Will the boom last?

LONDON – For much of the past year, I have argued that a cyclical economic recovery from the COVID-19 disruption would be stronger than most people expected. In offering that outlook, my emphasis was on the cyclical (rather than structural) nature of the crisis: the lockdowns were always going to be only temporary; safe and effective vaccines have been brought to market with unprecedented speed; and governments have duly responded to the shock with massive levels of monetary and fiscal stimulus.

Judging by recently reported indicators of global economic activity, this outlook is now being borne out. The March 2021 data are consistent with an outright boom, especially in manufacturing. The recovery may be stronger than even I had anticipated, and by the end of March, the S&P 500 had risen above 4,000 for the first time ever.

The question, of course, is what will happen next. Will the boom last? To answer that, we should start with the most recent evidence. Among the more eye-catching figures reported for March is the Institute for Supply Management’s purchasing managers’ index (PMI), which rose by 3.9 points from February to reach 64.7. The survey was published on April 1, assuming it wasn’t a prank, and that is the highest level since 1983.

Moreover, specific components of the ISM’s PMI are consistent with a robust increase in economic activity. As I have explained in previous commentaries, two of my five preferred high-frequency indicators come from the ISM survey; the headline number and the difference between the indices for new orders and inventories. The stronger new orders are relative to inventories, the better the prospects for the near term. The March figures thus bode extremely well for the next three to six months, pending other developments.

The US is not alone. The latest PMIs published in other countries and regions have also been strong. IHS Markit’s PMIs for Canada and the UK were the highest they have been in a decade, far exceeding consensus forecasts; and the PMIs in many continental European countries also registered record increases, including even in some countries that have experienced a resurgence of COVID-19 infections. The PMI for the eurozone as a whole rose to its highest level in the bloc’s 24-year history.

Another must-watch high-frequency indicator is South Korea’s export data, which show that March exports increased by 16.6 per cent year over year – the strongest growth since 2018. This positive news almost certainly heralds similarly strong trade data from other countries that will report soon. Likewise, Belgium’s monthly business-confidence survey for March rose to levels above those published just before the pandemic. This survey is known to be a strong leading indicator for Europe, given Belgium’s high degree of trade openness.

We will get another signal soon with the release of China’s first-quarter figures, which are expected to show annualized GDP growth as high as 18 per cent. Taken together, these indicators augur a strong couple of quarters for real (inflation-adjusted) GDP growth around the world.

But what do these numbers really mean? Might they merely reflect the statistical effects of year-on-year comparisons, or a release of pent-up demand that will fade after vaccines are rolled out and lockdowns eased?

Much will depend on economic policies. If governments and central banks start to worry that generous fiscal and monetary conditions are unwarranted, they could start to tighten the screws. And financial markets will remain unpredictable.

Moreover, near-term concerns don’t touch on larger structural challenges such as climate change, government finances, Sino-American tensions, and inequality. Whether and to what extent today’s boom will benefit most people is a major question in itself. The current cyclical indicators suggest that the gains will accrue to median households more than people think, at least for a while.

As such, I don’t think the near-term rebound will be merely a statistical phenomenon resulting from the low base in 2020. Rather, it reflects a massive increase in involuntary savings, monetary and fiscal stimulus, and the targeted generosity of bailout programs. How long it will last will depend on a complex combination of factors, including the speed at which personal savings are spent down, the continuance (or suspension) of government support, inflationary signals, and the behaviour of markets – which themselves will be influenced by all of the above.

Oddly, despite the strong economic figures, market conditions have grown trickier since US President Joe Biden arrived in the White House. Bond markets may be poised to repeat the mini-bear episode of 1994, which would add more zest to the powerful sectoral rotation that has been playing out in equities. Let’s hope inflation doesn’t come roaring back. If it does, all of today’s good news will have proved to be rather fleeting. (The writer is a former chairman of Goldman Sachs Asset Management and a former UK treasury minister, is Chair of Chatham House and a member of the PanEuropean Commission on Health and Sustainable Development. The article is courtesy Project Syndicate, 2021).