Key Forecast Trends

• The global economy bounced back strongly in the third quarter but is now entering a more difficult phase as a resurgence in COVID-19 infections and gradual withdrawal of emergency policy support limit the pace of the rebound.
• That’s likely to mean a more modest pace of expansion in the US and a temporary contraction in Europe. In China, where output is back above pre-crisis levels, a sustained recovery looks likely.
• We continue to think that damage from COVID-19 will linger for a few months more and that additional policy support will be necessary. With monetary policy nearing the end of the road, fiscal policy is the key variable to watch.
• If fiscal policy plays its part, the recovery should pick up pace again in the second quarter of 2021, barring a significant deterioration in the public health situation that would lead to renewed economic restrictions.
• Central banks continue to grapple with persistently low inflation, made worse by the impact of COVID-19. The US Federal Reserve (Fed) has already switched to an inflation make-up strategy and the ECB may be mulling a similar move.
• Warm words won’t push inflation higher. But, combined with large-scale bond purchases, they can ensure that interest rates remain at ultralow levels for the foreseeable future and thus facilitate fiscal expansion. For now, that’s the main role for central banks.