Our view in a nutshell

Japan

• As the government declared another state of emergency, q-o-q real GDP growth in Q1 2021 should be negative again.
• With the prolonged pandemic pushing down inflation, suspension of the GoToTravel campaign will technically increase the rate.
• We do not expect the Suga cabinet to make any significant change in economic policy and in BOJ’s monetary policy.
• The risk is renewed yen appreciation, caused by deepening US-China tensions and further risk averse moves in markets.

Asia

• The growth path is likely to be bumpy in the near term due to virus risks, but we expect a durable cyclical rebound into H2 2021.
• The distribution of vaccines, faster global growth, tech upcycle and easier financial conditions should support the growth recovery.
• As growth recovers, we expect inflation to gradually rise but remain within the central bank targets.
• Upside growth surprises are likely in China, India, Singapore and Korea, while Thailand and the Philippines may disappoint.
• We expect more rate cuts in Indonesia and Malaysia by H1 2021 but no changes elsewhere through 2021.
• China: We expect the growth recovery and Beijing’s gradual policy normalization to resume following the containment of Covid-19.
• Korea: We expect Korea’s sequential growth momentum to improve in Q1 on stronger-than-expected export growth.
• India: Economic normalization amid above-target inflation suggests rates on hold and a gradual withdrawal of excess liquidity.
• Indonesia: Rising inflation amid debt monetization and current account deficits could test monetary policy credibility.
• Australia: We expect the recovery to continue, but note the RBA is taking no chances, and anticipate QE3.0 in time.

United States

• Democratic control in Washington means more fiscal stimulus, but partisanship and narrow majorities will likely constrain policy.
• The pandemic will weigh on short-term activity, but the vaccine outlook is positive for the medium term.
• We expect constant Fed asset purchases through 2021 before a gradual taper in 2022, but risks skew towards earlier action.
• The Fed will likely stay at the ELB at least through Q2 2023 with inflation remaining the key determinant to liftoff.
• The unemployment rate will decline more gradually from here as the pace of recovery slows relative to the post-lockdown rebound.
• COVID-19’s impact on service prices and the impact of labor market slack, particularly on rent, will weigh on core inflation.
• Notable risks include new SARS-CoV-2 variants along with both upside and downside risk around fiscal policy.

Europe

• With lockdowns still in place we see euro area GDP falling at a similar pace to Q4 in Q1, then recovering from Q2.
• While underlying inflation remains low, base effects and policy changes should raise headline inflation sharply this year.
• With GDP rebounding and inflation rising in the short term, we expect the ECB to keep policy on hold this year.
• UK lockdowns should have a smaller effect on GDP than last spring. A full recovery in GDP takes until beyond 2022.
• While pent-up demand and policy stimulus should be supportive, we expect a renewed fall in GDP in the current quarter.
• After another £150bn of QE we think the BoE is done with easing. We do not expect negative rates, but risks remain.

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