FOR several times now, the financial markets have been ready for the day that many are hoping for, which is putting the pandemic behind us. This has caused a few disappointments and been manifested as smaller selloffs in the stock markets. In my interpretation, especially concerning the negative reaction to the emergence of the Omicron variant, the disappointment was mainly about the expected macroeconomic growth suffering another setback. That is my assessment, but I argue that it has been possible to observe it several times in 2021. Therefore, I have been arguing for some time that classic gross domestic product (GDP) growth will have a bigger importance for the stock market over the next 18 months and it will weigh more than it has been for an even longer period.
I think the global economy is doing fairly well. However, the crisis has generated a huge government debt pile in several countries. This will be a problem at some point, but probably not until five to seven years from now. I justify the comfortable attitude of the world economy with the reasonable resilience that the global economy has shown throughout the crisis, therefore, I am not fundamentally concerned about the economic outlook. The same goes for the health of the financial markets, in which I have good confidence in, overall. But the prospect of global growth itself, which is one of several important factors if investors are to remain in a good mood, is more critical in my view.
In this context, another very respectable organization was on the stage last January 11, namely the World Bank. Once again, it has lowered its expectations for global growth this year, as well as for 2023.
The forecast for 2021 and the current year has been lowered by 0.2 percentage points, however, the GDP growth for 2023 was raised by 0.1 percentage points. This change is seen in relation to the World Bank’s previous estimates from June last year. Now, 0.2 percentage points may not sound like much, but it covers the whole world, which makes it worth noting.
When I choose to look at 2023 and further ahead, it is because the 2021 figures will automatically show an increase due to the sharp decline in 2020. In the figures for 2022, I expect different growth packages to play a role in the GDP growth. That will also be the case in 2023, but the economic realities will become visible in earnest next year. If one uses the World Bank’s figures as a forecast, then I would consider a global growth of 3.2 percent as low. However, global growth has moved around this level from the period of the global financial crisis to the Covid-19 crisis.
Inflation will be a bother for longer than first anticipated, though I believe in extended second round effects that will keep inflation up at a higher level than normal. My expectation is not that inflation will get out of control, as it will require a trigger, but right now, I cannot imagine what it should be. However, an extended period of relatively high inflation is in line with the risk that the global supply and transport chain will not be back to normal until 2024.
The World Bank also assesses that the high growth rates will return to Asia, and I agree with this very much. I consider the forecast of 2.1-percent GDP growth in the eurozone in 2023 to be incredibly optimistic, but I very much hope that the World Bank is right.
The forward-looking macroeconomic challenge linked to the crisis is that it did not fundamentally change the economies by, for example, providing fertile ground for new growth. As the World Bank confirms, the outlook is just a global GDP growth of a certain magnitude. As low interest rates increasingly disappear and growth moves to the weak side, I regard this as another warning that the “easy” profits in the financial markets are now history.
The financial markets will continue to offer many opportunities, but investors will have to work harder with their investments to find sweet deals. Conversely, one could argue that should this be a semi-gloomy prediction, then the investment outlook is probably fine, regardless of the fluctuations that are sure to come.
Peter Lundgreen is the founding CEO of Lundgreen’s Capital. He is a professional investment advisor with over 30 years of experience and a power entrepreneur in investment and finance. Peter is an international columnist and speaker on topics about the global financial markets.