The International Monetary Fund (IMF) is not known for its boundless optimism, so when it released a significantly upgraded economic outlook last week, it was yet another sign that the global economic recovery is accelerating. The IMF now foresees +6% growth in world GDP this year, a 0.5% upgrade from its January update.
Why the sudden improvement? It is largely down to upgrades in expected US growth, where the IMF now predicts a +6.4% rise in US GDP, a major upgrade in its forecast. This implies the US economy will surpass its pre-Covid levels in 2021, a remarkably speedy recovery from the depths of the pandemic-induced recession in 2020. Other highlights from the IMF’s latest update include a 0.3% point upgrade to China’s estimated 2021 GDP growth rate, which is now forecast to see growth of +8.4%.
Just as important as real GDP forecasts in this recovery is inflation. Recently, rising inflation expectations spooked markets, and rightly so. Uncontrolled inflation would be a major headwind for any economic recovery and could have dramatic implications for financial markets. But the flipside of that is low and stable inflation alongside strong economic growth, which would be very positive for global equity markets.
This second and much more optimistic outcome is exactly what the IMF now expects to happen, at least for the next two years. And the IMF is not alone in predicting a ‘Goldilocks’ outcome of positive growth and low interest rates, with low and stable inflation. Jamie Dimon, CEO of JPMorgan Chase, said last week in a commentary to shareholders that he believes the US economy could experience this outcome between 2021 and 2023, with high savings rates, large fiscal stimulus and supportive monetary policy combining to drive a post-pandemic boom, alongside low and controlled inflation.
Investors, in our view, must remain cautiously optimistic. The momentum of the global economic recovery is accelerating, and the ‘V-shaped’ recovery so many had hoped for is now the base case assumption. But we are not out of the woods yet, particularly with respect to the trajectory of inflation and unanticipated second order effects from the pandemic. The strong economic recovery might still be a bumpy road and predictions of low and stable inflation are premature. Nonetheless, the apparent strength of the economic recovery is very positive news for equity markets and should be welcomed.
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