March 11, 2021
Global economic outlook
As we assess the near-term outlook for the global economy, we find ourselves focusing on how tremendously uneven the recovery continues to be. This is certainly true for sectors—services continue to lag manufacturing significantly—and also for regions, with economic activity in the United States set to soar on the back of pent-up demand while growth momentum in China slows.
We’re also seeing greater divergences in monetary policy, with the U.S. Federal Reserve (Fed) scaling back emergency programs while the European Central Bank and others ramp up their respective bond-buying programs to contain rising rates. The People’s Bank of China, meanwhile, tightens modestly to rein in excessive credit growth.
The biggest known unknown is the extent to which the unprecedented level of fiscal stimulus unleashed last year will affect growth and inflation. While vaccine rollouts and how the COVID-19 outbreak evolves will remain a key risk to the great reopening of the global economy, we no longer see the pandemic as the most important macro driver in the coming months.
While vaccine rollouts and the rate at which COVID-19 evolves remain the largest risk to the highly anticipated great reopening of the global economy, we no longer see the pandemic as the most important macro driver in the coming months."
U.S. economic outperformance likely to continue
The United States has outperformed most developed economies since the start of the year and should continue to do so throughout 2021. Key drivers include sizable fiscal stimulus, likely additional infrastructure spending, and an accelerated vaccination rollout. The ramp-up in the pace of the inoculation program has helped to normalize mobility levels and should continue to do so. It should also lead to a surge in services spending, along with a jump in services sector employment. As we get closer to business as usual, we expect the Fed to prepare the markets for the eventual unwinding of quantitative easing, which we believe will begin before the end of 2021.
Key market views
Given that the S&P 500 Index appears to be fully valued, we expect modest index-level returns to take a back seat to stock selection and sector rotation to take place as the next phase of the pandemic plays out.
While we expect a modest decline in rates following an aggressive rise in Q1, we ultimately believe the 10-year interest rate could rise to 2% by year end; crucially, the path higher is likely to be volatile and driven by Fed communications. We expect the yield curve to steepen aggressively as the 30-year yield continues to climb while the Fed attempts to keep the 2-year yield well contained.
Canada: a strong second half likely
We believe the Canadian economy is on track to follow the developed world with a robust second half, led by a sizable pop in services activity; however, a slower vaccination schedule means that Canadian recovery is likely to be slightly delayed. Interestingly, the Bank of Canada (BoC) has tied its monetary policy response to the pace of vaccinations rollouts, thereby suggesting a slower pace of monetary policy normalization is likely. That said, Canada’s fiscal response is stronger relative to its developed peers, which we believe will continue throughout 2021. This should provide ample support to the economy, particularly the Canadian jobs market.
Factors to monitor
Housing activity remained robust throughout the pandemic with low interest rates providing meaningful support to sales activities. We’re seeing evidence of speculative activity and believe there's heightened probabilities of some form of regulatory response.
The BoC’s holding of Canadian government debt, as a share of the market, is particularly high relative to the United States. The bank may need to make adjustments to its bond-buying program to avoid distortions in the market. That said, any policy action could be paired with a commensurate form of easing to avoid any unwarranted tightening of financial conditions.
Will China's growth momentum continue?
Details from China’s National People’s Congress support our view that the Chinese economy has hit a cyclical peak. The 2021 GDP target at over 6.0% is well below consensus estimates of around 8.4%¹ and should be easily achieved through base effects without the need for additional stimulus. Indeed, China’s political leaders have set out to tighten the fiscal deficit from 3.6% to 3.2%¹ with no mention of a lower overall interest rate, a sign that monetary support could be less accommodative going forward. Credit will also be tightened aggressively, by approximately 20.0% from the previous year, signaled by a pledge to keep growth in money supply and aggregate financing to the real economy in line with nominal GDP growth.²
The Chinese government targets a much weaker credit impulse this year relative to 2020. The expected slowdown in credit growth will weigh on the wider economy in the second half of the year.
Review of critical supply chains, which is aimed at insulating the United States from shortages of critical imported components—such as semiconductor chips, large-capacity electric vehicle batteries, rare earth, and pharma—is due to take place by early June. Tighter U.S. import controls will likely affect Chinese exports, the key pillar of China’s economic growth last year.
Previous editions of Global Macro Outlook
U.K. economy: growing optimism
The United Kingdom’s relative success in vaccine rollout puts it head and shoulders above most other major developed economies and offers a tailwind for growth in 2021. At this juncture, the United Kingdom is poised to capture even greater upside—at least on a relative basis—as its services sector benefits from the expected relaxation of social distancing measures. The recent U.K. budget also surprised to the upside, offering a fiscal tailwind to assist in the economy’s reopening over the next couple of quarters. Inflation expectations in the United Kingdom aren’t only well anchored, but also relatively elevated, having traded solidly above 2.0% over the past five years or so.³
1 “Full Text: Report on the Work of the Government,” xinhuanet.com, March 12, 2021. 2 “China’s Central Bank to Step Up Efforts to Curb Financial Risks,” Bloomberg, March 9, 2021. 3 Bloomberg, as of March 23, 2021.
March 4, 2021
February 25, 2021
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