What does a policy triangle mean for investors?
Global economic growth is currently determined by three areas that form a policy triangle: health policy, fiscal policy and monetary policy. Policy makers can compensate for weak performance in one area by boosting another, calibrating the economy to support growth. Likewise, where the economy is in danger of overheating, policy makers may tighten measures to avoid high inflation.
With the Covid-19 recovery underway, we examine each of these policy areas, how they are impacting global growth and what they mean for investors.
Health really is wealth
For the first time in living memory, the economic performance of most of the globe has hinged on the efficacy of health policies. This is because, without effective health policies, economies have had to curtail activity under the social restrictions necessary to slow the spread of Covid-19.
Genomic surveillance, population testing and contact tracing measures have all made a significant difference to national outcomes, especially early on in the pandemic. However, inoculation programmes are the measure currently making the biggest difference to how quickly an economy can reopen.
The fiscal fillip
Over the last year, we have seen governments increase spending in a bid to compensate for the lost economic activity caused by the pandemic.
Big packages do not guarantee a rapid recovery, but they certainly seem to help. In terms of size, the UK, Singapore, the US and Canada have increased fiscal support the most – spending in 2020 is estimated to have increased by around 10% of gross domestic product (GDP).
Spending is also set to be extended. The huge increase in spending in 2020 led economists to expect a global fiscal contraction in 2021, as governments let fiscal measures expire once economies were permitted to re-open.
The policy predicament
The combination of strong demand for goods and services, and tight supply of goods and labour is already resulting in inflation. Headline inflation rates across the world’s main economies vary, but all are rising and it is difficult to predict how long it will last.
The challenge for central bankers is that monetary policy, the final tool in the policy triangle, takes time to take effect and so needs to be calibrated in anticipation of economic conditions. While US monetary policy makers continue to favour supporting the recovery for long enough to ensure that workers from the most disadvantaged groups also benefit from the improvement in economic conditions, guidance is beginning to hint at the need for tighter monetary policy.
The recovery in growth is contributing to higher inflation, and the expectation that monetary policy will tighten in time. With this in mind, we continue to favour those sectors and regions with exposure to the cyclical upswing in economic conditions.
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Any research in this document has been procured and may have been acted upon by Close Brothers Asset Management for its own purposes. The information is being made available to you only incidentally. The views expressed herein do not constitute investment, taxation or any other advice and are subject to change. They do not necessarily reflect the views of any company in the Close Brothers Group or any part thereof and no assurances are made as to their accuracy. Investments may not be suitable for everyone. Past performance is not a reliable indicator of future results. The value of investments and the income from them may fall as well as rise and is not guaranteed. An investor may not get back the original amount invested. Unless otherwise indicated, all information and opinions expressed in this document are those of Close Brothers Asset Management and are correct as of June 2021.