2021 Midyear Market Outlook

Building a Sustainable Recovery

Accelerated vaccine campaigns in the developed countries, additional stimulus, and a surge in business activity as industries reopen all appear to have set the stage for robust global economic growth in the second half of 2021 (Figure 1).

Pent‑up demand and fiscal and monetary stimulus should help sustain above‑average growth well into 2022, Sharps says. Recent forecasts from the Organisation for Economic Cooperation and Development (OECD), he notes, suggest that global gross domestic product (GDP) could grow almost 6% in 2021, and 4%–5% in 2022.1

If consumer demand continues to accelerate in the second half of 2021, Sharps adds, “we could experience an economic boom unlike anything we’ve seen in some time.” 

This might be better characterized as a sequenced global recovery, rather than a synchronized global recovery.

— Robert Sharps, President, Head of Investments, and Group CIO

Although China and the U.S. have led the recovery so far, Sharps predicts that faster growth will extend to other economies as 2021 progresses. “This might be better characterized as a sequenced global recovery, rather than a synchronized global recovery,” he says. However, the timing of that sequence is likely to remain uneven, as some countries and regions, including India and Latin America, continue to struggle with the pandemic.

A quickening recovery is reshaping the demand in ways that could create both short‑term and long‑term potential opportunities for investors, Sharps says. Areas that could potentially benefit include the travel and hospitality industries, airlines, restaurants, and medical services.

By speeding up the adoption of more efficient technologies and business models, the pandemic also could set the stage for future productivity gains, Sharps argues. That could raise the long‑term global potential for economic and earnings growth.

Growth Surge Brings Rising Inflation Expectations

(Fig. 1) Real GDP year‑over‑year growth rates and 10‑year yields minus inflation‑linked 7- to 10-year yields*

Real GDP year‑over‑year growth rates and 10‑year yields minus inflation‑linked 7- to 10-year yields*

Past performance is not a reliable indicator of future performance.

*Break‑even calculation uses the 10‑year benchmark government yield minus the Bloomberg Barclays Government Inflation‑Linked (7–10 Year) Index yield for each country.

Sources: Bloomberg Finance L.P., data analysis by T. Rowe Price, and Haver Analytics (see Additional Disclosures). T. Rowe Price calculations using data from FactSet Research Systems Inc. All rights reserved.

The Inflation Debate

Although signs of inflationary pressures—such as surging commodity prices and a global semiconductor shortage—periodically rattled markets in the first half, central bankers and other financial officials have taken a relatively dovish view, Thomson notes. “The received wisdom is that the monetary authorities understand inflation and have the tools to deal with it,” he adds.

The optimistic case, Thomson says, is that the acceleration is a transitory effect that will fade as supply bottlenecks are overcome and the surge in post‑pandemic demand runs its course. But Thomson cites several longer‑term trends that he thinks could produce a structural shift to higher inflation rates: 

  • Large U.S. fiscal deficits, which have been dramatically enlarged by pandemic stimulus efforts.
  • Demographics, as retired baby boomers spend their savings and labor shortages push wages up.
  • “Deglobalization”—a turn toward higher tariffs, immigration barriers, and supply onshoring.

Vaselkiv says wage hikes by leading U.S. companies also suggest that the balance of economic power has tilted toward workers in ways that won’t be reversed quickly. This is not entirely bad news, since rising consumer income could help sustain the recovery as fiscal and monetary stimulus efforts wind down.

But Sharps cites another potential inflation threat that decidedly lacks any upside: cyberterrorism. Recent extortionary attacks on a primary U.S. pipeline and a major meat supplier show how fragile global supply chains could be in a wired age. “You could argue that these were one‑off events,” he says, “but at this point they seem to be turning into serial one‑offs.”

Source: OECD Economic Outlook No. 109, Preliminary Version, May 2021. Future outcomes may differ materially from estimates.

Additional Disclosure

Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

Haver Analytics—(Japan Cabinet Office, Statistical Office of the European Communities, UK Office for National Statistics, U.S. Bureau of Economic Analysis, China National Bureau of Statistics)/Haver.

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Important Information

This material is provided for informational purposes only and is not intended to be investment or tax advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of June 2021 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation concerning investments, investment strategies, or account types, advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Please consider your own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy. Actual future outcomes may differ materially from any forward-looking statements made.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. These risks are generally greater for investments in emerging markets. Fixed-income securities are subject to credit risk, liquidity risk, call risk, and interest-rate risk. As interest rates rise, bond prices generally fall. Investments in high-yield bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. Investments in bank loans may at times become difficult to value and highly illiquid; they are subject to credit risk such as nonpayment of principal or interest, and risks of bankruptcy and insolvency. Small-cap stocks have generally been more volatile in price than the large-cap stocks. The value approach to investing carries the risk that the market will not recognize a security’s intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced. All charts and tables are shown for illustrative purposes only.

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