In recent weeks, investors have been increasingly expressing their confidence in economic stability, citing improved trade relations, strong corporate earnings, and a host of encouraging signs from the labor markets, among other factors. Investors are hopeful that despite a host of challenges from slowing growth in key markets to geopolitical events, the global economy will be able to avoid an outright recession. Here, we examine why investors see the world economy avoiding a nine-month downturn, and hope for this positive outcome.
Signs of Expansion
Investors are optimistic that the global economy will be able to avoid a prolonged recession largely due to signs that certain markets are showing positively onto economic output.
In the United States, the pace of economic growth is currently at a healthy two percent. Additionally, the unemployment rate has dropped to its lowest rate in nearly five decades. While it is likely too soon to call this the end of the longest expansion in the history of the U.S. economy, it is still a very positive sign that the North American economy will be able to avoid imminent challenges.
European markets have also shown greater signs of stability. While there has been a slowdown in activity in Europe during the second quarter, many of the problems have not been exacerbated to the point of leading to a full blown recession.
The same can be said for emerging markets, which have been hit hard by the United States and China’s trade war. A number of emerging markets such as India and Brazil have been able to avoid deeper contractions, and this means that the global economy may be able to get back on its feet more quickly.
Interest Rates
Interest rates have played an important role in providing economic stability in a wide variety of markets. While rates have remained unchanged in the United States, the Federal Reserve has adjusted its outlook to a more dovish stance which signals its future intentions of keeping receipts low in order to stimulate economic activity.
In Europe, the Central Bank has kept interest rates low. This helps to ensure that economic activity is not hindered by expensive credit and makes it easier for businesses to continue to grow their operations.
Other markets have also seen Reserve Banks playing an important part in providing economic stability. In Brazil and India, for example, central banks have reduced benchmark prime lending rates in the last few months to help spur investment amidst challenging economic times.
Fiscal Policies
In addition to monetary policy, governments have been employing a wide variety of fiscal tools in order to aid the economies in their jurisdictions. In the United States, for example, President Donald Trump has signed into law tax cuts and other measures which are designed to help spur economic growth.
At the same time, the Trump administration has worked closely with congressional leaders on both sides of the aisle to draft a $2 trillion infrastructure bill. If passed, this would represent one of the largest investment packages in the history of the United States and could help accelerate economic growth.
Moreover, governments in other parts of the world are also pursuing fiscal stimulus programs. China, for instance, has announced a series of tax cuts and incentives for small businesses in order to help bolster job creation and growth.
Similarly, policies such as the European Commission’s €750 billion Next Generation EU package are designed to help countries in the bloc survive the economic ravages of the COVID-19 pandemic.
Markets
The markets have so far done a good job at maintaining a certain level of stability. Despite a modest pullback in the last few months, benchmark indices such as the S&P 500, Dow Jones Industrial Average, and the NASDAQ remain well above their pre-COVID-19 levels.
At the same time, gold prices have remained high throughout much of the year, a sign that investors are hedging against market volatility by purchasing the safe-haven asset. Further, certain stocks such as tech giants such as Apple, Amazon and Microsoft have continued to perform well and have bucked the pullback in most other markets.
These stocks are accompanied by a bullish sentiment which has been bolstered by strong performance in corporate reporting. During the second quarter, for instance, 87 percent of the S&P 500 companies beat analysts’ estimates for earnings.
Overall, investors have continued to voice their confidence in the global economy despite a wide range of problems from trade tensions to slowing growth in key markets. As we have seen, there are a number of positive signs which point to the continued health of the global economy, including low interest rates, positive corporate earnings, and encouraging governments policies. Thus, investors remain hopeful that the global economy can stave off a recession.
