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Are we near peak of fiscal stimulus? And what of inflation?

By David Burrows

08:35, 21 July 2021

Dollar bills

All eyes are on the central banks’ meeting in August. Many are asking if we are near the fiscal stimulus peak and if inflation is expected.

Other questions concern whether optimistic talk of a sustained global economic recovery is overstating things, and growing concerns about the effects of unprecedented policy stimulus.

Also, how long can fiscal stimulus continue, and how important is the feedback from the ‘central banking party’ in Jackson Hole, Wyoming, at the end of August?

Edward Perks, chief investment officer (CIO) at Franklin Templeton Investment Solutions, believes the contribution of fiscal stimulus remains a key driver of growth prospects.

US still in pole position

“The US remains in the lead, with infrastructure spending potentially adding to the mix, but may also be closer to the high-water mark than many have imagined,” said Perks.

“At the point where analysts fully discount additional spending in the longer term, even if its delivery runs out over many years to come, it raises the bar against which growth will be judged,” he added.

Perks further commented: “The US may be approaching the point of ‘peak fiscal stimulus’, and is perhaps on the downslope for quarterly growth in gross domestic product. For now, however, we retain a moderate preference for US stocks.”

China’s economy has seen a deceleration in credit growth and, as Perks stresses, since February of this year, its equity market has lagged the gains seen in the broader global indexes. “We see this trend as one that is most likely to persist and continue favouring developed equity markets in general.”

Perks concluded: “Thus, we have moved to extend our more cautious stance towards China, and towards emerging market equities more broadly.”

Inflation concerns

Sonal Desai, CIO at Franklin Templeton, pointed out that inflation pressures are rising globally as economic normalisation has spurred a consumption-led recovery.

Supply bottlenecks, rising commodity and input prices, labour shortages and wage increases, an ever-growing stockpile of excess savings, ultra-low borrowing costs and massive fiscal stimulus are all contributing to a rapid increase in inflation.


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Said Desai: “While we do not believe inflation will get out of hand, it will be difficult to keep it subdued as prices continue to rise and policymakers maintain a very loose policy stance.

“Rising inflation may force central banks to tighten monetary policy faster than market expectations to rein in prices.”

Jackson Hole summit

Arnout van Rijn, Robeco CIO Asia Pacific, agreed that all will be keenly watching the Fed’s annual central banking party in Jackson Hole this summer.

So far, major central banks have taken the view that inflation will be transitory and unlikely to cause them to alter their present course of action.

Van Rijn’s views differ slightly to Desai’s with regard to inflation fears, and pressure on the Fed and major central banks to tighten policy.  He explained that despite all the speculation about inflation recently, fast-rising consumer prices have essentially remained a US phenomenon.

Elsewhere, inflation remains much more subdued. In China and the Eurozone, for instance, consumer prices are rising at around 1% and 2%, respectively, and in Japan they remain broadly flat.

An additional reason for central banks to stand firm and not rush to tighten monetary reins yet is that accommodative financial conditions will be instrumental in funding the transition towards a low-carbon economy.

Said Van Rijn: “In times of climate emergency, with colossal investments needed from both the public and private sector in the coming years, this may prove to be the ultimate argument for central bankers to keep money flowing at the expense of temporarily higher inflation.’


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Read more: Where is inflation heading and how should investors respond?

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