Global Macro Outlook - Fourth Quarter 2021

What You Need to Know

Global risk sentiment has shifted from optimistic to sober, as more uncertainty clouds the growth/inflation mix and monetary policy. Inflation has lingered much longer than expected, and global central bank responses may vary depending on their tolerance for it. Overall, we see global GDP up 6% for 2021, but some slowing next year.

Key Forecast Trends

The skew of risks around global growth has shifted markedly in recent months: from widespread optimism and upside risks to a more sober assessment of the outlook.

China’s property market, the US debt ceiling and soaring energy prices in Europe all cloud the outlook. We’re also concerned that supply-side dislocations stemming from COVID-19 could be more pervasive and persistent than expected.

So, while our numbers haven’t changed very much—we expect the global economy to grow by 5.9% this year before slowing to 4.2% in 2022—this stability masks an important change in the narrative.

Of particular concern to us is the specter of a more challenging growth/inflation mix and a less certain outlook for monetary policy—one in which the only choices available to central banks are difficult ones.

For now, we share the view that inflation is likely to fall back next year. But upward pressure on prices has already been less transitory than expected, perhaps hinting at a more fundamental shift in inflation dynamics.

How central banks respond will depend on their tolerance for higher inflation and the extent to which inflation expectations are well anchored. That’s likely to mean greater dispersion—some smaller central banks have already tightened.

But the key focus is the US Federal Reserve. As things stand, we don’t expect a US rate hike until 2023. But rapid tapering would, in theory at least, leave the door open for an earlier move—something else for markets to fret about.

Forecast Overview

Key Assumptions

COVID-19: fading as a cyclical driver but could inhibit consumer behavior and weigh on growth for some time to come
Fiscal policy: still expansionary but scope for additional support now fading
Monetary policy: should remain highly accommodative, even as central banks start to reduce bond purchases; rate hikes may soon move onto the horizon
Secular backdrop: headwinds to be exacerbated by COVID-19; populism and climate policies to remain key drivers

Central Narrative

Global growth: to slow but set to remain above the precrisis trend: post-lockdown momentum and highly supportive policy mix
Inflation: likely to fall back, but significant risk that current price pressures prove more pervasive and persistent than expected
Yields: gradual increase likely as economies normalize; central banks will want to avoid a disruptive increase
USD: broadly stable against EUR and JPY with modest upside bias; global outlook now less supportive for growth-sensitive currencies

Key Upside Risks

Monetary stimulus more effective than anticipated—could housing be the channel?
Households spend more of their accumulated savings than expected

Key Downside Risks

Deteriorating growth/inflation mix forces central banks to tighten policy even as growth slows
Policy error pushes Chinese property market into hard landing
COVID-19 variants

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