PERSPECTIVE3-5 min to read

Forecast update: will doves cry?



Keith Wade
Chief Economist & Strategist

The Democrat sweep and President Biden's announcement of a $1.9 trillion stimulus bill has led us to upgrade our forecast for US GDP growth with a knock-on effect to the rest of the world. We now expect US GDP to increase 4.7% this year and 4.9% next, an upgrade of just over 1 percentage point for both periods. The rest of the world benefits through stronger trade and the impact is most noticeable in our 2022 global growth forecasts which are raised from 4.1% to 4.6% as the world economy normalises.

For 2021, stronger US fiscal policy helps, but at the global level the gains are largely offset by a significant downgrade to our Eurozone growth forecast from 5% to 3.5% as a result of an extended lockdown and a slow vaccine roll-out. Meanwhile, despite also experiencing an extended lockdown, UK growth is upgraded slightly to 5.3% assisted by a successful vaccine roll-out. Japan and the emerging markets are also upgraded, but the net result is that our global growth forecast is only marginally stronger for 2021 at 5.3%.

Alongside higher growth comes increased inflation, largely driven by higher oil and commodity prices. We now expect global consumer price inflation to rise 2.6% this year (previous forecast 2.2%) before easing back to 2.4% in 2022. Given current concerns, the moderation next year is critical for policy and financial markets. Overall, the forecast moves in a more reflationary direction with stronger growth and higher inflation than in our last forecast in November.

A new inflationary era?

Concerns are increasing that we are now entering a new inflationary era and we do expect headline consumer price indices to pick-up sharply in coming months as powerful base effects feed through.

We are expecting the headline US CPI inflation to rise to 3.5% in Q2 before falling back as the base effect washes through. Unless one-off price shocks feed through into wages and a broader rise in costs, the impact on inflation will be temporary.

Our view is that the economy has spare capacity and can absorb the increase in demand without causing a second round of price increases. Inflation tends to decline after recessions and during recoveries as firms get back to work and use the slack created by the downturn to raise output. Productivity strengthens and unit labour costs fall allowing companies to keep prices competitive.

As a consequence, we see US and world inflation falling back later on in 2021 and into 2022. The time for a more sustained pick-up in inflation will come in the second half of next year when we estimate that the output gap will have closed in the US and economic slack will have been largely used up. Although there are pressures on prices in specific sectors at present it is too early in the cycle to see inflation taking off.

Fed policy

The focus on inflation is understandable as it could undermine one of the key supports for the market: loose monetary policy. However, we have to remember we are dealing with a new policy framework where there is scope for inflation to run above 2% for a period.

Average inflation targeting is designed to avoid the persistent undershoot of core inflation seen over the past decade. There is also the requirement to reach maximum employment. There is a strong desire to see the benefits of economic growth spread more widely to low paid and minority workers. Judging by the disproportionate impact of the pandemic on lower paid workers where employment rates are down by a fifth, there is much to be done before maximum employment is reached.

On this basis we do not see the Fed raising rates during the forecast period and probably not before end-2023. We do expect a gradual scaling back of QE before then with the purchase of bonds being reduced from its $120billion/month rate in Q2 next year.

Important Information

The contents of this document may not be reproduced or distributed in any manner without prior permission.

This document is intended to be for information purposes only and it is not intended as promotional material in any respect nor is it to be construed as any solicitation and offering to buy or sell any investment products. The views and opinions contained herein are those of the author(s), and do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The material is not intended to provide, and should not be relied on for investment advice or recommendation. Any security(ies) mentioned above is for illustrative purpose only, not a recommendation to invest or divest. Opinions stated are valid as of the date of this document and are subject to change without notice. Information herein and information from third party are believed to be reliable, but Schroder Investment Management (Hong Kong) Limited does not warrant its completeness or accuracy.

Investment involves risks. Past performance and any forecasts are not necessarily a guide to future or likely performance. You should remember that the value of investments can go down as well as up and is not guaranteed. You may not get back the full amount invested. Derivatives carry a high degree of risk. Exchange rate changes may cause the value of the overseas investments to rise or fall. If investment returns are not denominated in HKD/USD, US/HK dollar-based investors are exposed to exchange rate fluctuations. Please refer to the relevant offering document including the risk factors for further details.

This material has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited.


Keith Wade
Chief Economist & Strategist


Economic views
Keith Wade
Follow us

Contact Us

Level 33, Two Pacific Place, 88 Queensway, Hong Kong

(852) 2521 1633

Online enquiry: Please complete the web form below and we will reply as soon as possible.

Contact us

The investments mentioned in this website may not be suitable to all investors. The information contained in this website is provided for reference only and does not constitute any investment advice. Investors are advised to seek independent advice before making any investment decision.

Investment involves risk. Past performance is not indicative of future performance. You should remember that the value of investments can go down as well as up and is not guaranteed. You may not get back the full amount invested. Please refer to the relevant offering document including the risk factors.

This website is intended for Hong Kong residents only. Non-Hong Kong residents are responsible for observing all applicable laws and regulations of their relevant jurisdictions before proceeding to access the information contained herein. Schroder Investment Management (Hong Kong) Limited is regulated by the SFC. The website (excluding Schroder Provident Plan related pages) has not been reviewed by the SFC.

The website is issued by Schroder Investment Management (Hong Kong) Limited.