The global economy is flying, but with structural imbalances building, will its strength be reflected in markets?
- The OECD forecasts that the UK economy will grow 7.2% in 2021, its fastest rate since 1941.
- There are also strong forecasts for most major economies around the world
- However, the recovery is uneven and inflation is building, which could unsettle investors
Whether the UK fully unlocks or not on 21st June, its economy is flying. The OECD forecasts that the UK economy will grow 7.2% in 2021, its fastest rate since 1941. Unemployment is likely to be ‘just’ 6.1% by the end of the year – high, but not compared to predictions of 15% or more early in the pandemic. It appears that the UK has come through the worst.
The Euro area is also predicting to see strong growth, at 4.3%, while the US is likely to deliver 6.9% in the year ahead. China and India are scheduled to grow 8.5% and 9.9% respectively. If 2020 was an economic horror show, 2021 promises to be filled with opportunity and growth across the global economy.
The OECD credits swift action by policymakers: “Never in a crisis has policy support – be it health, with the record speed of vaccine development, monetary, fiscal or financial – been so swift and effective. As a result, the manufacturing sector is growing rapidly, merchandise trade is rebounding strongly as borders gradually reopen and travel is slowly resuming. Moreover, reopening is being accompanied by a surge in consumption and hours worked. This is very encouraging, as it should limit the scars that arise from the crisis.”
It's not just the OECD that believes things are going swimmingly. PMI data consistently shows record-breaking expansion figures. To date, this has been focused on manufacturing, but services data is fast catching up.
In theory, this should be a strong backdrop for stock markets and certainly, investors appear to have rediscovered their optimism after a period of weakness. It is the perfect backdrop for companies to grow earnings and unchallenging comparison figures should flatter this year’s numbers. This, in turn, should drive share prices.
However, there are caveats. Markets have priced in a lot of good news. ‘Recovery’ stocks may have gone as far as they can given the continued uncertainty over virus variants, while growth stocks still look expensive. Investors are left hunting for those left-behind stocks that don’t fit either category.
Equally, the recovery is uneven. Areas such as Japan and certain emerging markets are not enjoying the same pace of recovery. Higher commodities prices and bottlenecks in areas such as semiconductors will benefit certain sectors and hurt others. Inflation keeps rearing its head. The stock market party can go on a little longer, but ultimately, pressures will build.