Spark Global Limited reports:
Wang Qian, chief economist of the Asia Pacific region of the investment strategy and research department of global asset management giant Vanguard, made the remarks at an online exchange on July 29. For now, the outlook for the global economy will largely depend on the development of the epidemic, according to Pioneer. The path to recovery will vary by country and industry.
Macroeconomic indicators suggest that the global economy has bounced back from a sharp recession, without parallel in modern history, faster than most had expected. Pioneer’s investment strategy team argues that countries that are more successful at containing outbreaks, whether through vaccination campaigns or quarantines, tend to have a better chance of maintaining good economic growth.
Returning GDP to pre-pandemic levels is a long way off
Based on Pioneer’s full-year forecast, there is still a long way to go before GDP growth returns to pre-pandemic levels.
In the U.S., Vanguard raised its full-year GDP growth forecast to more than 7%, as the economy is boosted by improved health care and strong fiscal support. Local vaccination progress has accelerated after a slow start, paving the way for the opening up of face-to-face contact industries. Other government programmes, including increased unemployment benefits and cash handouts for low-income earners, have supported continued growth in consumption.
In the eurozone, Pioneer maintained its full-year growth forecast of around 5 per cent. The intermittent vaccination process, coupled with repeated lockdowns, pushed the euro zone back into recession at the start of the year. But with supportive policies in place, travel restrictions eased and consumption still 10 per cent below pre-pandemic levels, Pioneer believes the eurozone economy is likely to rebound sharply.
In the UK, Pioneer lowered its full-year growth forecast to about 7 per cent. The UK economy grew surprisingly in the fourth quarter of 2020, setting the stage for a higher start to 2021 and suggesting more challenging year-on-year growth.
In China, Pioneer lowered its full-year growth forecast to about 8.5-9 per cent. China’s epidemic has basically come to an end, and its GDP growth has been among the first to recover to the pre-epidemic level. However, the structure of the economic recovery is unbalanced. Although the export growth was high in the first half of the year, the recovery of consumption and service sector was not as strong as expected due to the repeated outbreaks in local areas and the growth of disposable income lagging behind economic growth, while investment is still under downward pressure due to the macro policy tightening. In the second half of the year, economic growth is expected to stabilize, pick up and be more balanced, as policies shift to moderate neutrality and the vaccination process accelerates, exports remain robust, consumption recovers steadily and infrastructure investment turns positive.
In emerging markets, Pioneer raised its full-year growth forecast to more than 6 per cent. The resurgence of the pandemic, particularly in Asia, weighed on growth in emerging markets in the first half of this year. But growth in emerging markets is expected to accelerate as vaccination efforts continue.
Inflation is expected to continue to rise moderately
In view of the superposition of a series of factors, including by the force of the global economic recovery and higher than expected unprecedented monetary and fiscal stimulus, and gradually restore economic activity restart and supply of the spike in demand for goods and services, market growing fears of rising inflation, pioneer leading inflation is expected to present a moderate degree of continuous increasing.
Better economic conditions and a slight rise in inflation have, in turn, raised doubts about the direction of monetary policy. Some central banks have already slowed the asset purchase programmes launched in the early days of the pandemic, and many others are starting to consider a slowing schedule. Similar moves will inevitably lead to the gradual exit of loose monetary policy. Still, Vanguard doesn’t expect an initial rise in central bank short-term interest rates to be widespread until 2023.
The Fed announced last year that it would adopt an “average inflation targeting” system, in which 2% is set as a long-term target rather than a ceiling. In other words, the Fed will be able to tolerate inflation above 2% for some time. Vanguard expects policy to remain accommodative through the second half of 2021, but with the Fed likely to announce a slowdown in the pace of asset purchases in the second half of the year, the market is unlikely to reach the Fed’s criteria for rate hikes — price stabilization and full employment — until the second half of 2023.
Given rising energy prices and a gradually strengthening economy in the UK, headline inflation is likely to be above 2.5% by the end of 2021. Core inflation is likely to move closer to the Bank of England’s 2% target in 2021, and while Vanguard expects the Bank to pause and then stop asset purchases until the end of the year, it does not expect to raise policy rates until 2023.
As for China, Vanguard still expects core inflation to be about 1-1.5% in 2021, well below the People’s Bank of China’s 3% target. Amid a modest recovery in consumer demand, the transmission of higher producer prices to consumers is limited. The recent RRR cut shows that monetary policy has shifted to neutral and more flexible, and Vanguard believes the central bank will keep interest rates and exchange rates stable in the second half to support a steady economic recovery.
In emerging markets, inflation has been generally higher than expected. Some parts of Asia are no longer disinflationary, and the spillover effects of higher borrowing costs in developed markets are pushing inflation well above pre-pandemic levels elsewhere. While there is still potential for growth, inflation trends and rising US interest rates have limited the easing bias of emerging market central banks to some extent.
For the problem of the tendency of emerging market equities, qian wang, said one reason for this year big emerging markets, the whole market at the beginning of the year for the emerging markets is a vision, thinks that the economic rebound this year, in fact, due to the slow process of vaccination, frequent outbreaks, lags far behind of economic recovery in the developed countries, so the poor market performance. Qian wang said.
“Over the long term, our capital markets models show that emerging markets are now significantly overvalued after taking into account both risk and return, which is why, even when we consider that returns should be higher, the risks are higher. But over the next decade emerging markets, thanks to high valuations, will return an average of only around 4.4%. So overall we remain cautious on emerging market assets in both the short term and the long term, and if there is a cyclical rebound, it will probably have to wait until the outbreak is under control.”
Reprint indicated source：Spark Global Limited information