Fears surrounding growth rates and inflation are overdone, according to Invesco Perpetual’s John Greenwood (pictured), who believes the US business cycle will continue to expand to record levels. 
The chief economist said current growth rates across Europe, the US and China remain steady but won’t necessarily shoot the lights out, which he said is conducive for central bank policy decisions and market movements.
This is despite widespread fears that rising inflation will force central banks to tighten policy aggressively, which could spell the end for the current economic cycle.
“The US continues to expand, European growth had improved markedly over the past two years and China is still in good shape. Overall the developed world is doing well,” Greenwood said.
“That is spilling over into the emerging markets world in the likes of smaller east Asian economies and Mexico. They’re all benefitting from the upswing primarily in the US and the eurozone but, as I say, China is also in good shape.
“I think this kind of environment is going to persist. It’s not been an environment of stellar growth, but steady growth is much better for markets and monetary policy in the long run.”
Since the year following the last financial crisis, most major equity markets have achieved triple-digit total returns.
Performance of indices since 2009
Source: FE Analytics
Some investors are concerned that these gains have been artificially bolstered by ultra-loose monetary policy and that, soon enough, tapering from central banks could spell the end of the equity rally.
In an article published earlier this month, Artemis’s William Littlewood warned that a market downturn is highly likely, due to the fact central banks have increased investors’ appetite for risk.
“Economic growth splutters along. Although there is little sign of an imminent recession, it has been eight years since the last one. Before then, gaps between recessions were seven years and eight years,” Littlewood said.
“Despite central bankers' efforts to ward off recessions, these are natural and probably necessary characteristics of capitalist economies. The next recession is probably not too far away.”
While Greenwood said most economies are now growing together for the first time in several years, he doesn’t believe inflation should be a cause for concern.
Firstly, he pointed out that subdued money and credit growth is not the correct backdrop for rapid inflation.
“One view of the market - which was prominent at the beginning of this year and may become prominent at the end of this year – was that as Mr Trump cuts tax, the fiscal deficit will create inflation,” the chief economist said.
“If you look at all the data, that is not the case. The only expansion of fiscal deficits that create inflation are the ones which are accompanied by a surge in money and credit growth. That is not happening.”
Secondly, Greenwood said many investors are concerned that wage growth will suddenly pick up as unemployment levels are low and the labour market has tightened.
“That’s also not likely to happen, even if it was a reliable theory,” he reasoned. “We’ve had globalisation and changes in technology, which means that labour doesn’t have the pricing power it used to have.
“In any case, wages don’t rise rapidly unless there is a background of rapid money and credit growth.
“So as long as we have the subdued rates of growth of money and credit that I’ve mentioned, then I think the inflation outlook is something we can be relaxed about.”
Because of the combination of subdued inflation and the relative fragility of most economies, Greenwood believes central banks won’t rush into significant rate hikes, either.
In the US specifically, Greenwood believes the expansion of the business cycle could continue for the longest period of time in history.
“People often talk about the business cycle being mature and surely about to end, but business cycles don’t die of old age,” he continued. “They’re killed off by monetary tightening. There is no reason at the moment for any monetary tightening.
“Growth is moderate, inflation is, in most countries, below target, so there’s no reason to squeeze unduly.
“In fact I think the current expansion, which has already been going for eight years and four months since June of 2009, will actually turn out to be the longest ever expansion.
He added: “The longest expansion in US history was in the 1990s from March 1991 to March of 2001, so that was exactly 10 years – 120 months. We’ve just hit 100 months of the current expansion, this will be the longest expansion ever. I’m perfectly confident about that.”
Performance of index March 1991 – March 2001
Source: FE Analytics
That said, the chief economist doesn’t believe this is without potential risks to the downside. One potential headwind, according to Greenwood, would be if the US Federal Reserve decided to taper its balance sheet aggressively by $50bn per month.
“What that means is the private sector has to absorb this money per month. That could cause a bit of turmoil in markets for a while,” he said.
“But I think that, if it turns out that’s a problem, the Fed will back off and slow down the rate of balance sheet reduction.
“I see it as a risk, but it is not something that is going to derail the economy.”