The emergence of several highly contagious variants of Covid-19 has meant increased lock-down restrictions in many major economies, and will send some into double-dip recessions. But unified Democratic control of the US Presidency and Congress implies further large-scale fiscal stimulus, which will boost growth.
Taking account of both developments, we have revised our 2021 GDP forecasts for almost everywhere outside the US down, but our US forecasts for 2021 and our global forecasts for 2022 up.
There have been several important developments since our November 2020 forecast round, which mean we are issuing a mid-quarter interim forecast update.
Manufacturing sector resilience
Data at the end of last year showed remarkable resilience in the manufacturing sector, which is less affected by renewed lock-downs relative to the spring. Admittedly, lengthening supplier delivery times show up as a positive in PMI calculations which gives a false impression of strength, while retail sales and mobility measures were weakening in the final months of 2020. But it means we have revised up our 2020 GDP forecasts (pending Q4 data), particularly for the UK, Eurozone and Brazil.
Covid-19: new strains
More infectious strains of coronavirus have been identified in the UK, South Africa and Brazil. Alongside household mixing over the holidays, this is driving sharp increases in Covid cases and deaths in several economies, and has necessitated tighter lock-downs in many more. In Europe, school and hospitality closures are particularly economically damaging, and we now forecast that the UK and most Eurozone economies will contract in both Q4 2020 and Q1 2021. In Japan, the state of emergency has spread beyond Tokyo to more prefectures, while the (postponed) 2021 Olympics are increasingly unlikely to take place. All this could take Japanese GDP growth negative in the first quarter.
Chart 1: More infectious strains of coronavirus have meant increased lockdown stringency (Oxford Stringency Index)
ASIRI (as of Q1, 2021)
Vaccine rollout under way
Vaccine rollout has begun. The early pace of rollout has fallen short of government promises in most economies; take-up willingness is worryingly low in much of continental Europe; while emerging markets other than China, Russia and India are yet to secure meaningful quantities of vaccine. The US, UK and Israel are exceptions, where the initial rollout has been rapid, although still plagued by hurdles. We still expect vaccines to allow a meaningful easing in restrictions and a sharp economic rebound from Q2 2021 onwards, but easing may have to be more cautious with more contagious variants of coronavirus in circulation.
US election results
Democrat victories in the two Georgia run-off elections for the Senate mean unified control of the US Presidency and Congress. While the razor-thin majority in the Senate will constrain some of President Biden’s legislative agenda, our US fiscal policy expectations have nonetheless shifted from a sharp contraction to additional stimulus. We are factoring in at least an extra $1trn Covid relief package in the short term (on top of the $900bn bill passed last year), and a $500bn-1trn broader fiscal package over subsequent years. The effect of all this is to raise the level of US GDP by end-2022 some 3% relative to our November forecasts.
Bringing all this together, our 2021 global growth forecast of 5.1% is above-trend but below-consensus. Our forecasts reflect a larger near-term hit from renewed lockdowns, which the consensus is yet to properly incorporate. By contrast, our 2022 global growth forecast of 4.8% is both above-trend and above-consensus, as re-opening continues to drive strong global economic activity. We continue to think that the Covid crisis will inflict lasting damage to the level of global GDP relative to the pre-crisis trend path. That damage will be largest in Europe where the economy is heading into a double-dip recession, and smallest in China where the recovery has been rapid albeit is now moderating.
Turning to inflation, both the short- and long-term implications of this crisis are likely to be net disinflationary. Admittedly, over the next few months, energy base effects – as well as idiosyncratic drivers such as an expiring VAT cut in Germany and the suspension of travel subsidies in Japan – are going to push headline inflation much higher. But this will be temporary and short-lived. The global economy has enormous spare capacity which will take time to erode; inflation expectations are low and anchored; and central banks have plenty of room to contain inflation if needed. And while there has been much speculation about ‘policy regime change’ driving inflation higher, the timidity of central bank framework reviews and reactivity of fiscal policy are not pointing in that direction.
All this means that monetary policy should remain broadly accommodative, albeit there is little in the way of additional big-bang stimulus factored into our forecasts. The Fed, ECB, Bank of Japan and Bank of England continue to expand the size of their balance sheets through QE. The ECB may yet increase its monthly asset purchases further amid chronically low inflation, but we think the Fed will taper purchases during 2022 as fiscal stimulus drives demand higher and unemployment lower. Meanwhile, the Chinese credit impulse and broader financial conditions are set to move from being very loose to broadly neutral, amid a renewed focus on financial stability concerns.
Finally, there are very wide confidence intervals around our central forecasts. Indeed, in this interim forecast round, we have lowered the probability weighting of our central case, and increased the chance of alternative scenarios, while keeping a small positive skew to the outlook. On the upside, there are scenarios in which vaccine rollout boosts activity by more than we anticipate and limits long-term economic scarring, especially if governments decide to re-open economies as soon as the most vulnerable share of the population have received inoculations. But on the downside, if the faster-spreading variants of the virus become embedded in the likes of the US, Brazil or India, double-dip recessions will not be confined to Europe. And in extremis, virus mutations could render the current crop of vaccines dramatically less effective, meaning endemic virus spread and rolling lockdowns until such time as new vaccines can be developed
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