The challenges of a recovery under pressure - Dorval's Macro Corner (October 2021)

"Adapting economic knowledge to market realities and breaking free from the tyranny of indices"
François-Xavier Chauchat
Member of the Investment Committee, economist and strategist.

For the global economy, rebalancing supply and demand will be the big deal of the quarters to come. This rebalancing will take time. At the moment, the imbalance pushes up prices and limits growth, mostly in industry. In addition to the tension on the productive apparatus that are typical when crises end (as in 2010/11), there are some unusual characteristics. The first stems from “whatever it takes” policies, which have produced exceptional dynamism in demand on the way out of sanitary restrictions. The second is due to shortages of all kinds, including the lack of semiconductors, labor shortages, and especially the insufficient stocks of energy raw materials (natural gas in Europe, coal in China, etc.) . The third is energy transition, which may be partly responsible for price volatility, which raises questions about its economic impact in the medium term.

Despite these problems, the risks to global growth should not be overstated. Mastering the Delta variant will help restore order in production chains, especially in Asia. Above all, it will accelerate the recovery of tourism, leisure and transport, sectors with high job intensity. In addition, countermeasures have been put in place to limit the effects of the energy crisis: protection of the purchasing power of households in Europe, re-import of Australian coal into China, etc. Finally, the energy transition stimulates public and private investment, which should more than offset its negative effects.

Faced with price increases, the major central banks logically maintain that monetary policy does not have to respond to a supply shock. The Federal Reserve has already announced, however, that it will slow down its asset purchases soon. The improving labor market is the major reason for this adjustment, but investors are wondering to which extent the inflation environment is also playing a role. So there is a slight doubt about the Fed's reaction function, which sometimes makes investors a little nervous.

In markets which have already largely priced in the global recovery since the start of the year and where interest rate expectations are rising, these uncertainties - to which must be added the problems of Chinese real estate - are logically weighing down. Investor positioning has changed a lot in recent weeks, however, as investors become more cautious, which should lessen the impact of potential bad news. In addition, equity P/Es have fallen significantly since the start of the summer, with 2022 P/Es now close to 15 in Europe, for example. Finally, the risk premium of equities relative to bonds would remain attractive even if bond yields rose significantly further. With a global economy that remains dynamic, our central scenario therefore remains moderately positive for equity markets.


Download Dorval’s Macro Corner of October 2021 in PDF version here

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