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
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.
