On 17th April 2023, ECB President Christine Lagarde gave an important speech at the Council on Foreign Relations in New York where she discussed how recent transformative changes including the Russian invasion of Ukraine, the weaponisation of energy, the sudden acceleration of inflation and the growing rivalry between the United States and China were harming the global economy. She said that central bankers had for decades focused on regulating demand without having to pay too much attention to supply-side disruptions.

However, according to Lagarde, past decades of stability may now be giving way to lasting instability, resulting in lower growth, higher costs, and more uncertainty around trade. Lagarde highlighted a world that is becoming more multipolar, which may, over time, prove consequential to the US dollar as the world’s global reserve currency. She voiced her concerns about escalating geopolitical risks and the challenges ahead for central bankers focused on delivering price stability as their primary objective.

Ultimately, a multipolar world increases the risk of slowdowns in global economic growth, while supply-side disruptions tend to lead to rising prices for goods and services.

These trends in GDP growth and inflation are the primary drivers of long-term returns for equities and fixed income, which is why they are so important to understand. For now, global growth and inflation trends remain favourable. Inflation, although high, is moderating while GDP growth remains positive in real and nominal terms. As we have previously reported, we continue to expect disinflation in an increasingly multi-polar world as the dominant theme for 2023. There are risks on the horizon, which we continue to monitor.

Despite the risks noted above, Madame Lagarde must be pleasantly surprised by how global equity and fixed-income markets are performing this year. Year-to-date, global equities have returned over +5% with European equity markets leading, +9%. Energy prices continue to contribute to the gradual decline in rates of inflation with crude oil falling over -10% and natural gas prices falling -54% in the first four months of the year. Eurozone government bonds and Euro inflation-linked bonds have each added +3%, while UK and US inflation-linked bonds are flat year- to date.