Caption: March economic outlook from Rathbones
Economic update from Rathbones Fund Managers
"We believe that inflation will be kept tamped down by strong economic forces, but we don’t have a crystal ball.
The reopening surge could be explosive indeed. Take the UK: something like 90% of all self-catered holiday accommodation in the UK has been booked out for this summer. And that’s before we know whether anyone will be able to travel further than the end of the drive! Restaurants and bars are similarly booked out months ahead despite the lack of certainty. At least in these sorts of sectors, such hefty demand coupled with reduced supply means short-term prices are headed one way: up. One of the major influences on longer-term inflation is people’s expectations of inflation. If they think inflation will rise, they tend to agitate for greater wages, which has a significant effect on inflation. Who knows how people here in the UK — and those abroad who will be experiencing similar scenarios — will react. There is one impediment to widespread wage growth, which we mentioned earlier: it’s hard to argue for a pay rise if unemployment is high. That is, unless your particular set of skills is in high demand (to paraphrase Liam Neeson).
Over in the US, which tends to create the global economic winds that blow through all other nations, lockdowns have been less total and commerce seems to be sharply rebounding already. This, combined with a humungous $1.9 trillion stimulus package that appears imminent, could redraw the economic landscape. It will do three things in particular: 1. Vastly increase households’ ability to spend; 2. Massively increase the issuance of US government bonds (pushing yields even higher); 3. Boost unemployment benefits (potentially reducing people’s desire to take a job paying less).
There’s a lot of secondary and tertiary impacts that flow from just those three major phenomena. Over the coming months, as markets reopen and another round of stimulus kicks in, we feel like there’s a reasonable chance of a rerun akin to the ‘taper tantrum’ of 2013 when the US Federal Reserve hinted that it couldn’t hoover up bonds forever. Investors worried about rising yields, so started selling bonds aggressively, while the US Federal Reserve stepped in to buy them and calm things down. Another bout of this sort of thing wouldn’t be great for any sort of asset in the short term, so we’re sitting on a little more cash than usual as we wait to see how the first stages of the global reopening go.
Longer-term, we’re optimistic about markets and the investments we hold, however we just feel like the reopening months could get a bit erratic as people’s expectations mix with reality and evolving economic conditions. Like any transition! So we’re keeping some of our powder dry to take advantage if it comes."
Rathbones kindly share their monthly ecomic outlook with us each month.