Q3 2021 Commentary Letter: A Tale of Two Parts

The third quarter began on an upswing. Covid-19 was in the rear-view mirror – or so it seemed. Growth was accelerating. Across America and Europe, holidaymakers eagerly planned summer vacations. Expectations were high for a “normal” return to work and school in the fall. Financial markets continued to rise to new records.  

The picture changed sharply during the quarter – as the ravages and uncertainties of Covid-19 continued to bedevil the global economy. By the quarter’s end, economic indicators showed a mostly flat summer – supply chain disruptions and labor shortages hampered production. In China, growth slumped to just 0.2 percent from Q2 (4.9 percent on a one-year earlier) with power shortages and a property slowdown adding to Covid woes. Health concerns across the globe led to a pullback in travel and other services and in the US probably contributed to disappointing jobs numbers. Payrolls rose by only 194,000 in September, after 366,000 in August. Both fell far short of the million plus increase recorded in July. But inflation stayed persistently high. Consumer price increases hovered between 5.2 and 5.4 percent year-on-year through the third quarter, a 13 year high. As whispers of stagflation grew louder, equity markets slipped across the globe. After stocks hit new peaks in July and August, September followed with the first negative month since January. 

The growth outlook for the global economy in Q4 is more promising, particularly for advanced economies. Vaccination rates are rising there and the Delta variant, which raged across the world, seems to be subsiding, following an as-yet unexplained pattern of two-monthly cycles of disease. The IMF, in its World Economic Outlook, released October 12, lowered its global growth projection for 2021 very slightly, to 5.9 percent. Underlying the global figure were larger shifts in projections for individual countries. In particular, the IMF has downgraded its 2021 projections for the US and other advanced economies, in light of the summer surge in Delta. But it still sees a healthy recovery going into next year, with the US forecast to grow 6 percent this year and a little over 5 percent in 2022. Markets have also cheered up a bit, although bond traders are on the lookout for earlier than expected monetary tightening.

Caution is still warranted – and investors should remain ready to be flexible. Much as we might wish it, the pandemic is not yet behind us. With winter coming, and economies — and travel — gradually opening up, there could be another rise in infections and perhaps linked to new variants of the virus. After all, Covid-19 has confounded forecasters with its twists and turns for nearly two years now. What also matters is the reaction function of policymakers.

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