If one thing is certain for the global economy, the next 18 months will be nothing short of a party. Cash-rich consumers across the world are already hitting restaurants, bars and shops with a vigour not seen in decades. For many businesses, sales are up and trade is booming, and that’s before most governments have lifted the full suite of restrictions imposed on their populations. Once this happens – and when cross-border travel is made easier – the good times will be even better.
But as the world dances, it is too easy to forget the problems that lie on the horizon. For one, central banks around the world have presided over a period of ultra-loose monetary policy that has seen a massive expansion of balance sheets, through quantitative easing programmes, coupled with rock bottom interest rates. The effect of these measures has been clear: sustained and almost unprecedented asset price inflation. Equity markets, particularly in the US, climbed during the global pandemic to reach all-time highs in the opening half of 2021. Property prices across the developed world are soaring.
In this market frenzy, investor behaviour is also changing. Retail consumers, flush with government stimulus cheques and personal savings, are taking higher investment risks both with traditional equities and with emerging cryptocurrencies. Fixed-income markets, meanwhile, are not reacting in predictable ways to market signalling; too much money is in the system and it is causing all kinds of distortions.
The problem is that this situation cannot go on forever. The spectre of inflation is rising and with it the prospects of tighter monetary policy regimes. Government stimulus measures are also winding down. As a result, financial markets that have been used to easy money will have to adjust to a changing reality in the coming years. It is an adjustment that could cause substantial upheaval. If we’re lucky, the 2020s may see the gradual deflation of an unsustainable asset price bubble. If we’re unlucky, we could be looking over the precipice at the next crisis.
