Has global growth peaked?

Bastian Teichgreeber, Chief Investment Officer at Prescient Investment Management

At Prescient, we go with numbers and not with the narratives. This evidence-based decision-making is always part of our thinking – it’s what we believe in, and it’s ingrained in our DNA. That being said, we observe a negative narrative that has started to haunt markets, namely “peak” everything.

Growth will slow down after the snap bounce-back from the Covid-19 pandemic, inflation and corporate pricing power must recede from current elevated levels, fiscal policy is largely exhausted, and the monetary stimulus will have to be scaled back in a while. In brief: the extraordinary factors that have underpinned a major rally in risk markets since late March 2020 are coming to an end.

As the best will soon be over, risk markets are at risk. Perhaps sovereign bonds might offer some value, despite their very depressed yields? As is usually the case with such simple stories, the narrative contains more than one kernel of truth. But in our view, it still misses the big picture. As long as economic policy doesn’t spoil the outlook through major mistakes, the fundamental backdrop for economic performance, corporate earnings and risk markets in the advanced world remains positive.

But let’s focus on the numbers and not the narratives. Last summer, advanced economies rebounded spectacularly from the plunge in activity caused by the first wave of lockdowns in early 2020. When supply was switched on in constrained sectors, activity bounced back in an almost V-shaped fashion. The same pattern is now unfolding in a more muted form after much milder restrictions were relaxed while fighting the pandemic’s recent winter wave in the northern hemisphere.

Our Prescient Economic Indicator tracks millions of data points daily to stay on top of economic trends. We even use data from Google Analytics or Twitter to gain a more detailed understanding of these trends. What we picked up early was that following the unprecedented drop in activity in March and April last year, a steep change to significantly positive rates of change was recorded in month-on-month GDP numbers very soon thereafter. However, our indicators now suggest that this pace will most likely not be repeated in the quarters to come. In this sense, “peak growth” is now clearly behind us. The same holds for many year-on-year comparisons of corporate profits and other indicators we use to form our systematic house view – reflecting a base effect from the 2020 lockdown damage.

But the concept of “peak growth” makes little sense. For us, the key question is whether economies will decelerate to their mostly meagre low post-Lehman rates of trend growth after reaching their pre-pandemic levels of activity – or whether they can sustain a faster rate of growth thereafter. We believe that an unprecedented monetary stimulus, continuing fiscal support, pent-up consumer demand, a drawdown of excess savings and a need for companies to raise investment in response to rising demand and to offset the investment pause of early 2020 will underpin solid growth for years to come. Beyond such demand-driven gains, the outlook for supply is also more positive than usual. Helped by a faster diffusion of cutting-edge technologies in the wake of the pandemic shock and more private and public investment, we project a long period of rapid gains in productivity and per-capita GDP. Countries that don’t get their economic policies badly wrong by overburdening businesses with high taxes and stifling regulations can enjoy Golden Twenties – a narrative of which we’ve depicted the numbers already last month.