Sustained low global inflation

This is a key macroeconomic theme with implications for long term economic growth, monetary policy and yield curve levels and shapes.

The global headline consumer inflation has been ranging between 3% and 4% since the early 2000s, with Advanced Economy (AE) inflation hovering around 2% (and recently falling below the Central Bank 2% target levels) and Emerging Market Economies’ (EMEs) consumer inflation falling from around 7% in the early 2000s to below 5% currently. The expectation is that global inflation will range between 3% and 4% in the medium term.

Global growth has remained weak over the past decade despite near zero AE monetary policy rates and massive asset purchases by most AE central banks. The huge asset purchases have not lifted global inflation because the bank reserves created by the asset purchases were largely deposited back into the central bank and directed into the capital markets, rather than being lent into the economy to stimulate activity, as was the intention.

The Covid-19 pandemic has severely disrupted the global economy in 2020 requiring further significant monetary policy intervention and fiscal support. Gross global national debt levels rose to 331% of GDP in Q1:2020. Public debt levels are similarly at record high levels and expected to continue to rise sharply over the next year. The record high and rapidly rising fiscal debt levels require sustained low bond yields, suggesting that Central Banks will implement measures to keep rates low at least into the medium term.

As part of the Covid-19 relief packages, governments have made extensive use of credit guarantee programmes to encourage banks to lend to households and businesses. These credit guarantee programmes together with increased fiscal spending have increased AE money supply growth. This acceleration in money supply growth could be sustained if the pandemic relief programmes remain in place into 2021 and perhaps beyond. The sustained higher money supply growth could lift global inflation contrary to current expectations.

The combination of controlled low bond yields and rising inflation would heighten financial repression, and make equity investing more challenging. Governments will have to embark on structural reforms to lift the growth trajectory of their economies. These reforms are likely to emphasise Environmental, Social and Governance (ESG) issues which will require sectoral adjustment in equities in the areas of energy, banking, healthcare, communications, and transport. Market participants are likely to favour the companies that lead their sectors in terms of progress on ESG initiatives.