The world is entering an unpredictable period defined by increasing fiscal policy use, decreasing global trade and higher inflation and interest rates, according to a new research paper by the Investment Management Corp. of Ontario.
“At IMCO, we believe that these global trends are leading us towards a new era of investing, one where it becomes increasingly difficult to rely on the past as a predictor of the future,” noted the paper.
According to the investment organization, the neoliberal economic policies pursued by most Western governments between 1980 and 2020 are waning as a result of a confluence of factors, including an increased use of fiscal policy by governments and de-globalization. This shift will make it less reliable for investors to draw on lessons from the past four decades in future decisions. “This multi-decade policy rate tailwind could be in jeopardy as central banks wrestle with burgeoning inflationary forces.”
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According to the paper, governments’ confidence in their ability to intervene in the economy was strengthened during the coronavirus pandemic. “This experience provided a stark reminder of the power of fiscal [policy] and could set the stage for greater use of this policy lever.”
The IMCO also pointed to a slowdown in international trade, which has been in decline since 2008, as a sign that the world is entering a new economic era. Since 2020, global trade declined at a faster rate than in the previous decade. This was, in part, a response to the pandemic, Russia’s invasion of Ukraine and increased tensions between China and the U.S.
In the past two years, governments and corporations have sought to rebuild supply lines away from adversarial nations. “De-globalization will likely play a role in driving inflation as re-shoring shifts production to higher-costing regions, potentially increasing consumer prices.”
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The IMCO also found efforts to decarbonize economies are pushing governments to become more involved in markets, which could lead to rising costs. “Government interventions, such as carbon pricing and other policy measures, are also likely to drive up energy prices, adding further tailwinds to the global inflationary trend.”
If direct intervention in the economy through fiscal policy does increase, it could lead central banks to adopt much higher interest rate levels than have been seen in recent decades, noted the paper. “Central banks. . . could become less willing to provide support to markets in times of slowing growth and heightened market volatility, focusing instead on taming burgeoning inflationary forces with restrictive monetary policy.”
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