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 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

• 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 spending to catch up.
• Northeast Asia benefits from chip shortages amid the tech super cycle, with better pandemic resilience supporting consumption.
• In Southeast Asia/India, 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 policy divergences this year, with a RRR cut in China, rate hikes in Korea and India and unchanged rates elsewhere
• China: We expect downward pressure to increase in H2, and Beijing to counteract with “targeted tightening + universal easing”.
• Korea: We expect economic recovery to slow, but the BOK is likely to hike rates in August and November.
• India: The second wave should slow near-term growth, but the medium-term upcycle and policy normalization from Q4 2021 are intact.
• Indonesia: The impact of the latest Covid wave on GDP and the fiscal deficit will be large, raising debt monetization risks further.
• Australia: Extending COVID-19 lockdowns add near-term downside risk but should not derail the broader recovery.

United States

• Vaccinations and economic re-opening are boosting growth, but supply constraints may limit the pace of normalization.
• Democratic control in Washington means more fiscal stimulus, but partisanship and narrow majorities will likely constrain policy.
• We expect constant Fed asset purchases through 2021 before a gradual taper in 2022.
• The Fed will likely stay at the ELB at least through Q1 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.
• 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 along with both upside and downside risk around fiscal policy.

Europe

• As lokdowns are lifted the recovery in euro area GDP should strengthen, particularly as we head into the second half of 2021.
• Base effects, policy and weight changes, and global price pressures set to raise European inflation well-above target by year-end.
• We expect ECB PEPP tapering from September and ultimately, as the program finishes, a switch into increased APP buying.
• With mobility rising significantly the risks are for an earlier recovery in UK GDP to pre-pandemic levels than our Q2 2022 view.
• Inflation is accelerating and we have raised our Q4 2021 view to 3.2%. Still, we see inflation falling back to target by end-2022.
• Following another £150bn of QE the BoE should be done with easing. We expect combined QT and rate hikes from early 2023.

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