Inflation and the possibility of a recession are putting economists in the limelight as investors make decisions about where to invest. But Robert Lind, a Capital Group economist based in London, says economists' opinions aren’t always helpful.

“I think economists should show some humility when they make forecasts, particularly when we start talking about inflation and recessions, given that our record in forecasting either of those two things over the course of the last couple of decades hasn’t been great,” he said today at Capital Group’s midyear outlook report.

He was joined by two Capital Group colleagues: Diana Wagner, equities portfolio manager in New York, and Pramod Atluri, fixed income portfolio manager in Los Angeles.

At Capital Group, Lind said, economists, analysts and portfolio managers think in terms of a variety of scenarios that include “known unknowns” so they can attempt to deal with the complex and large-scale shocks that are affecting the global economy. These are the same known unknowns that the central banks are considering, he said.

“One of the biggest challenges for central banks at the moment is simply the scale of the inflation overshoot that we’ve seen, particularly in the U.S. and increasingly in Europe,” he said. “That is challenging central banks because it’s something that none of them predicted. They are only partially understanding why inflation has overshot as much as it has, and they are also cognizant of the fact that policy has been left too loose for too long.”

In addition, there is increasing risk around energy prices, particularly in Europe, given the disruption to energy supply to Europe’s largest economy, Germany. Put it all together, he said, and it’s generating much weaker economic growth than anyone expected six to nine months ago.

Lind said he expected the Fed and the ECB will focus on the inflation part of the equation, but they can’t ignore the softening growth numbers.

“Given the scale of the shocks that we’ve seen, and they are massive, we shouldn’t rule out the fact that policy makers will make mistakes. Over the last 20 years, it’s been relatively easy to run macro policy. This time around, given the scale of it, it’s a much harder environment in which to run the economy, much harder for policy response,” he said. “It increases the likelihood that we will see much greater turbulence and volatility in the underlying macroeconomy, but also importantly in assets prices, which will be very important for financial markets.”

So where do Capital Group’s portfolio managers see opportunity?

Atluri said he sees inflation as the biggest risk, as inflation and volatility are tightly linked right now, and the next few inflation readings will be crucial to anticipating just how aggressive the Fed will be.

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