The second half of the year will see very strong growth in global gross domestic product (GDP) as the world economy reopens, according to Western Asset.
However, investors should remain cautious about extrapolating short-term cyclical boosts into a presumption of a higher secular trend rate of growth or inflation, the firm’s global report said.
The report also predicted that the secular challenges, which included the stagnation of Western societies’ middle-class wages, ageing demographics and rising global debt burdens, that kept US and global growth to a moderate pace at best over the last several decades would persist.
“Moreover, the small and medium-sized business destruction in many countries not seen since the Great Depression may take years to replace. Given this backdrop, Western Asset expects central banks to remain extraordinarily accommodative for the foreseeable future,” the firm said.
According to Western Asset, the key drivers behind the global outlook and the value across global fixed-income markets would include realized US growth would fall short of the expectations that seem to be built into current market pricing due to absence of a complete full-capacity reopening of restaurants, hotels, airports, theatres, etc.
Following this, rebound expectations for continental Europe were hampered by the slow vaccine rollout and by renewed lockdowns in Q1 and early Q2.
“We view this as a delay in the economic rebound rather than a fundamentally altered trajectory, especially as vaccine supply is picking up markedly in Q2,” the report said.
Western Asset also expected China to be an anchor of stability for growth, though such growth would increasingly be domestically driven with less spill over demand from the rest of the world.
As far as Australia was concerned, it said: “The reopening of the economy ahead of the schedule laid out by both the government and the Reserve Bank of Australia (RBA) in late 4Q20 hasn’t changed their conviction with regard to holding monetary policy in a super easy stance.
“They still forecast no change in the cash rate for at least three years despite the progress made to date, which has the market questioning the soundness of this as property prices increase sharply.”