Global Macroeconomic Outlook

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Global Economy

Virus trajectory influences outlook

Lockdowns Threaten Economic Recovery

While the U.S. economy continues to rebound from the pandemic’s effects, a resurgence in coronavirus cases may threaten the positive path. Key economic indicators remain strong, including manufacturing, home prices, employment and consumer spending. But renewed lockdown measures, combined with uncertainty surrounding additional fiscal aid and consumer confidence, remain risks. With vaccines on the horizon, we expect growth to improve in 2021.

Europe Faces Another Downturn

After rebounding from a record economic decline in 2020’s second quarter, Europe faces the prospect of another downturn amid coronavirus-related closures and curfews. Similarly, the U.K.’s economy continues to struggle with a rise in infections and new lockdowns. The looming deadline to forge a trade agreement with the eurozone is also adding to the economic uncertainty. We expect growth in Europe and the U.K. to return to pre-virus levels in late 2021 or early 2022.

China's Recovery Bucks Global Trends

Strong domestic demand and export growth, along with central bank accommodations, aided China’s economic recovery. China remains the only major economy likely to report economic growth for 2020. Nevertheless, ongoing trade tensions with the U.S. and Europe likely will continue to create economic headwinds. Rising COVID-19 infection rates worldwide, along with deglobalization trends, may also pressure China’s growth.


Inflation

Inflation mostly muted

U.S. Inflation Remains Weak, for Now

Falling energy, apparel and transportation services costs kept annual headline inflation relatively weak and below market expectations in October. Longer-term market-based inflation expectations continue to rise but remain below historical averages. We believe these indicators don’t accurately reflect the longer-term inflationary effects of soaring federal debt, a weaker U.S. dollar and onshoring trends among U.S. businesses. We expect these factors to eventually drive U.S. inflation significantly higher.

Europe Wrestles with Deflation

Annual inflation in the eurozone continues to decline, as the region struggles with renewed lockdowns and slowing growth. But, U.K. inflation recently inched higher due to rising prices in several categories. Nevertheless, we expect the effects of pandemic-related shutdowns to keep inflation well below central bank targets in developed markets.

EM Inflation Mixed

Inflation rates in Latin American and European emerging market (EM) countries generally remain higher than in developed markets and close to central bank targets. Meanwhile, inflation remains weak in many Asian nations. In China, inflation has steadily declined and recently fell to its lowest level since 2009, primarily due to weakness in food prices. At the other end of the spectrum, Turkey continues to struggle with high inflation amid currency weakness. 


Monetary Policy

Monetary support continues

Fed Assesses Its Options

Concerned about the economic effects of mounting coronavirus cases, the Federal Reserve (Fed) believes the U.S. economy needs more fiscal and monetary support. The Fed is maintaining its near-0% interest rate policy and bond-buying efforts but considering other steps as several emergency lending programs expire at year-end. For example, policymakers are considering shifting their bond-buying to longer-dated Treasuries, increasing the dollar amount of bond purchases or altering the makeup of those bond purchases. We still believe the Fed will do whatever it takes to support the economy.

Europe Seeks More Stimulus

Amid mounting downside risks and ongoing deflation, European Central Bank officials are recalibrating existing monetary stimulus programs. They also believe the region needs more fiscal aid. Meanwhile, the Bank of England is keeping rates at record lows and increasing its bond-buying efforts as recession fears grow. However, with rates already at or near 0% and bond-buying efforts well underway, policymakers have few options. We still expect central banks to use every policy tactic available to support their economies.

China Considers Withdrawing Stimulus

With China reporting a robust economic recovery, People’s Bank of China officials are considering unwinding the monetary stimulus launched in early 2020. That stimulus included two interest rate cuts to combat the economic effects of the pandemic. However, given the fragile global economic recovery and the rising default risk in China’s corporate sector, a full stimulus withdrawal seems unlikely. 


Interest Rates

No impetus for rising rates

U.S. Rates Remain Contained

Given the Fed’s extremely dovish interest rate policy and ongoing quantitative easing program, we expect U.S. Treasury yields to remain in a low and relatively tight range. It’s unlikely the 10-year Treasury yield will top 1% any time soon, largely because the Fed doesn’t want rates to climb much higher. Low rates are keeping companies’ borrowing costs low, which in turn is supporting the financial markets. Low rates are also aiding the government’s deficit funding.

European Rates Still Negative

With weak growth and significant central bank stimulus, most government bond yields in Europe remain in negative territory. U.K. rates are modestly higher and slightly positive, while rates in Japan linger near the central bank’s 0% target. We expect rates in developed markets to stay at these unusually low levels through 2021.

EM Yields Are Higher

Government bond yields in EM countries are generally higher than in developed markets. Given the mounting global economic uncertainty, we believe this dynamic provides opportunities to own local rates investments in EM countries where rates are higher and more likely to fall or remain stable, including South Africa, Mexico, Peru and Indonesia.



Q1 2021 Investment Outlook Resources

References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.

International investing involves special risk considerations, including economic and political conditions, inflation rates and currency fluctuations.

Alternative mutual funds that hold a variety of non-traditional investments also often employ more complex trading strategies than traditional mutual funds. Each of these different alternative asset classes and investment strategies have unique risks making them more suitable for investors with an above average tolerance for risk.

Diversification does not assure a profit nor does it protect against loss of principal.

Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.

Mutual fund investing involves market risk. Investment return and fund share value will fluctuate. It is possible to lose money by investing in mutual funds.

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