Spring rain

Market report

Both high frequency and more traditional data sets continued to show the global economy unevenly waking from its enforced winter slumber. Meanwhile, policymakers seemingly remained committed to provide muscular support to aid this recovery. The Spring Budget in the UK was very much part of this theme of ongoing fiscal generosity this week. In this context, government bond markets continued to struggle with nominal and real yields rising in many geographies. Still rising commodity prices are being interpreted as both a reflection of this perkier than expected global economic backdrop and a brewing inflationary threat. Precious metals were a notable exception, as the stiffer competition for safe haven flows from government bonds offering positive real yields, eroded support. Some parts of the stock market continued to struggle with this rise in bond yields/discount rates, but in aggregate there has been little change on the week so far.

CIO view

We remain sanguine about the rise in bond yields so far. In the main, this move can be seen as investors positively reassessing the prospects for global growth and inflation. Some of this re-assessment is founded in the welcome, but surprisingly sharp, decline in infection rates around the world. However, as noted above, the continuing commitment of policymakers to try and plug the various holes punched by this pandemic is also important.

The future rise in UK corporate taxes garnered plenty of headlines on the day. However, the real difference, relative to carefully nourished expectations, came from the extension of emergency support measures well into the third quarter and the incentives to business investment. Many have been scrambling to upgrade their near-term economic forecasts for the UK as a result.

The debate on how to rebuild government finances around the world is obviously only just beginning. Some will favour a measure of redistribution following a crisis that both highlighted and widened many inequities. There may be a levelling-up narrative within corporate taxation too. The tax take is seen by many as too vulnerable to the head office mobility of multi-national businesses. Taxing economic activity where it happens rather than where a head office happens to be located has long been argued as a way to offset this. It may be that this crisis, and the damage it has done to public finances, provides the necessary push to force global agreement in amongst many competing interests.

More broadly, it is worth pointing out that the level of taxes is just one input into the battle to attract companies to invest and operate in a particular country. The quality and quantity of available labour, the wider institutional context, and the rule of law are just some of the other important factors to consider. Much of this gets lost in an often oversimplified debate.

From the perspective of future global growth, there is very little evidence to suggest that tilting the playing field (many would add the current regulatory backdrop to taxation) so heavily in favour of a handful of mega corporations is helpful for productivity. The last decade or so has certainly not been a stellar one for this key metric, though causation is difficult to accurately establish. We should welcome the continuing commitment of policymakers to provide support. A less permissive academic and wider consensus made this more difficult to do in the wake of the Great Financial Crisis. Then, the cries to get on top of the debt piles and reign in spending were dominant and a more sluggish, scarred global economic recovery was possibly the result. Borrowing costs remain low, even after the slump in government bonds (partly fuelled by a slight reassessment of the path of base rates) and the needs of the global economy remain great, even as the welcome signs of economic spring tentatively proliferate.

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