Fund Manager of the Optimal Income Fund for M&G Investments, Richard Woolnough, has shared his optimistic insights into how 2021 could look for the economy. While there were no surprises in his discussion for those up-to-date with the investment market, what many will have found encouraging is his analysis of our ‘T-shaped recession’ and what that could mean for investors. So, what were the key points?
Summarising the economy of 2020
We’re all aware of the dramatic collapse in GDP during 2020 and consequent recession. This was a ‘natural collapse’ due to the COVID-19 pandemic, and therefore a service curtailing rather than a manufacturing-lead recession, as has been the case historically.
Woolnough reminds us that this means a resolution is much more tangible, given that once people can return to consumption – travelling; entertaining; dining and so on – the economy will, inevitably, be boosted. In other words, it’s possible that a big collapse could herald a big rebound, hence the economy looking ‘T-shaped’. It could, and by all accounts should, be a black-and-white situation of cause and effect. Of course, the virus’s movement from pandemic to endemic will signify the real point of economic recovery, through intervention through, for example, the vaccine(s).
The response from Government and central banks
Woolnough applauded government aggression in cutting interest rates, alongside the wealth transfer from public to private sector, helping to form what he called a ‘bridge to normality’. In addition, the handling of investment bonds has been dealt with differently than ‘usual’ recession circumstances; in 2020, credit has been tightened rather than widened, mainly due to this recession being seen as short term. Investors have attributed this to the conclusion that our current economy is indeed T-shaped – a sharp drop, but a sharp recovery – viewing the income stream over the life of an asset and providing a high rate of default as a solution.
Getting away from zero bound rates
The economy’s rate is currently at zero, hence why the banks have been unable to aggressively cut rates as would have been expected going into a recession. A zero rate is an unattractive investment opportunity for most, which is why Woolnough surmises that the government and central bank must work together to get away from the zero bound problem. Debt needs to be monetised and money needs to be printed, which will allow the government to decide on where said money is invested, as this is a political and not a financial decision for the greater good of economic health.
2021: an appetite for growth
This, Woolnough concludes, needs to be the centre of 2021’s economic recovery. It means no tightening of interest rates and fiscal restraints, but a continuation of ‘fiscal generosity’ to keep growth high and inflation higher. Ultimately, what our economy needs in 2021 is a lockstep change in fiscal and monetary policy.
For more updates for investors on 2021’s economic prospects, keep an eye on the City House Investors Ltd. blog.