Global Overview – A rise in virus cases and some setbacks to vaccination programmes have pushed back the recoveries in some countries somewhat, but we still expect strong global growth of over 6% this year. The US will continue to lead the way thanks to its strong policy stimulus while the euro-zone will lag further behind than most expect. Downside risks are rising among the emerging markets, relating partly to struggles to get the virus under control in major economies, including India and Brazil. While China has emerged strongly from the pandemic, growth there will soften as credit is restrained. This mixed outlook has some interesting implications for inflation: we see significant risks of a sustained pick-up in the US but a more modest threat elsewhere.
US – Huge fiscal stimulus and a successful vaccination programme will see the US continue to lead the advanced economies with a 6.5% rise in GDP this year and a 4.0% gain in 2022. Such strength will stoke inflation, but the Fed is unlikely to react for some time as it focuses on its broad full employment goal.
Euro-zone – In contrast to the US, renewed virus cases and setbacks to vaccination programmes have delayed the recovery in the euro-zone and economic activity is unlikely to regain its pre-pandemic level until the second half of next year. While inflation will rise in the near-term, the increase is likely to prove transitory.
Japan – Despite a slow start, the vaccination process is set to take off over the spring allowing restrictions to be removed in H2. GDP should return to pre-virus levels before the end of the year, only a little after the US.
UK – Growth looks set to take off as pandemic-related restrictions are removed and household saving rates normalise from very high levels. The tax hikes and spending cuts which most fear may not need to happen.
China – China’s impressive rebound has already levelled off and, with credit conditions tightening, we suspect that growth will be a bit softer than the consensus assumes this year and next.
India – With soaring infections threatening the recovery, the RBI will be in no hurry to raise interest rates
An excerpt from the Global Economics Chart Book - Capital Economics, issued 23rdApril 2021
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