As we approach the end of the year, there has been no let up by policymakers to boost important parts of the global economy, with Japan and the eurozone taking fresh steps last week to revive flagging growth.
The Japanese government announced that it would implement a sizeable fiscal package worth ¥73.6 trillion ($707.6 billion) to help stimulate the economy amid an increase in virus cases and a slide in support for the government.
Over in the eurozone, the European Central Bank strengthened its quantative easing programme, promising to buy €500bn ($605.5bn) more bonds over a longer period, while leaving official interest rates unchanged.
The ECB's focus is clearly on maintaining favourable financing conditions for governments and companies against a background of ongoing Covid-19 restrictions, which look likely to stretch into the New Year.
New ECB forecasts lowered the eurozone growth projection for next year to 3.9 per cent, down from 5 per cent previously, although it raised it for 2022 to 4.2 per cent from 3.2 per cent.
Meanwhile, EU leaders finally managed to agree to its €1.8tn budget and post-pandemic recovery package, which is just as well as Brexit talks also appeared to flounder.
The US on the other hand, which has the highest number of Covid-19 cases in the world, was unable to make progress on a second coronavirus relief agreement, a symptom of the political rancor that continues in the wake of the November presidential election.
Senate Republicans failed to support a $908bn bipartisan proposal, with issues including state and local aid, liability protections, unemployment assistance and stimulus checks still dividing Congress.
Millions of Americans face losing unemployment benefits at the end of the month and the possibility of losing their homes if more financial support is not forthcoming – and a reminder of the dire situation came from initial unemployment claims, which jumped 173,000 to 853,000 last week, the highest since September.
However, Congress passed a one-week government funding extension to December 18 to ensure the government does not shut down, so the talks will continue but the omens are not great.
It might be surprising then that US markets remained so sanguine about these risks despite some turbulence in the middle of last week. Even after a sell-off in the Nasdaq, stocks rebounded on initial public offering fever as Airbnb’s launch surpassed expectations.
The ongoing rally in markets, however, is causing increasing consternation among some analysts.
The Bank for International Settlements (BIS), often regarded as the "central bankers’ central bank", published its Quarterly Review last week, with its main message being concern “about the daylight between valuations, which are still above or near their already stretched pre-pandemic levels, and economic prospects, which are still uncertain”.
Many others are making comparisons between the current equity valuations and those last seen during the 2000 dotcom boom, asking if investors are right to be so bullish when share prices are so high relative to earnings and cash flow.
The consensus view is that global gross domestic product will recover by 4 per cent or 5 per cent next year, helped by easy monetary and fiscal policies, and that inflation will remain subdued given the still wide output gaps and elevated unemployment rates.
One risk could be that monetary and fiscal reflation disappoints, especially as the unprecedented monetary and fiscal stimulus of 2020 is unlikely to be repeated next year. But another risk could also be that consensus estimates are too cautious and that inflation, far from being subdued, could begin to recover as a vaccine-charged recovery takes hold.
Market-based measures of inflation expectations have indeed been picking up, creating upward pressure on Treasury yields.
Of the two risks, inflation is probably the one that markets need to be most concerned about in 2021. While more sluggish growth would keep central banks on hold, pouring ever more liquidity into markets, an upturn in inflation would see central banks tolerance of overshooting price pressures put to the test, something that elevated valuations would struggle to contend with.
Tim Fox is a prominent regional economist and financial markets analyst, and an adviser to Switzerland-based St Gotthard Fund Management