Outlook: The beginning of a new reflationary business cycle

A summary of our macroeconomic outlook

• The world entered 2020 with a late-cycle prognosis, yet the COVID-19 pandemic upstaged the perceived trajectory of fundamentals, resulting in a drop in consumer and investment activity, and a shock to markets. Government intervention was swift and hefty; central banks across the globe pumped a record ~$30 trillion of liquidity to support and assist in recovery.
• While uncertainties remain on the efficacy of vaccines, additional virus strains and lockdowns, we believe we are at the onset of a new business cycle. Positive GDP growth driven by business capital expenditure and rising consumer spending should feed into price inflation and wage growth over the long-term. Resurgence in consumer and business activity is expected by the second half of 2021, as sentiment-driven soft data has mostly recovered and fundamentals-driven hard data, while lagging, is on an upward trajectory. In 2021, we expect central banks globally to maintain yields at low or negative levels and introduce substantive fiscal stimuli to stoke demand and economic growth.
• GDP growth will most likely not cross into positive territory until the back half of 2021, however we expect it to normalize across both developed and emerging markets over the next decade. Looking specifically at the U.S., output gap is substantially negative. Combined with the shift of pricing power towards consumers, we expect low inflation over the near-term. Inflation should rise and surpass a 2% level in the mid-long term alongside tightening employment, burgeoning money supply and a highly tolerant Federal Reserve. Over the coming decade, growth and inflation metrics should generally rise. Investors should prepare proactively for unexpected (pandemic-like) shocks or overheating periods which could necessitate policy intervention and end the cycle prematurely.

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Tags: Growth, Income, Inflation