Commentary on financial market developments – May 2021
- US: accelerating inflation
- Favourable OECD forecast
The uptrend in equity and commodity markets continued in May. The riskier shares of emerging market companies performed best. The price of gold rose strongly again due to accelerating inflation, and oil ended trading close to USD 70 per barrel.
The engine of growth is a combination of fiscal and monetary expansion, applied in particular by the US and the EU. Massive government spending and low interest rates provide an ideal environment for business in the short term. However, it is only a matter of time before such loose policies start to translate into accelerating inflation. And accelerating inflation is already visible. Year-over-year inflation in the US has accelerated to 4.2%! Central banks will have to start raising interest rates soon to keep the price level rise from spiralling out of control. Rising interest rates will make the cost of capital more expensive, taking some of the profits away from companies. So it is a question of when the optimism of post-covetous growth will be replaced by scepticism of rising interest rates and the exhaustion of government stimulus.
On the last day of May, the OECD issued a new forecast that the world economy will recover faster. The world economy is expected to grow by 5.8% this year and 4.4% next year. The estimates have improved mainly due to the rapid pace of vaccinations. However, the performance of individual economies will vary widely, depending mainly on the strength of a country’s health sector and the size of government stimulus.