Odds on for economic recovery

Vanguard’s US-based chief economist Joe Davis said there is an 80 per cent chance the global economy will achieve a self-sustaining recovery in the wake of the global financial crisis.

Speaking at a function in Sydney this morning, Davis said while a fiscal crisis would likely remain a lasting legacy of the financial crisis, major asset markets would continue to recover and investor patience would be rewarded.

However despite his broad-based optimism, Davis did issue a somewhat more cautious prognosis for fixed-interest investments. He suggested that higher inflation would likely erode investor value leading to a modest or mixed outlook for fixed-rate returns.

“We then look at fiscal deficits which are currently very high across the developed world, and what we see is that low GDP growth does not necessarily imply low asset returns,” he said.

“In fact the price stock investors pay for economic growth — that is, P/E ratios — tends to matter much more than any expected growth rate.”

Davis offered a range of views about various current macro economic issues, describing the current friction between the US and Chinese currencies and “the new Cold War”. He added that Australia had enjoyed the enviable twin benefits of surging demand for raw materials flowing from the Chinese economic boom while maintaining strong cultural and financial links with developed western economies — including the US.

“But it will be interesting to see how Australia manages that relationship going forward and it is something I will be watching with interest,” he said.

Davis also said that the Chinese government faced a number of challenges managing its own economic expansion, most notably with regards to an inflationary outbreak.

“The Chinese still run the risk of doing what the US Federal Reserve did in the 1970s and not reigning in inflation for fear of hurting growth.”