth. This might sound like science fiction but it’s how the future is shaping up and with a record $8.7bn raised by venture capitalists in the last year to support companies developing commercial opportunities in space, this kind of technology may be here sooner than we think.
The current bull market could create an exciting opportunity to tactically asset allocate by investing in and having greater exposure to value stocks, but don’t lose sight of the longer-term outlook and how the world is moving on a secular basis in terms of technology. Economic forecasting might not be much more accurate or convincing than the British weather forecast, but as an investment strategy goes, a focus on the longer-term structural changes that are going on in the world might be just the ticket.
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