Advertisement
Coronavirus pandemic
OpinionComment
Chris Iggo
Chris Iggo

Macroscope | Coronavirus recovery: strong growth and low interest rates set to drive global resurgence

  • After a year of restricted economic activity, the level of pent-up demand is huge as people, firms and governments have piles of cash to spend
  • High nominal GDP growth and low interest rates cannot coexist forever, but the combination will be a boon to equity markets in the short term

Reading Time:3 minutes
Why you can trust SCMP
Workers make iron bars at a steel factory in Lianyungang, in eastern Jiangsu province, on February 12. Photo: AFP
Chris Iggo
The theme of reflation continues to dominate financial markets. Economists expect significant increases in the pace of economic growth later this year. This, of course, is in response to the lifting of lockdowns and social mobility restrictions as the widespread deployment of Covid-19 vaccinations brings infection and mortality rates down and reduces the pressure on public health systems.
Advertisement

After a year of restricted economic activity, the level of pent-up demand is huge. Savings rates have increased as consumers have been starved of opportunities to spend on dining out, entertainment and travel. Firms also have lots of cash and could start to invest it to take advantage of strong growth, boosting jobs and incomes as they do. Governments have also been busy spending money to support jobs and incomes. In many countries, they continue to do so.

All of this, plus the natural tendency of economic activity to bounce back, will mean some eye-watering growth rates in the second half of 2021. The economies that did a good job in managing the pandemic have been able to open up already and are seeing the benefit in stronger growth rates.
Last week, Australia recorded its second consecutive quarterly GDP growth rate of more than 3 per cent. China’s growth rate in the final quarter of 2020 was 6.5 per cent, and consensus forecasts for Chinese GDP growth this year are around 8 per cent. Forecasts of annualised growth rates of around 6 per cent for the US in the second half of the year are common. Little wonder, then, that equity investors remain bullish.

These are growth rates for real GDP. When we consider expectations for rising inflation, the combined growth of nominal, or current US dollar, GDP is going to be something we have not seen since the 1980s.

01:33

China’s economy accelerated at end of 2020, but virus-hit annual growth lowest in 45 years

China’s economy accelerated at end of 2020, but virus-hit annual growth lowest in 45 years
Most people working today in financial markets have not seen growth so strong. They are told that rising growth and inflation leads to higher interest rates as central banks attempt to slow things down. Today, that might not be the case. Central banks are happy to let their economies run hot for the time being.
Advertisement
Advertisement