Global Macro Outlook - February 2021

Key Forecast Trends

Global growth is set to accelerate strongly once advanced economies lift COVID-19 restrictions, spurred on by highly expansionary policies and a partial drawdown of forced savings. But there are key differences between countries.

Fresh stimulus should push the level of US output above the pre-crisis trend in the second half of 2021. Depending on the extent of any supply-side scarring from COVID-19, this could put upward pressure on inflation.

The outlook for Europe is more muted, partly due to measures to contain COVID-19 and slow vaccine rollout. The level of output is unlikely to regain pre-pandemic levels until the middle of 2022.

In China, output is back at pre-COVID-19 levels and the priority now is economic and social stability. We expect China to exert a stabilizing influence on global growth.

Base effects should push headline inflation higher in coming months. Thereafter, the immediate path forward will depend on the complex interplay between the pace of the demand recovery and supply-side scarring. Upside risks are highest in the US.

Strong growth and rising inflation point to higher bond yields. But central bank policy is still focused on suppressing yields and driving inflation higher. We expect yields to remain largely anchored in Europe and Japan, with some upside likely in the US.

The return of US exceptionalism points to a stronger dollar against the euro and the yen, but strong global growth should support growth-sensitive currencies.

Forecast Overview

Key Assumptions

Virus: likely to weigh on growth in 1Q, then fade as a cyclical factor
Vaccine: effective vaccines an important part of this process, but won’t allow an immediate return to business as usual
Fiscal policy: should remain highly supportive at the global level; US now leading the way
Monetary policy: central banks to keep policy rates anchored and bond yields low
Secular backdrop: headwinds to be exacerbated by COVID-19

Central Forecast

Global growth: strong rebound likely after soft first quarter
Reflation: fiscal stimulus to push US output above precrisis trend; more gradual recovery elsewhere
Inflation: regime shift underway, 2021 outlook remains nuanced but upside risks rising
Yields: joined at the hip to be tested as growth recovers; yield increase likely to be modest
USD: higher against EUR and JPY; brightening backdrop for growth-sensitive currencies

Key Risks

Virus mutations and/or vaccine failure lead to a materially worse growth path, pushing recovery further back into 2022
The US Federal Reserve (Fed) fails to control the reflation narrative; bond yields rise sharply
Are we missing historical warning signs of inflation: big increase in demand when supply is impaired; fastest broad money growth since the 1980s; growing acceptance of money-financed fiscal stimulus?

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