The world in 2035: Jon Levy, Loomis Sayles

Jon Levy, a global strategist covering European markets for the macro strategies group at Loomis, Sayles & Company, reveals how he thinks we might be reflecting on some of the major geopolitical, social, economic and market trends ten years from now.

“There are two meaningful trends taking shape that could come to define this decade. The first is an inverse of the deflationary environment and attendant monetary policy regime that prevailed between the global financial crisis and the Covid shock. This means a decisive move away from the responses to the global financial crisis (GFC), and policy tools like lower-for-longer rates, quantitative easing, the eradication of term premium from rates markets and the broader suppression of interest rate volatility.

“This is because we are turning the page on a regime of low and stable inflation, where the risk was probably skewed to the downside, and I think that will force central banks to reach for a different tool kit. Indeed, we’ve already started to see signs of this, such as 2021-2022, when central banks declared unconditional warfare on inflation, as well as the end stages of the tightening cycles, during which they relied on the passage of time, while keeping rates at restrictive levels.

“The second trend I see is governments playing a catalytic role in bringing about a wave of investment. This is a response to climate risk, energy transition objectives and geopolitical evolution. It will be important to view policy decisions through this lens and consider that there will be an element of adaptive competition to decisions made anywhere in the world. We are in something of a global infrastructure race, with that term applying very broadly. It is much easier to engage in this competition than in an arms race, so we should also consider that this process will likely lead to sustainably higher levels of both public and private investment. In turn, this may contribute to the persistence of upside risks to inflation targets – in contrast to the post-GFC environment.

“Central banks will need to consider how to adapt inflation targeting frameworks. If inflation runs above targets as a result of investment that should ultimately alleviate this risk, central banks may need to look through upside misses - albeit for a longer period than they may have done in the past. These lags are a source of uncertainty. The element of variability is more variable. And rates markets will need to adapt. We may need to actually have more trust in central bank forecasting at precisely the point at which it becomes harder - and in the aftermath of some particularly poor forecasting results. And central banks will probably need to make serious investments in forecasting processes.”