Macro forecasts: charts and commentary

US

The US economy expanded rapidly in 2021H1, as the successful roll-out of vaccines allowed those in front-line roles to return to work as the economy continued to re-open. 

We expect the peak growth impact of re-opening to be in 2021Q2, with growth easing back over the subsequent quarters, albeit still above trend through to the end of 2022. 

The fiscal support packages in late 2020 and early 2021 have supported household income and should continue to drive strong consumption growth through this year. With strong demand and some capacity constraints, businesses are also expected to increase their investment in capital goods and inventories.

 A further large fiscal package – perhaps in the range of $2-3 trillion – is expected later this year to boost public infrastructure and support lower-income households through a range of measures. Supply-chain bottlenecks have pushed inflation up in some industries this year, and that may continue through to the end of 2021.

 Underlying inflationary pressures are also likely to rise somewhat, as the labour market tightens, and inflation expectations rise. In our central case, we expect the Fed to accommodate the increase in inflation for a period, with a first rate hike in 2023. However, with the risks to growth and inflation tilted to the upside, the Fed may need to move earlier if those were to materialise.

Figure 1. US

Euro zone

The outlook for the euro zone is brighter than three months ago. At that time, the region was experiencing an alarming new wave of case numbers and had made an unimpressive start to vaccination programmes. 

Even so, we had anticipated that the impact of lockdowns would be much less than previously and that a rebound would materialise in Q2. Both judgements proved correct. 

Moreover, the euro zone has since reversed infection trends convincingly and improved greatly on its vaccination efforts. As a result, we have upgraded our growth projections for all of the major European nations and the region overall. GDP fell by “only” 0.3 per cent in the first quarter, despite comprehensive lockdowns. It is now expected to grow by between 2 per cent and 3 per cent in both Q2 and Q3, before slowing at the turn of the year. Inflation is currently close to target and is expected to move higher by the end of 2021. 

The ECB – along with fiscal authorities everywhere – is set to remain in supportive mode this year and next, even if the debate switches now to when to lift the foot off the policy accelerator.

Figure 2. Euro zone

UK

As feared, UK GDP fell again in the first quarter as restrictions on activity were reimposed in the light of the vicious new wave of virus infections in Q4 and Q1. 

As elsewhere, the hit from lockdown measures was nothing like as damaging as it was a year ago, another illustration that firms and individuals have adapted to COVID conditions successfully after the initial shock. Output fell by 1.6 per cent in the first three months of the year. 

But the UK may well see the strongest rebound in the G7 in Q2 as the economy re-opened – growth of 5 per cent or more in the quarter is to be expected. Although another wave of infections is currently underway, led by the Delta variant, with the most vulnerable groups fully vaccinated there have been minimal repercussions so far in terms of hospitalisations and deaths. As long as this continues, re-opening should continue and there will be no need for renewed restrictions. 

Inflation has pushed higher and may rise further from here but should be falling next year. The Bank of England, like other central banks, has signalled it believes the impulse will be transitory and that they do not need to respond to it.

Figure 3. UK

China

As opposed to direct funding for consumers and the unemployed, as most DM and many EM countries did, China provided credit-fueled stimulus to banks and firms, with infrastructure and property supporting the economy. 

Exports continue to boom (+28 per cent y/y in May, with imports continuing to rise even faster, at a sizzling +51 per cent y/y) and are continuing to benefit from COVID restrictions elsewhere. 

There are clear signs now that policymakers are successfully containing leverage, with credit growth slowing and aggregate measures showing a negative impulse. This is feeding through to activity, with industrial production slowing from an 8 per cent annual pace to around 6.5 per cent between Q1 and Q2. The hope is that this can be slowed while retail sales and consumption pick up as the economy normalises, converging to a 5.5-6.0 per cent real growth rate. 

Inflation is a problem, driven by commodities that lifted PPI to 9 per cent; CPI is lower, at 1.3 per cent, but is flattered by falling pork prices. Authorities have taken actions to ease speculation and price spikes, but are unlikely to hike rates; the currency has appreciated already but is likely to be kept stable. 

The Sino-US relationship remains fraught, but the focus has shifted from trade to human rights, technology and military influence.

Figure 4. China

Japan

We still expect Japan to attain pre-crisis GDP levels by the end of 2021, but the beginning of the year has disappointed our raised expectations. 

Exports are just below where they were in Q4 2019 and are growing rapidly in response to global demand. Industrial production is already above pre-pandemic levels, along with consumption of durable goods. 

Three supplementary budgets have kept fiscal spending robust. As restrictions ebb in Q2/Q3, the Tokyo Olympics should help activity, but Japanese consumers have shown an unwillingness to spend, and continue to accumulate large savings. 

Overall consumption remains only partially recovered, with services spending nearly 20 per cent lower than pre-COVID. Because of this weak demand, and as Japan remains a “pursued economy”, with better investment returns in most sectors available externally, capital expenditure will remain weak. 

The BoJ is monetising fiscal expenditure and continues to fail to achieve much more than zero inflation. Political scandals are an ongoing hurdle, but PM Suga should at some point – post-Olympics, and after slow vaccinations eventually catch up to other rich countries – seek a fresh mandate in snap elections, which could remove uncertainty and help both domestic investment and FDI.

Figure 5. Japan

Canada

Like its larger US neighbour, Canada saw growth slow rather than turn negative (as in most of Europe) in the first three months of 2021. 

But as case numbers fell back again and the economy re-opened, growth has rebounded strongly in Q2 and momentum looks to be carrying through to Q3 as well. The Canadian economy could grow by as much as 7 per cent this year. 

As elsewhere, growth has also become more balanced, with service activities reviving robustly. Canada has also benefited from the twin kickers of successively higher oil prices and the global revival in trade flows, including commodities in particular. 

Inflation has shifted higher too, although not to the same extent as in the US. The Bank of Canada has already signalled a further taper of its asset purchases later this summer and may stop entirely by the end of the year. Policy rate increases still look unlikely until much later next year, but some hawkish comment has led markets to price in between two and three hikes by the end of 2022.

Figure 6. Canada