NEW YORK CITY: How will the global economy and markets evolve over the next year? There are four scenarios that could follow the “mild stagflation” of the last few months.
The four scenarios depend on whether growth accelerates or decelerates, and on whether inflation remains persistently higher or slows down. Wall Street analysts and most policymakers anticipate a Goldilocks scenario of stronger growth alongside moderating inflation in line with central banks’ 2 per cent target.
In this rosy scenario, inflation would subside, keeping inflation expectations anchored around 2 per cent, bond yields would gradually rise alongside real interest rates, and central banks would be in a position to taper quantitative easing without rocking stock or bond markets.In equities, there would be a rotation from US to foreign markets and from growth, technology and defensive stocks to cyclical and value stocks.The second scenario involves overheating.