LIVE MARKETS-What is it... back to the 70s or to pre-WWI?

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WHAT IS IT...BACK TO THE 70s OR TO PRE-WWI?

Investors are still confident that AI-related investment will keep buoying equities and that a post-midterm rapprochement between Washington and Tehran will help contain energy prices.

But markets could face a rude awakening if either assumption proves misplaced, raising the risk of a toxic mix of slowing growth and persistent inflation.

The past few decades have been defined by an activist policy response to economic downturns, with central banks cutting rates and governments ramping up spending to support the economy.

“After an era of ever-bigger interventions, these old stabilisers now face major obstacles,” Henry Allen, macro strategist at Deutsche Bank, says, referring to monetary and fiscal stimulus.

“On the fiscal side, policy is constrained today by sovereign yields at multi-year highs, alongside the highest debt-to-GDP ratios in several decades,” he adds.

“Then on the monetary side, policy is constrained by persistent inflation that’s increasingly supply-driven.”

According to Allen, today's backdrop bears similarities to past periods when economic stabilisers were constrained or left unused.

He cites the 1970s and the pre-World War I era, when the gold standard and balanced-budget orthodoxy sharply limited governments' ability to support growth and smooth economic cycles.

(Stefano Rebaudo)

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