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The latest monthly Economic Commentary by Conrad Burge
The global economy is continuing to recover from last year’s recession, which saw the largest decline in global output since the Second World War. According to the International Monetary Fund (IMF) in its latest report (July), the world economy contracted by around 3.2% in 2020, with the cause being what the IMF has termed the ‘Great Lockdown’, which was a series of restrictions put in place by governments to hold back the spread of the Covid-19 coronavirus pandemic, which originated in China and spread around the world from early last year. With recovery underway, the IMF is forecasting global growth of 6% this year and a still elevated 4.9% in 2022 (0.5% above its April forecast). In particular, the IMF is anticipating very strong growth in the US of 7% this year and 5% next year, driven by what is expected to be very large federal fiscal stimulus (although some of this has yet to pass through Congress) as well as ongoing monetary stimulus in the form of historically low interest rates and very high ‘quantitative easing’ (‘QE’). This is despite what have been ‘second and third waves’ of the pandemic and new, apparently more virulent, variants of the virus taking hold in some regions.
One significant effect of the pandemic has been a very large lift in the household savings rate, at least across the developed world. As recovery unfolds an expected reduction in this rate could accelerate growth. As the IMF has put it, ‘as economies reopen, private spending is expected to pick up, financed in part by (household) savings. The speed at which these savings are drawn down will influence the pace of the recovery and inflation pressure’. With regard to the outlook for inflation, however, it should be noted that forecasts remain benign. In the words of the IMF, ‘in most cases inflation should subside to its pre-pandemic ranges in 2022 once the transitory disturbances (which largely reflect pandemic-related disruptions) work their way through prices’. One cost of fiscal stimulus measures that will eventually have to be faced is a huge rise in government debt levels, although for the time being this can be financed at historically low interest rates.
The Australian economy has also been recovering strongly, although a ‘second wave’ of the virus has recently hit some regions, leading to further lockdowns, which could slow growth marginally for a time. Vaccination rates though have been accelerating, which could assist recovery over the rest of the year, although monetary and fiscal stimulus looks likely to be needed through 2022.
Most share markets reacted to the initial spread of the pandemic last year with a short-lived heavy setback but then began to rebound, with most major markets rising in 2020. This year, up to 27 July, market movements have included rises of 17% for the broad US market (S&P500), 14% for the technology-focused Nasdaq, 8% for the UK, France 18%, Germany 13%, Japan 2%, India 10% and Australia 13%, while China fell 3%. Markets could have further upside, assuming expansionary monetary and fiscal policies remain in place.
Major sovereign bond markets saw yields reach record lows in March 2020. Central banks have since tried to keep rates low to lift economic activity, although longer-term bond yields in some cases have risen this year. The US 10-year Treasury bond yield fell to an historic low of 0.54% on 9 March 2020 but was 1.24% on 27 July 2021. Similarly, the Australian 10-year bond yield was 0.57% on 8 March 2020 but was 1.21% on 27 July this year, although well down since March. Most bond markets continue to look expensive.
Fiducian’s diversified funds are currently above benchmark for international and domestic shares, around benchmark for listed property and well underweight fixed interest sectors, while cash weightings remain well above benchmark.
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