Beyond Bulls & Bears

Perspectives

Quick Thoughts: The Growth and Inflation Argument Continues

When it comes to questions about inflation, growth, and the impacts of vaccination rates on global economies, many of us are asking: what’s next? Our Head of the Franklin Templeton Investment Institute, Stephen Dover, and five economists from Franklin Templeton’s specialist investment teams discuss the current environment and how it shapes their views on the path forward.

When it comes to questions about inflation, growth, and the impacts of vaccination on global economies, many of us are asking: what’s next? Will economies continue on their current growth trajectories? Will inflation remain transitory or continue at high levels into 2022? Where are interest rates going? And, how will different economies react to inflationary changes and policies aimed at stimulating economic growth, as every country has varying goals and a mixture of social and economic policies? I had the opportunity to get the perspectives of five economists from Franklin Templeton’s specialist investment teams. Here are some highlights of our conversations:

  • Our economists diverge on what economic growth will look like in the second half of 2021. There is uncertainty about the pace of economic recovery for countries that lag in vaccinations or experience the proliferation of COVID-19 variants. Initial expectations for how economies recover based on the shape of prior COVID-19 peaks are being tested, even in countries with high vaccination rates. For example, Israel has experienced high case rates and hospitalisations despite high vaccination levels.
  • The many paths to economic normalisation require critical variables: reasonable inflation rates, high levels of vaccination, and fiscal and monetary stimulus.
  • Inflation, especially inflation expectations, continues to be a significant focus for our investment teams as inflation figures rose this year in several countries, driven by a combination of factors that included supply/demand constraints, vast fiscal and monetary stimulus in many countries, cyclical upswings associated with resurgent economic activity, and the spending of excess savings.
  • Our economists differ on whether inflation will remain transitory or continue to remain at high levels into 2022. The economic data continue to show sharply rising prices, which put pressure on fiscal and monetary authorities to adjust policy to prevent economic overheating. The volatile nature of how governments and consumers respond, from both policy and behavioural perspectives, creates a growing range of potential economic outcomes.

To dig deeper, I invite you to read Macro Perspectives: A second-half surge, or pause? for more on how our contributors’ views both converge and diverge on what economic growth will look like in the second half of this year.

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