Resilient markets make for strong outlooks

As we look across the global economy, we see growing evidence that developed economies are proving more resilient to lockdown restrictions in 2021 than they did in early 2020. Current forms of lockdown are also doing less damage than many observers feared.

When looking at the impact of lockdowns on global markets, we can look at our own GDP as evidence that economies have been resilient. In Q4 2020, the UK’s GDP print was positive, despite tighter restrictions. This resilience, first seen in Asian economies, is now evident in developed economies, eroding certain downside risks we had foreseen on the horizon.

The US economy wobbled at the end of 2020. Consumer spending edged down in November and December and employment declined in the final four weeks of the year. Nonetheless, fourth quarter GDP climbed a solid 4 per cent quarter-over-quarter. The drop in employment, meanwhile, mostly owed to low-paying restaurant jobs—higher-wage posts actually rose. In turn, the rising trend in household labour income remained in place.

That favourable backdrop for households interacted with a new round of stimulus checks at the start of 2021 to produce a surge in retail sales in January. On the whole, it appears that consumer spending reaccelerated in early 2021, and we expect ongoing strength in household demand to support above-trend US growth for the next few quarters.

Vaccine rollouts picking up pace

Rapid and widespread dissemination of vaccines is setting the foundation for strong growth momentum once economies start reopening—another unambiguously positive development.

Vaccine rollouts have been particularly brisk across the US and UK. Latest US data indicate that if the current pace of dose administration persists, close to 75 per cent of the US population aged 16 and older could be fully vaccinated by early September. What’s more, that pace could accelerate in the coming months.

Experts now project that 16 per cent of the global population could be vaccinated by the end of 2021. Critically, the projected rollout is likely to be broad-based across geographies. If it is, that would be a remarkable achievement against a deadly virus that only emerged about a year ago.

We note other economic tailwinds heading into the second quarter. The US Congress, working with the new Biden administration, is now preparing another round of fiscal stimulus that will likely be approved within the next month. Although it will fall short of the White House’s original proposal, it seems set to top $1trn, or more than 4 per cent of GDP.

We do not expect the stimulus to deliver an equivalently sized boost to the economy. Still, we are upgrading US growth forecast for this year by about a percentage point and now think GDP will climb at roughly a 6 per cent pace in 2021.

The economy remains mostly in early-cycle mode. Although it is progressing quickly through that phase of the expansion, we do not see significant near-term probability of a recession—outside of the somewhat unquantifiable remaining threats related to the virus.

Nor do we envision a material pullback in private sector spending. Growth could plausibly exceed our projections in two ways.

First, fiscal stimulus could prove more effective (that is, display higher multipliers) than we think. Second, while the saving rate will likely drift lower over time, we do not expect households to spend much of the stockpile of ‘excess savings’ they have accumulated over the past year. If they use the money to bring their balance sheets back toward pre-shock levels, the economy could run considerably hotter.

Looking ahead, we expect the accommodative policy backdrop to support asset markets. At their March meeting, Federal Reserve (Fed) policymakers are set to revise upward their own near-term growth outlook, following their December forecast of a 4.2 per cent GDP gain in 2021. That revision, though, seems unlikely to trigger any change in policy settings or forward guidance.

Moreover, the Fed no longer places much weight on its own inflation forecasts and instead prioritises realised inflation, which remains moderate.

Finally, last year’s adoption of an average inflation targeting framework implies greater willingness to let price increases move higher over time, partly to head off the possibility that the pandemic shock, coming after a decade of below-target outcomes, pushes down inflation expectations and makes the eventual achievement of the Fed’s goal that much harder.

We maintain a pro-risk stance with a positive outlook on the global economy in 2021. The recent fiscal stimulus measures reinforce our view that the US economy will grow, if anything, significantly above trend this year. Better vaccine rollouts and strengthening economic resilience amid restrictions have come together to reduce negative tail risks and are simultaneously interacting to introduce upside risks to our outlook.