While the global economic recovery continues to unfold, the year’s 3rd quarter has seen a slower global growth rate. It’s been an interesting time for investors as governments and economies deal with the fallout of the global pandemic.
For example, the US economy grew at a moderate 2% below the revised 2.8% which was expected. This is after exceptional growth in Q1 & Q2 of 6.3% & 6.7% respectively. Some of the current headwinds include, among others, bottlenecks in supply-chains, rising energy prices, China housing slowdown, the end of US unemployment benefits, and importantly, for investors, inflationary pressures.
Inflation in the US has continued to be higher than most large, developed economies during the month of September with a CPI at 5.4% compared to 3.1% in the UK, and 3.4% in the Euro-Area. Ports and railroads have been clogged because the economy is demanding more goods, and during the pandemic, consumers have reduced spending on services and increased spending on goods, specifically durable goods. Prices will continue to rise until enough demand softens to bring everything in line with supply chain limits.
To date, the $9.3T sum of all stimuli in the US has been hefty and split across administrative actions ($0.7T), legislative actions ($4.8T), and Federal Reserve actions ($3.8T). The Federal Reserve is expected to start tapering their quantitative easing within a few months’ time and are now acknowledging that supply-chain bottlenecks & pressure on wages could be longer and more persistent well into next year. Consider that until recently, the Federal Reserve was stating that these inflationary pressures were transitory only.
The European Central Bank, on the other hand, still views these inflation pressures as transitory and has not made any new policy decision changes. Several central banks have already started raising rates such as Norway, New Zealand, South Korea, Brazil, and the Czech Republic. In the G7, the Bank of Canada has ended its quantitative easing while the Bank of England (BoE) has also revised its thinking.
Andrew Bailey, governor of BoE, said action might be needed to tame medium-term inflationary pressures & medium-term inflation expectations. Comments were interpreted as a sign that the BoE may raise rates before Christmas.
Other risks to global economic growth include pressures within China’s real estate sector which constitutes nearly 30% of their economy. Large real estate developers have started to default on some of their sizable liabilities. Evergrande, the 2nd largest property developer in China, was reported to have missed offshore bond payments to make several other missed payments. Sinic, another large developer, has also recently defaulted on a bond. The People’s Bank of China, however, has described Evergrande as an idiosyncratic case and stated that risks are controllable.
Given the balance of risks, we can expect capital markets to be more turbulent in the next few quarters. As always having a suitable level of globally diversified risk assets within your portfolio and a long-term perspective will remain the best approach to weather any potential volatility or paradigm shift coming in the global macro environment.
If you have any questions about this market update or want to find out more about Brite and how we can maximise your pension and investment assets, please get in touch with us.