Economic confidence remains fragile, and we see strong headwinds to US growth both over the rest of this year and into 2023. But after that the bull case of a “Roaring ‘20s” remains on the table, supported by long-term positive forces. These secular trends support our view that investors should be selective, rather than sitting on the sidelines.
Even after the recent period of high inflation, investors should not discount the possibility of a “Roaring ‘20s” secular bull case for the US. (UBS)
Sentiment has brightened in the past month, but investors are still actively debating whether a US soft landing or recession is more likely in the near term. But there isn’t much discussion about what comes afterwards. In the first half of 2021, before inflation surged, investors were pondering the possibility of a secular paradigm change, with a “Roaring ‘20s” scenario very much on the table. By October, when it was becoming evident that inflation wasn’t transitory, the paradigm shift investors feared was a replay of 1970s-style stagflation.
Even after the recent period of high inflation, investors should not discount the possibility of a “Roaring ‘20s” secular bull case for the US, consisting of sustained GDP growth above 2%; falling inflation and strong job growth as the decade proceeds; rapid productivity improvement; and revolutionary technologies that change the world. We explore 10 factors that could support this outcome in a recent publication. Here we will outline just three.
Growth will be boosted by an increase in public spending on infrastructure and R&D. The passage of the CHIPS and Science Act and the Inflation Reduction Act, combined with the infrastructure package passed last November, will result in about USD 1.2tr of spending and tax incentives over the rest of the decade focused on public infrastructure, semiconductor production, energy transition technologies, and funding for basic R&D. Spending will ramp up in 2023, the bulk of it in the next five years. This is likely the last sizable fiscal spending for at least a few years, with Republicans poised to regain control of the House of Representatives and elevated inflation discouraging additional spending. But the bipartisan support for the CHIPS Act shows that there is political willingness to spend in areas believed to help the country’s economic competitiveness.
A secular transition to green energy will spur investment. The global transition to clean energy and net-zero carbon emissions was well underway last fall, and Russia’s invasion of Ukraine has only heightened the need to invest in energy security. All of this will require many trillions of dollars in public and private investment over the next two decades. The USD 370bn of incentives in the Inflation Reduction Act is likely only a first step, which will also induce far more in private investment. The race to create a greener economy should be a boost to growth, all else equal, but it’s also potentially inflationary as the labor and materials needed to make this transition will remain in high demand, and the need for energy security only exacerbates this risk. Click here to read more.
The digitalizing of business models is likely to gain momentum. The past two-and-a-half years have demonstrated that companies can successfully deploy technology to efficiently run their businesses in ways thought inconceivable pre-pandemic. Now, moving into an endemic state of COVID-19, entire business models will increasingly be built around digitalization, potentially resulting in greater efficiency gains.
The commitment to moving in that direction was evident in second-quarter data. While residential and business structures GDP investment categories declined by more than 10%, intellectual property investment jumped 9.2%. Second-quarter earnings also underscored the resiliency in IT spending, with a higher revenue beat rate for IT services than for the market overall. This was driven by the critical nature of software as companies are not putting digital transformation projects on hold. Click here for more on being selective in long-term growth.
So, while the secular bull case has taken a hit over recent months, factors at work in the economy currently falling under the radar suggest that, starting in 2024, the rest of this decade could look more like the second half of the 1990s than the second half of the 1970s.
This article is based on Glasses of rosé, a blog by Jason Draho. Click on the link to read about the seven other factors impacting the Roaring 20s narrative.
Read the original report Ten reasons we might see a “Roaring ’20s” 24 August 2022.
Main contributors: Mark Haefele, Christopher Swann, Vincent Heaney, Jon Gordon, and Brian Rose
This content is a product of the UBS Chief Investment Office.
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