One of our themes for this decade is that a number of structural economic headwinds have diminished or even reversed, which will generate stronger economic growth and higher inflation. Extremely volatile economic and inflation data this year have made it challenging to decipher underlying trends, and it could take another 1-2 years before investors start to realize that a return to the mushy growth and sub-2% inflation world is not in the cards, as the current consensus believes.
A just-published report examined a number of topic investment issues, as well an update on fiscal policy trends in the U.S. and euro area. Last decade’s austerity mindset has decisively reversed, with most politicians generally embracing long-term fiscal stimulus – on a scale that is unprecedented in recent decades.
Fiscal austerity last decade, especially in Europe, added to the economic headwinds in the 2010s and are now generally discredited. While the longer-run consequences of governments aggressively increasing debt will only be evident in time, the immediate impact is to stimulate economic activity, and has increased the odds of a more durable period of strong growth.