Inflation, Deflation Or Muddle Through – Olivers World Economy Insight

This note looks at the state of the world economy, with recent developments suggesting that it is back in the “danger zone” referred to by the IMF and the World Bank last September, and focuses on alternative scenarios as to how it may pan out and what that would mean for various asset classes.

Key points to note are as follows:

  • While the global economy has been ‘muddling through’ in the face of public debt problems over the last few years, this is still the most likely scenario going forward.
  • Alternative scenarios involve a return to global recession and/or deflation (as bond markets are factoring in) or a surge in global inflation. Of these, a surge in inflation is judged to be the least likely.
  • The implications for investment returns under the inflation or deflation scenarios are very different, but the ‘muddle through’ scenario would likely support reasonable returns from shares and growth assets.

Meanwhile, in Australia the run of strong data releases set off by the March quarter GDP release continued with employment up a surprise 38,900 in May. The underlying picture is not as strong as indicated by the headline jobs growth, with hours worked actually falling 0.3%, unemployment still trending sideways and a big part of the employment growth being concentrated in NSW (+30,000) which is hard to believe. However, given the strong GDP and jobs data its likely the RBA will now take a pause in easing (barring a blow up internationally), before resuming rate cuts around August/September.

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