Over the five years from 2018 to 2023, there's a healthy likelihood that the world's economy will continue to grow at a steady pace with modest inflation, BMO Global Asset Management said Tuesday.
The five-year outlook emerged from BMO's annual Global Investment Forum, which captures the views of a group of its international investment leaders and strategists stimulated by the input of independent experts.
The discussion strives both to anticipate how a realistic set of events could unfold over the next five years, and to consider some of the possible extreme outcomes of these scenarios.
The report highlights three scenarios expected to play out over the next five years:
- "Steady as she goes"
- "Policymakers pull the punchbowl"
- "Perfect policy prevails"
"The findings in this report reflect the key themes presented at our Global Investment Forum," BMO's chief executive and chief investment officer Richard Wilson said in a statement.
"We believe that the report helps investors make sense of the world we are operating in, allowing them to feel more confident in making informed investment decisions."
Here's a closer look at the three scenarios.
Scenario #1: Steady as She Goes — 60% probability
BMO's base-case scenario predicts that the global economy will steadily grow with modest inflation. The gradual withdrawal of quantitative easing and higher interest rates will likely to be tempered by muted inflation pressures and flexible markets, "reducing these headwinds to a gentle breeze rather than a disruptive gale."
However, this relatively optimistic base case is preconditioned on Europe's surpassing the U.S. and becoming the leader in the global growth race, able to enjoy several years of above-trend growth without hitting the labor supply buffer, in contrast to the U.S. where modest expansion has involved a significant reduction in unemployment.
Investment implications: With the world economy remaining in good shape and healthy profit margins being maintained, risk assets should generally thrive in this scenario. Gradual tightening by central banks is a mild headwind, which will limit overall returns. Government bonds are likely to underperform and with spreads apt to widen, corporate bonds could fare even worse.
