Growth or pause? What to expect in the second half 2021

In the developed world economies, in the first half of this year, it looked like ongoing economic normalization, according to Franklin Templeton economists. But one question remains: What's next? The key variables at play are the potential effects of inflation , the global pace of vaccination and the central banks' approach to monetary easing.

Inflation continued to rise in some countries in June and July. It was driven by a combination of factors, including cyclical upswing, associated with either growing sustainable economic activity or deferred demand paid for by deferred savings. Economists Franklin Templeton have thus debated whether inflation will be only temporary or will remain at high levels until 2022.

Alternative indicators, such as numerous newspaper articles on scarce goods in categories such as cars, furniture, electronics or clothing, peaked at the turn of April and May, suggesting that evidence of declining inflation could come in the future . However, incoming data continue to show soaring prices, putting pressure on fiscal authorities and monetary policy authorities to adjust their measures to prevent the economy from overheating.

Franklin Templeton's views also differ on what economic growth will look like in the second half of the year. The global economic recovery was moving forward in the second quarter, especially in developed markets, as business activity returned, coordinated monetary and fiscal policies created a healthy mushroom, and growing vaccination coverage pushed some areas of the world closer to normalizing conditions.

Even in countries with high vaccination rates, initial estimates of how economies will recover based on the peak of coronavirus disease are being tested. In Israel, for example, the number of new cases and hospitalized patients is growing (the vast majority of 93% of vaccinated adults received a vaccine from Pfizer), and the state has already ordered a third dose from sections of the population. The volatile nature of government and consumer responses provides a wide range of possible outcomes.

Franklin Templeton summarizes the views of its experts:

Western assets
As economies continue to open, we expect global growth to rise sharply in the second half of the year. However, we are cautious about extrapolating the short-term cyclical boom to expectations of a higher growth or inflation trend, - Sonal Desai, Ph.D., CIO at Franklin Templeton Fixed Income

Optimism and consumer confidence have recovered sharply, and continued global recovery is now a prerequisite. However, uncertainty is not fading, as the pace of economic recovery varies between countries that have managed to bring the disease under control, accelerated vaccination campaigns, boosted their economies with a large dose of liquidity through extremely loose fiscal and monetary policies, and those that lag further behind. In our opinion, investors should be prepared for higher volatility, because the market is trying to interpret changes in the political setting - Michael Hasenstab, Ph.D., CIO Templeton Global Macro

We expect inflation data to remain elevated in many countries this year. Propel is the combination of factors that include the cyclical ups associated with recovering economic activity, bottlenecks on the supply side in certain sectors and the effect of benchmarks pandemic shocks 2020. These factors should, in our view, should be largely transitory, and the level of inflation is in 200 it will gradually ease towards current trends, due to factors such as higher unemployment and automation, which will further weaken wage pressures - Gene Podkaminer, Head of Research, Franklin Templeton Investment Solutions

We continue to believe that the supportive mix of loose monetary policy and generous fiscal support should build a more synchronized global expansion - certainly in developed markets. However, this shift may already be approaching its peak. In absolute terms, the strongest period of expansion occurred perhaps as early as the second quarter of this year - the United States may then approach the point of "peak fiscal stimulus" and its quarterly GDP growth may already be on a downward path - Francis Scotland, Director of Global Macroeconomic Research at Brandywine Global

The normalization of the world's major economic regions - at least in terms of real GDP levels - marks the end of the second phase and the peak of economic growth. The current trajectory should moderate and growth slow down; however, it is not possible to say unequivocally by how much. Markets now seem to be priced for the middle ground - a smooth landing. And if there is a catch in the bias of the outlook, it could be that the world is racing too hard now.

Source: Franklin Templeton