What's on the horizon for the global economy?

Our view in a nutshell

Japan

• We expect growth to accelerate on vaccination progress, but another pandemic surge suggests flat short-run economic activity.
• With the prolonged pandemic pushing down inflation, elevated international commodity prices will gradually push the rate higher.
• We do not expect significant change in economic or monetary policy, even under the Kishida administration.
• The risk is renewed yen appreciation, caused by deepening US-China tensions and further risk averse moves in markets.

Asia

• Asia’s growth is on a bumpy upcycle and is likely to become more broad-based across exports and domestic demand.
• The vaccine pivot point is ahead, with six economies likely to cross the threshold by Q3, enabling consumption to catch up.
• Northeast Asia benefits from chip shortages amid the tech super cycle, with better pandemic resilience supporting consumption.
• In Southeast Asia, elevated cases and tighter government restrictions could weigh on near-term domestic demand.
• We expect Singapore and Taiwan to be the growth leaders in the region, while Thailand and the Philippines could lag.
• Drivers of inflation will likely shift from supply-side to demand-push, but still broadly within the central bank targets.
• We expect central banks to remain patient, except in Korea and India, where we expect rate hikes.
• Korea: As Korea’s economy continues its gradual recovery, we expect a second hike in November following the August hike.
• India: We expect inflation to remain elevated, growth upcycle to continue and policy normalization to begin from Q4 2021.
• Indonesia: The impact of the latest Covid wave on GDP and the fiscal deficit will be large, raising debt monetization risks further.
• Australia: A COVID-19 third wave has interrupted the recovery but we see growth resuming from Q4, with progressive reopening.

China

• We expect a notable growth slowdown in H2, and Beijing to maintain its unique policy mix of “targeted tightening + general easing”.
• We see strong growth headwinds from Covid-19, cooling property markets, likely slowing exports and Beijing’s green measures.
• Beijing may stick to its property tightening policies and green measures to cut carbon emissions and energy intensity.
• We expect Beijing to ramp up its monetary and fiscal supports, but they appear insufficient to reverse the growth downtrend.

United States

• Vaccinations, economic re-opening and fiscal stimulus are boosting growth, but we expect a notable deceleration over 2022-23,
• Democratic control in Washington means more fiscal stimulus, but partisanship and narrow majorities will likely constrain policy.
• We expect a November tapering announcement with a $10bn ($5bn) reduction per month in monthly Treasury (MBS) purchases.
• The Fed will likely liftoff in Q2 2023 with one rate hike every six months thereafter until a terminal rate of 2.00-2.25%.
• We expect the unemployment rate to decline to 4.5% by end-2021 and 3.5% by end-2023 with breadth becoming more important.
• Economic reopening and supply chain disruptions will likely push up near-term inflation, but we expect deceleration in 2022.
• Notable risks include new SARS-CoV-2 variants, upside and downside risk around fiscal policy and higher inflation expectations.

Europe

• We expect euro area GDP to return to pre-pandemic levels in Q4 2021, but the pace of the recovery will differ across countries.
• Base effects, policy and weight changes, and global price pressures set to raise European inflation well-above target by year-end.
• After announcing a “moderate” tapering of PEPP, we expect an increase in the APP and a temporary APP envelope in December.
• Despite rising mobility, we continue to see UK GDP taking longer (H1 2022) to return to pre-virus levels than the BoE (Q4 2021).
• Our Q4 2021 inflation view now stands at 4.5%. Still, we see inflation falling back towards target by end-2022/early-2023.
• The biggest risk to our view of the first rate hike in August 2022 is for earlier tightening, though slowing growth is also a concern.

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