Macro forecasts: charts and commentary

US

In our 2021 Outlook we expected an above-consensus, rapid growth recovery in the United States. 

We have seen further positive news over the past three months, with stronger-than-anticipated activity during 2020 Q4 and the start of 2021 Q1, rapid vaccine roll-out and, most importantly, the passage of another very large fiscal support package (worth nearly ten per cent of GDP). 

This combination of factors has led us to revise up the central estimate of our growth expectations for 2021 to 6.5 per cent, with risks tilted to the upside. In particular, we continue to make the conservative assumption that only around 15 per cent of household excess savings are drawn down in 2021, with the risk that this could be materially higher. 

We have also revised our inflation outlook modestly higher, reflecting a more rapid elimination of spare capacity and a more positive outlook for the housing market. Despite these changes, we do not expect the Federal Reserve to raise interest rates before 2023.

Figure 1. US

Euro zone

Despite renewed lockdown measures since Christmas, the big three euro zone nations are currently experiencing a worrying third wave of COVID-19 infections. This is being countered by extensions to existing containment measures – and more may yet be needed – which will affect the timing and extent of the economic recovery that is still expected this year. 

Some encouragement can be taken from the experience in Q4 when restrictions on activity did not have as large an impact on output and demand as had been feared. Small declines in GDP are anticipated for the first quarter of 2021, but Q2 and beyond should still see a strong rebound as long as economies are able to reopen. 

The other cloud on the horizon for Europe is the unimpressive progress which has been made on vaccination programmes in the region. These have seen a number of organisational setbacks as well as some barely credible official adjudications about the vaccines themselves which may also contribute to a delayed recovery. 

Fiscal and monetary policy will remain supportive and underlying inflation is expected to stay contained.

Figure 2. Euro zone

UK

The renewed national lockdown imposed in early January is likely to result in a small fall in GDP in the first quarter, although fears of something similar in Q4 proved misplaced as the economy showed greater resilience than expected. 

While doubts and uncertainties remain, the UK’s outstanding progress on vaccinations since December – nearly half of the population have now received their first shot – has boosted sentiment and should allow for reopening of the economy as scheduled and usher in a convincing rebound in activity in Q2 and beyond. 

The UK is now set to regain its pre-COVID level of output a year from now and should grow strongly this year and next, as long as control of the virus is maintained. 

One concern for the future is the potentially overzealous plans of the British government to tighten fiscal policy in future years. Their position stands out by comparison to almost everywhere else in the developed world, where more relaxed approaches are being adopted.

Figure 3. UK

China

China’s economy is growing at a six per cent annual pace in 2021, which is expected to lift annual GDP to nearly ten per cent above 2020’s depressed level. 

Low inflation should keep the PBOC stance loose, with a bias to move to neutral if needed to contain leverage or financial speculation. 

The five year plan unveiled at the National People’s Congress indicates continuity, but was disappointing for those looking for more clarity, particularly around climate change goals. The Communist Party leadership will aim to decouple China from its technological and energy dependencies, as determined in the 5th Plenum, and has added food and financial security to these aims. 

Achieving a peak in carbon emissions by 2030 is ambitious, but aggressive investment in low-carbon power generation will continue. The tensions with the new US administration mean that a rapid reversal of tariffs is unlikely, but will depend on positive engagement on areas of common interest – such as climate, North Korea, and COVID-19 – as well as Western actions on human rights, Hong Kong, Taiwan, and Chinese economic and political malfeasance.

Figure 4. China

Japan

Japan should attain pre-crisis GDP levels by the end of 2021, with growth close to three per cent, yet another upgrade compared to the last quarter (and with upside risks). This is driven by public consumption thanks to fiscal spending which will remain supportive of growth, even as the deficit shrinks; private consumption and finally investment will rebound in upcoming quarters, but gradually. 

The state of emergency will enable lockdown restrictions to ebb in Q2, and the Tokyo Olympics will take place but with domestic audiences only in person. 

The BoJ has recently tweaked its intervention policies but the song remains the same: monetizing the fiscal expenditure and not doing anything much about very low inflation, which should remain close to zero. 

“Suganomics” includes administrative reform, regulatory improvements, and digitization, but the relatively new PM is dogged by recent scandals. He may seek a fresh mandate in snap elections, which would be positive in removing uncertainty and helping both domestic investment and FDI.

Figure 5. Japan

Canada

In common with many other economies, Canada enjoyed a far better Q4 than had been feared as case numbers rose steeply and new restrictions were imposed. 

GDP rose by a further 2.3 per cent after the outsized jump (of 8.9 per cent) in Q3 as the economy proved more resilient than expected. Canada is also being helped both by the strong growth (actual and prospective) in the US and by the rebound in the oil price which has boosted the commodity sector. 

Growth is expected to be slightly lower – but still positive – in Q1 this year but should then pick up again in Q2 and Q3. Restrictions were partly lifted in February and further easing is expected, although the recent tick up in case numbers warrants attention. 

As elsewhere, the exact pattern of recovery will be dictated by the path of the virus and by the vaccination programmes currently underway. GDP growth could exceed six per cent this year and while the BoC may consider tapering its asset purchases later this year if the revival pans out as we have suggested, it is in no rush to raise interest rates.

Figure 6. Canada