Taking the long-term investing view, the private bank is not in the habit of dispensing short-term economic forecasts or opinions, nevertheless the firm's global investment strategist says this is a particularly ripe moment.
In a briefing note yesterday, Rothschild managing director and global investment strategist Kevin Gardiner explained why he is breaking form to discuss what is unfolding for Western economies in short order. "Occasionally, we are confident (or rash) enough to be a little more specific about the future. This is one of those times," he writes.
Here are his comments.
We don’t usually make economic forecasts
This doesn’t mean that we have no views about the future. We couldn’t offer investment advice without them. But as long-term investors, those views are very broad. For example, notwithstanding the evolving wall of worry, we usually expect economies to grow more often than not (to “muddle through,” perhaps). We also assume that interest rates and security valuations will eventually normalise, though our definition of “normal” is fluid.
Just because something has been the norm in the past doesn’t mean that it will be the norm in the future too. But we feel happier with these views than we would with more quantitative, shorter-term hostages to fortune. They may seem bland, but when set against confidently detailed visions of apocalypse they can be remarkably useful.
That said, occasionally we are confident (or rash) enough to be a little more specific about the future. This is one of those times (though we’re still not offering numbers – even whole ones, never mind decimal points).
A possibility often discussed here is hardening into probability. The stage seems set for western economic growth to surge well in excess of trend for a while – after most of the ground lost to virus suppression has already been retraced. This will look less like rebound and more like momentum.
We feel able to offer this short-term “forecast” after a run of remarkable data, and the confirmation of the looming disbursement of another hefty US fiscal package ($2 trillion is equivalent to roughly a tenth of US GDP).
In addition, the big central banks continue to say that they will not “take away the punchbowl” from any economic party any time soon. Instead they expect to keep official interest rates low and, in the case of the ECB, are even trying to stop bond yields from rising in anticipation of an eventual hike. They are positively encouraging spending to go on a tear.
For the key US economy, those data recently include the highest service-sector ISM survey since it started in 1997, the strongest manufacturing ISM since 1983, and almost a million new non-farm jobs created in March. The surveys in particular are forward-looking, suggesting that a strong first quarter – in which US GDP possibly closed on its pre-crisis level – will be followed by a stronger second.
In the eurozone and UK, the year started more resiliently than had been feared in the face of the tightened COVID restrictions, and forward-looking survey data suggest a vigorous second quarter here too. A combination of (varying) vaccination and adaptation will help – with the contentious EU pandemic recovery fund (and an additional UK fiscal boost) now waiting in the wings.
It is a long time since things pointed so clearly to rapid growth in both the US and Europe. And while we have our misgivings about unnecessarily-generous policy, and are braced for higher inflation, that hangover may be some way down the road. For now there is enough spare capacity, even in the US economy, for surging demand to be met largely by output rather than inflation. Either way, further upward revisions to expected corporate earnings seem likely.
… and a medium-term clarification
This week the IMF became the latest official institution to raise its estimates of developed world growth in 2021. It is a safe bet that it will not be the last. In fact, because of the bureaucratic delays involved in producing such official projections, it is unlikely even to be the last upward revision from the fund. The revisions are modest, and the IMF economists probably didn’t have time to incorporate the last week’s robust US data in their assessment.
After a fall of 3 per cent in 2020, the fund now sees real global GDP rising by 6 per cent in 2021, compared with a January forecast of 5.5 per cent (5.2 per cent in October). At some stage, probably in the first half of the year (the fund doesn’t offer quarterly details), the level of GDP will regain and pass its pre-crisis levels, confirming the downturn as horribly sharp but short. To its credit the fund always projected a relatively quick rebound, but back in June it was expecting the slump to be larger (at -4.9 per cent).