High hopes for a stronger-than-expected upturn in the global economy have rattled financial markets. Once it was clear that the US Congress was set to approve President Joe Biden’s massive US$1.9 trillion ($2.53 trillion) stimulus package without reducing its scale, expectations of economic growth in the US — and the world economy — soared. But, as these same expectations also drove bond yields and commodity prices higher, investors became skittish about inflation and whether central banks would be prompted to tighten monetary policy. Prices of bonds and equities have become much more volatile as a result.

So, are markets over-reacting, pricing in higher inflation and other risks when they should not? In essence, our view is as follows: There is a good chance that the world economy will enjoy a strong revival later this year. Despite this, the major central banks will still keep monetary policy ultra-easy because they are fixated on reviving growth. Combine vibrant growth with very loose monetary conditions and surely, there must be more imbalances. However, we also believe that inflation is not the risk that we need to worry about most for now; other risks such as external imbalances, protectionism and financial market turbulence are more pertinent. For the next year or so, there are sufficient counter- vailing forces to contain most of these risks, but things could get dicey beyond that.

Global growth prospects will be boosted by pent-up demand which is underestimated

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