Global Macroeconomic Outlook

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Global Economy

Recovery remains fragile

Positive Trends Emerge in U.S. Despite Lingering Headwinds

After a record decline in gross domestic product (GDP) in the second quarter, economic data improved rapidly as states reopened. Employment, manufacturing and retail sales data remain positive, but the pace is slowing. In our view, significant headwinds linger. We’re concerned that waning fiscal support, potential surges in the number of coronavirus cases and political uncertainty may prolong the recovery. Growth may not return to pre-virus levels until late 2021.

Rebound Slows in Europe

A record downturn in European GDP gave way to a robust rebound as the region’s economies reopened. However, the recovery is fading amid slowing manufacturing and retail sales, deflation worries and a COVID-19 resurgence in Spain, Italy and France. The U.K.’s economic recovery likely will slow, too, as temporary programs to prop up growth expire and another coronavirus lockdown looms. We expect growth in Europe to return to pre-virus levels in late 2021 or early 2022.

China’s Economy Bounces Back

China’s economy returned to expansion mode as the nation eased its coronavirus restrictions. Nevertheless, weak global demand and heightened trade tensions with the U.S. and Europe likely will continue to fan economic headwinds. Furthermore, rising COVID-19 infection rates in certain emerging markets (EM) countries, along with deglobalization trends, continue to challenge China’s economy.


Inflation

Price trends are mixed

U.S. Inflation Inches Higher

Although it remains weak, annual headline inflation is edging higher as the economy slowly recovers. Longer-term market-based inflation expectations are also rising but remain below historical averages. We believe these market indicators don’t accurately reflect the inflationary effects of soaring federal debt, a weaker U.S. dollar and onshoring trends among U.S. businesses. These factors should eventually drive inflation significantly higher.

Europe Dips Into Deflation

Annual inflation in the eurozone recently turned negative for the first time in more than four years, as the region struggles with slowing growth trends. Conversely, U.K. inflation inched higher amid the U.K. economy’s reopening. We expect the ongoing economic challenges to keep inflation well below central bank targets in developed markets.

EM Inflation Nears Targets

Inflation rates generally remain higher and close to central bank targets in most EM countries. Turkey remains a notable exception, as the nation’s currency devaluation is driving inflation sharply higher. In China, inflation is rising along with the nation’s economic rebound. We believe the slow global recovery will keep inflation close to EM central bank targets.


Monetary Policy

Central bank support aids recoveries

Fed Sets New Inflation Guidelines

The Federal Reserve (Fed) unveiled a new monetary policy framework intended to better achieve price stability and full employment. The Fed replaced its 2% inflation target with a flexible approach aimed at achieving inflation that averages 2% over time. Accordingly, inflation may run above or below 2% to make up for past misses. In addition, the Fed will no longer preemptively raise rates based simply on unemployment falling below conventional estimates of inflationary employment pressures. This means the Fed could leave rates lower for a longer period, even if inflation rises and/or unemployment is very low. We still believe the Fed will do whatever it takes to support the economy through the pandemic.

European Policymakers Remain Supportive

Central banks in Europe and the U.K. remain extremely accommodative in their efforts to combat pandemic-related financial challenges. Although policymakers are on hold, assessing the overall impact of their unprecedented stimulus, we expect central banks to use every policy tool available to support the economic recovery.

China Holds Rates Steady

After cutting rates twice in early 2020, the People’s Bank of China remains on hold as the nation recovers from coronavirus-related shutdowns. Nevertheless, we believe policymakers may have to consider enacting additional stimulus measures to combat the global economic effects of the pandemic. 


Interest Rates

Lower rates are still the norm

Fed Favors Low Rates

We expect U.S. Treasury yields to remain in a low and fairly tight range. If economic data continue to improve, we expect the 10-year Treasury to trade in a range of approximately 0.65% to 0.85%. We don’t think the Fed will let rates climb much higher, mostly because low rates are keeping companies’ borrowing costs low, which in turn is helping markets. Furthermore, low rates are aiding the government’s deficit funding.

European Rates Are Higher but Still Negative

Most European government bond yields have moved slightly higher, but they remain in negative territory. U.K. rates are modestly higher and positive, while rates in Japan remain near the central bank’s 0% target. We expect rates in developed markets to linger at these unusually low levels through 2021.

Yields Are Higher in Developing Countries

Government bond yields in EM countries are generally higher than in developed markets. In this period of global economic weakness, we believe this dynamic provides opportunities in EM countries where rates are higher and more likely to fall or remain stable, including Mexico, Peru and Indonesia.



Q4 2020 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.

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