US/China ‘irreconcilable differences’ to exacerbate global growth

The global economy will experience 2.2% real average annualised growth over the next five years and the tense relationship between US and China will continue to impact global growth, Northern Trust believes

The global custodian’s five-year outlook predicted that interest rates would remain low, with inflation continuing to be minimal due to muted global growth and timid policy responses.

It said the slowing growth would be exacerbated by “stuckflation” and “irreconcilable differences” between US and China.

Northern Trust chief investment strategist, Jim McDonald, said: “We expect this friction to unfortunately persist since we regard as irreconcilable their views on what constitutes the best economic model, as well as the role of government and their respective roles in global affairs”.

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The outlook said equity returns over the next five years were expected to be muted by historical standards due to slower growth and modest margin and valuations pressures.

“On a global basis, the report foresees equity returns in the range of mid-single digits and low-but-positive fixed-income returns,” the report said.

The highest average annualised equity return was forecast for Latin American emerging markets at 8.9%, with overall emerging markets at 6.1%. The second highest equities forecast was for the UK at 7.4% and EMEA at 6.9%. The lowest forecasts were for Canada and Japan both at 4.5%.

The investment landscape, the report said, would be shaped by six themes:

• Global growth restructuring;
• ‘Irreconcilable differences’ between the US and China;
• ‘Stuckflation’ as there is a continued failure of most central banks to meet 2% inflation targets, along with technological innovations and troves of data enhancing price transparency and discovery;
• ‘Executive power play’ of leaders tiling their focus too much on populist movements at the expense of sensible economic policy;
• ‘Monetary makeover’ which recognised that ‘stuckflation’ had stripped central banks of their purpose and made it impossible to address the insufficient level of global demand. Central banks would increasingly be subservient to political agendas; and
• ‘Staking out climate risk’ as it would continue to grow in importance as an investment consideration, with a wide variance among countries.