Economic and Strategy Viewpoint - March 2021

Forecast update: will doves cry?

• We have upgraded our forecast for global growth over the next two years with the main change being seen in 2022 when economies will have more fully normalised and fiscal and monetary policy remains loose. For this year, upgrades to the US, UK, Japan and some emerging economies are largely offset by a hefty downgrade to the eurozone to leave our global growth forecast little changed.
• Inflation remains a persistent worry for investors, but we continue to see the forthcoming pick up as temporary: driven by commodity price base effects with little prospect of the second round developments which would create a problem for the US Federal Reserve (Fed) and other central banks. Inflation will rise more persistently when the output gap closes in the second half of 2022.
• We believe that there is sufficient slack in the world economy to absorb a strong initial rebound in global demand as economies re-open. Nonetheless a dovish Fed will need a cool head in coming months as inflation rises and it communicates its new policy framework to investors. An inflation-led market sell-off is a risk scenario.
• Our other scenarios include a more reflationary outcome with less scarring and stronger fiscal multipliers and a return of trade wars with stagflationary consequences. Meanwhile, the ‘vaccine fails’ and ‘China hard landing’ make up our deflationary risks.

Please find our full update below.