By Talib Sheikh, Head of Strategy, and Mark Richards, Strategist, Multi-Asset team at Jupiter Asset Management 

As we reach the limits of what central banks can do to foster growth, the baton passes to governments

We are living through an earthquake for the global economy and the ground is still shaking under our feet.

It’s hard to say where everything will settle. Covid-19 vaccines may signal the end of the health crisis, but the damage wrought by the pandemic is still working its way through the global economy.

The policy response to the crisis from central banks and governments around the world has been enormous. There will be no simple reset back to pre-crisis days: the fiscal and monetary landscape has changed.

Economic history is punctuated by generational inflection points, and these developments could prove every bit as profound as coming off the gold standard in 1971, or Paul Volcker taking over the US Federal Reserve at the end of the 1970s and hiking interest rates to 20% (source: Bloomberg).

Profound changes have already taken place

There have been two profound changes already. The first is that most developed market central banks have changed how they implement policy, essentially accepting that they have a less robust model for how inflation is generated.

Historically interest rates were set according to where central bankers thought inflation would be in future, but the link between growth, employment and inflation has weakened. There is such doubt about how to forecast inflation that central banks are going to be more reactive rather than pre-emptive in setting interest rates and are likely to use ever more innovative tools to meet inflation targets.

The second change is in the scale of government intervention, with the state stepping in to effectively guarantee the bulk of bank lending since the start of the pandemic, while effectively nationalising the wages for large parts of the workforce through job retention schemes.

As we reach the limit of what central banks can do with monetary policy, the baton is being handed to governments to foster the growth that will be vital for economies to recover from the pandemic. Expect aggressive fiscal and monetary policy to work together for years to come.

Structural shifts in the global economy

Low taxation, deregulation and deindustrialisation have seen economic growth benefit the owners of capital over the providers of labour for decades: corporate profitability has gone up, while wages have stagnated. After this crisis we expect governments worldwide to focus on “fixing the system”. The most visible signs of this, alongside persistent deficit spending, will be higher taxes and the threat of regulation, particularly on tech oligopolies. This is likely to somewhat reduce corporate profitability.


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