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Economics Commentary

Global Macro Outlook - December 2020

09 December 2020
2 min read

What You Need to Know

With the imminent rollout of COVID-19 vaccines, we believe some version of global economic “normality” may soon return. Approaching 2021, the near-term outlook is brightened. Although we expect a difficult winter, global growth will likely accelerate as the new year progresses.

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Key Forecast Trends

  • The imminent rollout of COVID-19 vaccines has made it more likely that economic life will soon return to some version of “normality.” After a difficult winter, we expect global growth to pick up quite strongly next year.
  • We caution against thinking this marks a durable improvement in the longer-term outlook. The global economy faced structural headwinds prior to COVID-19, and the intervention of a global pandemic is unlikely to have improved things.
  • Still, the near-term outlook has brightened. The question now is whether stronger growth will lead to a more broad-based reflation in consumer prices and bond yields.
  • The pieces are finally falling into place for the shift to a higher inflationary regime. But with the US dragging its heels on fiscal policy, output gaps widening and inflation expectations dormant, it’s hard to see this happening in 2021.
  • The main aim of monetary policy in recent months has been to facilitate fiscal policy by keeping bond yields low. This new regime will be tested as growth recovers.
  • Yields are unlikely to rise much in Europe or Japan. But the US market has not yet internalized the possibility that current yield levels might be “normal,” making the outlook for US yields less certain.
  • With the US Federal Reserve (the Fed) intent on driving inflation and inflation expectations higher, it is unlikely to react to stronger growth the way it has in the past. That doesn’t mean yields won't rise at all, but a return to pre-crisis trading ranges is unlikely.

Forecast Overview

Key Assumptions

  • COVID-19: resurgent virus likely to weigh on growth over the near term then fade as a cyclical factor
  • Economy: some disruption likely due to virus resurgence and/or as emergency support is gradually wound down
  • Fiscal policy: fiscal stimulus to provide sustained policy support throughout the recovery phase
  • Monetary policy: central banks to keep yield curves anchored to facilitate fiscal stimulus
  • US election: non-disruptive result

Central Forecast

  • Global growth: after strong post-lockdown gains, growth likely to turn patchy in 4Q/1Q
  • US/Europe: a more modest pace of expansion in the US and small contraction in Europe look likely
  • China: sustained recovery helped by ongoing policy support
  • Fed: rates to remain at zero for the foreseeable future; QE to continue
  • ECB: further increase in bond purchases likely around year end; rate cut still possible

Upside Risks

  • Game-changing medical innovation
  • Return of multilateralism

Downside Risks

  • Virus spread
  • US bond yields
  • Accidental/premature austerity

Core Views

  • Yields to stay near/below zero
  • Stronger euro vs. the US dollar
  • Favor hard-currency EM debt

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