Weathering the Global Economic Recovery; Anne Brookes, Senior Client Partner at Coutts, Takes Stock of the Global Economy
Byline: Anne Brookes
Global growth is likely to slow by more than the consensus expects in 2011 as fiscal tightening by a large swathe of the developed countries starts to bite. The austerity measures in these countries, which account for sixty percent of developed economy GDP, will add to continued consumer de-leveraging, while banks remain reluctant to lend. Emerging markets will be affected by weaker demand in key export markets, but it is important to remember that these countries have scope to engage in further policy stimulus if required.
Indeed, we expect China to ease policy in the next six months and provide a catalyst for outperformance by Chinese equities. Although we expect US growth to slow, a return to recession remains a key risk rather than a certainty. The probability of a double-dip has risen in recent weeks, but remains well below fifty percent. Leading indicators suggest a 30% probability of a return to recession over the next six months. This even allows for the danger of a policy error as the economy makes the transition from policy stimulus and growth that is driven by inventory rebuilding to a sustained private sector recovery. Nevertheless, this transition will not be a smooth process, so equity market volatility will have regular spikes. Just as anaemic growth is par for the course in post-financialcrisis recoveries, so is sustained high unemployment.
Against that backdrop, and with simple policy rules suggesting that central bank interest rates should be minus five percent rather than zero, interest rates are likely to stay on hold through this year and next. As markets come to terms with this, government bond yields will remain under downward pressure and the yield curve will continue to flatten. The low rate environment will drive yield hungry investors into higher-yielding assets like corporate bonds, commercial property and dividend-paying equities, pushing up their value. …