Below are the top six takeaways from the most recent report to give a flavour of the investment outlook for the rest of this year and the start of 2022, and why above all they stay close to a cautious approach to investing.
1. Overall economic recovery looks rosy, but it’s wise to be cautious
Rapid vaccination roll outs have paved the way for a remarkably fast global economic recovery. This has already led to a significant pickup in economic activity and is set to continue until the end of 2021. As a result, its anticipated that the global economy will recover at a record-speed compared to previous post-recession periods. Almost all advanced economies are expected to reach pre-pandemic levels of GDP (Gross Domestic Product) by the end of 2022 at the latest and there are anticipated global annual economic growth rates of 6.2% in 2021 and 4.6% in 2022.
However, these predictions could be hampered by new virus mutations which could see restrictions being re-introduced. Therefore, Triodos fund managers are being cautious to avoid any knock-on effects including a possible rise in interest rates that could arise from rising inflation.
2. Household spending has boosted economies
Household spending in the US and UK has been increasing for many months and has been followed by the eurozone and Japan as restrictions have gradually lifted. This has been boosted in the US, UK and the eurozone with governments continuing to support the economy. Government spending is estimated to slow but private consumption is expected to increase as households continue to regain confidence and labour markets further improve.
3. The opportunity for an economic reset has been missed
Although the strength of the global economic recovery looks promising a closer look warrants less optimism. An unparalleled amount of money has been spent to counter the effects of the COVID-induced recession: public debt levels soared to new highs, and central bank balance sheets exploded. This has increased the vulnerability of the economic system, although the emergency support to households and businesses was necessary and created the conditions for a speedy recovery once economies were able to reopen.
However, the policy choices that have been made have predominantly been in favour of the old economic system, focusing on the short-term boost from consumption. The much-needed reset, which should have been spurred by large-scale sustainable investments that focus on the longer term, has not taken place. As a result, the boost in economic activity in 2021 will likely only be temporary, as the money has not been spent to facilitate structural improvements that increase overall wellbeing. In the meantime, economies have become more vulnerable through rising public debt levels.
4. Net zero targets put under more pressure
Since the start of the pandemic, more than half of the total support provided by G7 countries to energy-intensive sectors was given to coal, oil, and gas companies. Unfortunately, this hasn’t helped to accelerate the transition towards clean energy and reduce pollution. Only 10% of the total support was provided to the cleanest energy measures.
The International Energy Agency (IEA) assessed that all emissions pledges to date would fall well short of reaching goal of net zero emissions by 2050 and limit global warming to 1.5 °C. The report also shows that an enormous amount of investment in low-carbon technologies is required to make the necessary energy transformation.
This huge need for investments means the involvement of the private sector will be vital, but that can only happen once public policies are designed to facilitate this transition. Governments should invest in green infrastructure and first-of-a-kind projects to reduce the perceived risks to private investors.
5. Inequality has increased
The COVID-induced recession has increased the existing disparities of gender, age, income, and wealth. Women, people under 25, and low-income households are disproportionately represented in the sectors that have been completely shut down for an extended period (e.g. leisure and hospitality sectors). People with flexible working contracts were also worse off than their fixed contract counterparts. In combination with the forced (and probably partially permanent) shift towards digital services and telecommuting, this has exacerbated inequalities between low and high-income households.
There has been elevated inflation over the last few months, especially in the US. There are concerns from many investors that a consumption-driven recovery will lead to economies running in overdrive. However, central bankers have alleyed fears saying this is transitory, and investors agreed that its only for the interim and has been caused by hikes in supply and demand. See more here with regards to more on the effects of inflation with regards to savings.
Making a difference
Triodos Impact Investments funds focus on driving positive environmental and societal change around the world and work hard to deliver competitive financial returns. You can invest in the funds directly or via the tax-efficient Triodos Stocks & Shares ISA.
Please note that with investments in ethical funds and companies, as with all investments, past performance is not a guide to future returns and you may not get back the amount that you originally invested.
The tax benefits of an ISA are subject to change and depend on individual circumstances.