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2021: A Shot in the Arm for the Major Economies?

Thornburg Investment Management
23 Nov 2020
3 min read

Cornerstone macro sees a Goldilocks environment post-COVID.

Nancy R. Lazar is head of economic research and founding partner at Cornerstone Macro, which provides economic research to institutional clients. She spoke with Thornburg Investment Management about global economic trends, inflation rates and China’s renminbi currency.

Thornburg:  What global trends are already underway and likely to impact the economy in the next decade?

Nancy Lazar: I see three major themes playing out.

  • There is a new level of economic globalization and onshoring, which will benefit consumers and grow the middle class, especially in emerging markets. Capital spending is moving away from China to other parts of the world such as EMs close to China, but also to developed markets from Japan to the United States.
  • A lot of this investment has been in technology to enable production during the COVID-19 pandemic. Our view is that when you improve profitability from technology, you keep inflationary pressures lower, longer. I wonder if we couldn’t be in a period more like the 1990s, when we got healthy growth, but inflation stayed low because there was a technology wave supporting improving productivity.
  • Third, I think the private sector has awakened to the need to take steps to improve the environment and this will continue incrementally if the proposed Biden green agenda doesn’t happen for political reasons.

Similar to the late 1990s? Growth of technology use leads to a productivity increase.

Source: Cornerstone Macro data, U.S. Non-farm Productivity — 12-quarter avg. of the y/y% change in productivity

Thornburg: What do you see happening with the major economies now that two vaccines, and potentially more, for COVID-19 look promising for widescale distribution next year?

Nancy Lazar: We see China in a Goldilocks situation, with healthy growth and low inflation, and that is also net positive for the world. This is very different from what we’ve experienced over the past 20 years, when China would boom and then bust, push up commodity prices, push up interest rates and then all of those things would come unwound.

President Xi Jinping has targeted 5% GDP growth, slightly less than the previous 6%. But 5% is great growth for China. At the same time, China wants a lower inflationary environment, so they’re not putting in place as much aggressive stimulus as they have in prior cycles.

I am watching Japan closely. They have been doing structural reform; their consumption tax hike is now behind them; they’re moving out of the COVID situation. I am encouraged that at the end of the day, even Japan can be a more important global player from a trade perspective, but also a domestic demand perspective.

I do worry about Europe. Europe isn’t making enough structural changes, and therefore, they may stay where they are and that’s not good.

In the U.S. productivity gains from technology investment and slack in the labor markets will help delay inflation. Our current forecast is that we are going to get back to 2% inflation by 2022.  It could go higher than that later, say 2023.

Overall, we’re excited about the global backdrop, characterized by moderate growth with a sustained period of low inflation and commodity prices. Capital spending is moving around the world to other EMs besides China and also to the United States, bringing employment opportunities.

Thornburg: Speaking of China, what are your views on the strengthening renminbi and its prospects to become more of a global and reserve currency?

Nancy Lazar: The RMB has been strengthening because China has moved away from massive crisis stimulus. They’ve actually allowed short rates to go up. Short rates are up about 160 basis points in China while the United States obviously is still on its QE path, keeping its rates lower longer. For now, the RMB could stay stronger. I don’t think the RMB is going to be a reserve currency anytime soon–maybe more widely accepted within the EM world, but globally, probably not.

The interview was edited for length and clarity.

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