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Global Investment Outlook: Prosperity

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February 1, 2022

Tracking the policy pivot

This is one part of the Global Investment Outlook series. The other sections are focussed on inclusive growth and climate transition.

Financial markets are at a pivotal point in the capital cycle. In advanced economies, the major central banks are beginning to tighten monetary policy and governments are slowing their pace of spending. Keeping track of how economic policy “pivots” (tighter) in 2022 in response to strong growth and high inflation, and whether this is offset by household and corporate spending, is key for portfolio strategy.

Tracking the policy pivot

  1. Overview
  2. Dashboards

Overview

Our prosperity dashboard, which aims to help investors track the key features of the economy and understand the future risk-and-return environment, focuses on the following four categories:

  • Economic policy: strong aggregate demand is placing pressure on policy to “pivot” tighter. Keeping abreast of both the pace and type of this policy pivot is the first key category of indicators. Public health policy is also included as an important, if more uncertain, determinant of economic policy.
  • Inflationary pressures: high current inflation is putting pressure on monetary and fiscal policy. While we forecast inflation to fall in the second half of the year, there is an unusually high level of uncertainty around this outlook. In particular, the risk of high inflation being sustained for longer needs to be watched closely.
  • Capital cycle: how the capital cycle responds to demand and pricing conditions will be a key factor in determining inflation outcomes over the next two to three years. Household and business balance sheets have high levels of cash from policy support. If, how much, and where they spend will be key to both growth and inflation outcomes.
  • Asset prices: the response of asset prices to policy, inflationary pressures and shifts in the capital cycle is the final category of indicators.

Dashboard

Policy: COVID-19 pressures


78.3m

New COVID-19 infections globally over the month to 25 January 2022


fullscreen View supporting data

The dial highlights whether the macro driver is contributing to high, medium, or low financial risk

Policy: Fiscal policy stance


-4.6%

Our forecast for the fiscal deficit in advanced economies (% of GDP) at the end of 2022 – this is stimulative relative to economic conditions

Policy: monetary policy stance


-5.2%

Current real policy rates in the US, i.e. the federal funds rate minus current inflation

Inflation: headline and trend measures


6.1%

Current headline CPI inflation in the US with the recent direction of change

Inflation: tracking the pinch points


+4.8%

Average hourly earnings growth (year-on-year) in the US, with the recent direction of change

Inflation: tracking expectations


2.0%

US inflation markets are pricing-in average US inflation between 2027-31 to be a little below the Fed’s target; other measures of expectations have increased over the past year

Capital cycle: household savings rates


9.6%

The personal savings rate in the US and elsewhere has partially normalised; however, households still enjoy significant excess savings, which could be spent

Capital cycle: business fixed investment


22.4%

Holdings of cash by US businesses (as a % of GDP) are at elevated levels

Asset prices: inflation sensitive and downside protecting assets


25.8%

The 12-month price change of key inflation hedging assets

The other two sections of this report are available here: Overview, inclusive growth and climate transition.

Disclaimer

This document was prepared for general information purposes only and should not be considered a substitute for specific professional advice. In particular, its contents are not intended by Willis Towers Watson to be construed as the provision of investment, legal, accounting, tax or other professional advice or recommendations of any kind, or to form the basis of any decision to do or to refrain from doing anything. The information included in this presentation is not based on the particular investment situation or requirements of any specific trust, plan, fiduciary, plan participant or beneficiary, endowment, or any other fund; any examples or illustrations used in this presentation are hypothetical. As such, this document should not be relied upon for investment or other financial decisions and no such decisions should be taken on the basis of its contents without seeking specific advice.

This document is based on information available to Willis Towers Watson at the date of issue, and takes no account of subsequent developments. In addition, past performance is not indicative of future results. In producing this document Willis Towers Watson has relied upon the accuracy and completeness of certain data and information obtained from third parties. This document may not be reproduced or distributed to any other party, whether in whole or in part, without Willis Towers Watson’s prior written permission, except as may be required by law.

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