At the very beginning of the pandemic, we highlighted the uniqueness of the 2020 recession, the first of its kind caused by an external shock. As a result, we warned that it would be difficult to read the markets through macroeconomic and earnings data analysis given the distortions that fundamentals would experience for a few quarters.
The distortion of the data initially manifested itself negatively. The year 2021 will be characterised by the opposite phenomenon as the US economy experiences its strongest annual growth in a generation. The combined effect of involuntary savings that are likely to be partially spent after the economy reopens and the positive wealth effect of rising asset prices will most likely trigger quite strong growth in gross domestic product (GDP) for at least two to three quarters from the second half of the year. Julius Baer Research forecasts real US GDP growth of +6.4%.
It is worth noting that the current generation of investors is accustomed to negative growth shocks but has never experienced a positive one. Admittedly, this acceleration in growth is partly priced into the markets. However, it will be important to observe the reaction of governments and central banks when it actually takes place. In any case, we believe that the structural forces in place before the pandemic will still be at work when the normalisation of developed economies is complete. Indeed, we believe that the behaviour of private agents (households and companies) in the United States and Europe will continue to weigh on the speed of money circulation due to a structural preference for savings.
In the longer term, it is interesting to reflect on Ms Yellen’s initial statements in her capacity as US Treasury Secretary. Consistent with her philosophy at the helm of the Federal Reserve (Fed), she focuses on the risks of insufficient growth to absorb the underemployment caused by the pandemic. She also highlights the record inequalities observed in the United States and the chronic underemployment of minorities. Furthermore, the Fed echoes her concerns. The stage is set. This decade in the United States will most probably see the implementation of macroeconomic policies that combine active fiscal stimulus facilitated by monetary policy, viewing the latter as a continuum of the former. This transition is likely to take some time, however, and in the meantime, the rise in inflation in 2021 will be treated as temporary by central banks.
What lies ahead in the economy and financial markets? Our Group Chief Investment Officer explains.