Q2 | 2021

Global Macro Outlook

A period of divergence

Macroeconomic themes that could shape the financial markets in the months ahead

Download the full report

Macroeconomic Strategy, Multi-Asset Solutions Team

Key themes


  1. Inflation

    We expect headline inflation in the United States to rise significantly in Q2 to highs rarely seen in the past decade. Where the financial markets are concerned, what matters is whether inflationary pressure will persist into Q3 and Q4. We don’t expect it to, but it’s worth noting that any evidence of sustained inflationary pressures above 2.5% on a year-over-year basis is the largest—and most important—risk to our outlook (and the markets).

  2. Central bank speak

    Central bank communication can represent a risk in the coming quarter as policymakers begin to look for ways to normalize monetary policy without exacerbating the sell-off in the bond market. Reaching a happy medium isn’t likely to be a smooth process—expect bouts of volatility in fixed-income markets as the yield curve continues to steepen gradually and interest rates climb.

  3. Catching up: global services sector

    We expect the global services sector to catch up fairly aggressively with global manufacturing activity in Q2. That said, it’s worth questioning if the global industrial complex (including commodities) can maintain the current level of strong performance throughout the entire quarter—it’s one of the few downside risks to our outlook.

  4. Emerging markets

    We remain long-term, strategic believers of emerging-market (EM) assets—both equities and debt. However, peak liquidity, the expected appreciation of the U.S. dollar (however brief), and the slowing growth momentum in China suggest that EM assets could experience mounting headwinds in the coming months. We view any periods of underperformance as an opportunity to reengage.

  5. Domestic economic structure

    While investor focus will no doubt be on the great reopening of the global economy, much of the growth outlook for many economies continues to be defined by domestic structural challenges—from persistently low inflation (Japan) to systemically low levels of fiscal support (Europe) to potential housing bubbles (Canada).

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."

—Frances Donald, Global Chief Economist and Global Head of Macroeconomic Strategy

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.

  • Interest rates/yields

    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 sector

    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.

  • Bond-buying program

    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

  • Credit growth

    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. 

  • U.S.-China relations

    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.

Related viewpoints

Rising interest rates—implications for the Fed

Rising U.S. interest rates have unnerved investors. We examine the causes behind the development and explore the options that are available to the Fed.
Read more

How likely is food price inflation?

Investors haven’t worried about food price inflation for years. Is that likely to change soon? We examine which economies are most likely to be affected.
Read more

A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange-trading suspensions and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other preexisting political, social, and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment.

Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. These risks are magnified for investments made in emerging markets. Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a portfolio’s investments.

The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person. You should consider the suitability of any type of investment for your circumstances and, if necessary, seek professional advice.

This material, intended for the exclusive use by the recipients who are allowed to receive this document under the applicable laws and regulations of the relevant jurisdictions, was produced by, and the opinions expressed are those of, Manulife Investment Management as of the date of this publication, and are subject to change based on market and other conditions. The information and/or analysis contained in this material has been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information.

Neither Manulife Investment Management or its affiliates, nor any of their directors, officers, or employees, shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained here. All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife, Manulife Investment Management, nor any of their affiliates or representatives is providing tax, investment or legal advice. This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment strategy, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation does not guarantee a profit or protect against the risk of loss in any market. Unless otherwise specified, all data is sourced from Manulife Investment Management. Past performance does not guarantee future results.

Manulife Investment Management
Manulife Investment Management is the global wealth and asset management segment of Manulife Financial Corporation. We draw on more than a century of financial stewardship to partner with clients across our institutional, retail, and retirement businesses globally. Our specialist approach to money management includes the highly differentiated strategies of our fixed-income, specialized equity, multi-asset solutions, and private markets teams—along with access to specialized, unaffiliated asset managers from around the world through our multimanager model.

This material has not been reviewed by, is not registered with any securities or other regulatory authority, and may, where appropriate, be distributed by the following Manulife entities in their respective jurisdictions. Additional information about Manulife Investment Management may be found at manulifeim.com/retail.

Australia: Hancock Natural Resource Group Australasia Pty Limited., Manulife Investment Management (Hong Kong) Limited. Brazil: Hancock Asset Management Brasil Ltda. Canada: Manulife Investment Management Limited, Manulife Investment Management Distributors Inc., Manulife Investment Management (North America) Limited, Manulife Investment Management Private Markets (Canada) Corp. China: Manulife Overseas Investment Fund Management (Shanghai) Limited Company. European Economic Area Manulife Investment Management (Ireland) Ltd. which is authorised and regulated by the Central Bank of Ireland Hong Kong: Manulife Investment Management (Hong Kong) Limited. Indonesia: PT Manulife Aset Manajemen Indonesia. Japan: Manulife Investment Management (Japan) Limited. Malaysia: Manulife Investment Management (M) Berhad 200801033087 (834424-U) Philippines: Manulife Asset Management and Trust Corporation. Singapore: Manulife Investment Management (Singapore) Pte. Ltd. (Company Registration No. 200709952G) South Korea: Manulife Investment Management (Hong Kong) Limited. Switzerland: Manulife IM (Switzerland) LLC. Taiwan: Manulife Investment Management (Taiwan) Co. Ltd. United Kingdom: Manulife Investment Management (Europe) Ltd. which is authorised and regulated by the Financial Conduct Authority United States: John Hancock Investment Management LLC, Manulife Investment Management (US) LLC, Manulife Investment Management Private Markets (US) LLC and Hancock Natural Resource Group, Inc. Vietnam: Manulife Investment Fund Management (Vietnam) Company Limited.

Manulife Investment Management, the Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by its affiliates under license.