Business cycle update: Global expansion continues

The economy is shifting into high gear with the vaccine-led reopening.

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Key takeaways

  • In the US, pent-up consumer demand and supportive policies are providing momentum for ecnonomic growth and possible inflation.
  • A synchronized rebound in manufacturing has led the recovery globally though the service industry has been slower to come back.
  • The recovery in Europe is slower compared to the US. Developing economies continue to struggle with COVID-19 challenges.
  • Financial markets may be vulnerable to shifts in policy or rising inflation. Portfolio diversification remains as important as ever.

United States

  • The US economy is entering a period of high nominal growth as service industry activity continues to improve amid vaccine rollouts and reopening progress.
  • Having accumulated more than $2.1 trillion in excess savings since the onset of COVID, US consumers have significant savings to spend on services that were limited during the pandemic.
  • Manufacturing activity remains robust, and stressed supply chains and disruptions have slowed delivery times, depleted inventories, and raised inflationary pressures.
  • The Biden administration proposed $4 trillion of new spending and $3 trillion in tax hikes over 10 years, which if enacted would increase fiscal deficits and further support nominal growth.
  • Overall, pent-up consumer demand, supportive fiscal and monetary policy, improving business confidence, favorable credit conditions, and reopening momentum provide a near-term backdrop for higher growth and the potential for higher inflation.


  • Global activity continues to improve, led by a synchronized rebound in manufacturing, even as service industry activity has been slower to recover amid continued pandemic-related challenges.
  • China managed an impressive industrial-led recovery following the virus outbreak, although the rate of overall economic improvement is likely to moderate as credit growth slows and the expansion matures.
  • Virus-related lockdowns have kept Europe’s recovery slow relative to the United States. Growth will likely accelerate as vaccines are rolled out and the economies reopen.
  • Developing economies are benefiting from the ongoing improvement in global trade, but the services recovery remains delayed due to virus challenges in India, Brazil, and other emerging markets.
  • The prospect of a vaccine-assisted full reopening over the coming year has us constructive on continued broadening of the global economic expansion.

Asset allocation outlook

  • The improving cyclical backdrop is constructive for more economically sensitive stocks that tend to do well as activity improves.
  • Financial markets have become increasingly sensitive to and dependent on extraordinary levels of policy support, leaving them potentially vulnerable to a shift in policy or rising inflation.
  • Buoyant asset valuations reflect positive expectations built into asset prices and create the potential for outsized bouts of volatility.
  • Portfolio diversification remains as important as ever, with the valuations of non-US and value equities, and inflation-resistant assets appearing relatively favorable.

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