Global Macro Outlook - Third Quarter 2021

What You Need to Know

A steadily rebounding global economy has created intense supply-demand dislocations, along with new inflation concerns, across advanced markets. We believe inflation will prove transitory, but it could cloud the monetary supply outlook if it’s persistent—with broad implications for financial markets.

Key Forecast Trends

The recovery continues to gather pace. We’ve raised our growth forecasts and expect the global economy to grow by 6.1% this year and 4.3% in 2022. Both forecasts are well above the precrisis trend of around 3.0%.

It’s important to maintain a sense of perspective. While global output is now back to pre-pandemic levels, it’s still 3% lower than it would have been without the hit from COVID-19. This gap should narrow over the coming year, but we doubt that growth will be strong enough to close it altogether.

We’ve made significant upward revisions to our 2021 inflation forecasts to reflect the intensity of demand distortions and supply dislocations associated with COVID-19. We expect advanced-economy inflation to reach 2.4% this year (previously 1.7%), before settling back to 1.9% in 2022 as transitory factors start to fade.

This has become a finely judged call. Should demand growth be stronger, pandemic scarring deeper or supply-chain pressure more persistent than we expect, inflation could easily surprise to the upside. Wage- and price-setting behavior will be key.

Persistently high inflation would muddy the monetary-policy outlook and cast a long shadow over financial markets. As things stand, though, monetary stimulus is likely to be rolled back only very slowly in coming years.

That doesn’t mean a uniform monetary approach. Many central banks, including the Fed, will look to gradually return monetary policy to a more “normal” setting once the crisis fades. Others, like the ECB and BoJ, are in it for the long haul.

Forecast Overview

Key Assumptions

Virus: with vaccination programs reaching critical mass in the US and Europe, COVID-19 is fading as a key global driver
Fiscal policy: to provide ongoing support; little risk of a premature tightening
Monetary policy: some central banks will start to wind down bond purchases over the coming year; rate hikes still a distant prospect
Secular backdrop: headwinds to be exacerbated by COVID-19, but some relief on the trade-war front under new US administration

Central Forecast

Global growth: set to slow over the forecast horizon but should remain above the precrisis trend
Inflation: should ease back next year if current upward pressure proves to be transitory; risks skewed to the upside
Yields: likely to rise somewhat as economies start to normalize, but central banks will want to avoid a rapid increase—especially in the euro area and Japan
USD: range-bound against EUR and JPY; global backdrop still supportive for growth-sensitive currencies

Key Upside Risks

Monetary-policy stimulus more effective than anticipated—could housing be the channel?
Households spend a much bigger proportion of the savings built up

Key Downside Risks

High inflation more persistent than we think, forcing central banks into early tightening
New COVID-19 mutations render vaccines ineffective

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