Second quarter 2021 global macroeconomic outlook

August 2021

After a lock-down of the global economy to slow the spread of the COVID-19 pandemic; the advent of vaccines has led the IMF to materially upgrade its economic forecasts for 2021.

  • The IMF forecasts final global GDP to come in at 6.0% in 2021 and 4.9% in 2022; well above the past ten-year average of 2.9%.
  • In advanced economies, GDP is projected to rise by 5.6% in 2021 and 4.4% in 2022, as economies re-open and vaccination progress is made. The US is expected to fare better this year, with a forecasted strong economic recovery of 7.0%. The euro-area is expected to grow by 4.6% in 2021 and 4.3% in 2022, while the Japanese economy is expected to grow 2.8% in 2021 and 3.0% in 2022.
  • Growth projections have also been revised higher by the IMF for emerging markets, with 2021 at 6.3% and 5.2% in 2022. China is expected to see significant growth in 2021 of 8.1% and 5.7% in 2022.
  • Globally, inflation is projected to be slightly above long-term averages in 2021, consistent with rising economic activity. Inflation in most developed economies is forecasted to be below 2.0%, however, strong growth in the US is expected to be accompanied with inflation in 2021 and 2022 higher than longer-term averages.

In an effort to stem the expected significant declines in economic activity, fiscal and monetary authorities across the globe responded with immediate and aggressive stimulus measures.

  • US fiscal and monetary responses have been unprecedented. Fiscal authorities released over $3.5 trillion in directed stimulus in 2020. The Biden administration immediately implemented another COVID-19 response of $1.9 trillion in additional spending and support for unemployment and vaccination efforts. The new administration has an ambitious spending plan that they are proposing to be partially funded by comprehensive corporate tax reforms and income tax changes; the proposals are the Infrastructure Investment & Jobs Act (~$1.0T)1, and a yet unnamed social infrastructure budget outline (~$3.5T) to address childcare, climate change, and other social goals. The scale of these proposals and reforms may undergo significant legislative changes. Monetary policymakers are actively considering the removal of accommodative measures, including the termination of the quantitative easing program, and the raising of policy rates in early 2023 should conditions continue to improve.
  • While not all countries have sufficient space to launch ambitious fiscal countercyclical spending programs like the US, the monetary policy in advanced economies remains exceptionally accommodative as central banks engage in targeted quantitative easing and maintaining near-zero bound policy interest rates. A substantial portion of European and Japanese sovereign debt continues to offer lower yields than US debt, with many tenors pricing in negative nominal and real yields.
  • Substantial upward growth revisions for the US economy and rising inflation expectations have put pressure on emerging market monetary policy makers who must navigate between supporting domestic economic recoveries and risking currency depreciation as US interest rates rise. In some emerging market economies, policy makers have been raising policy rates to combat regional inflationary risks.

We acknowledge the wide breadth of new concerns presented by the pandemic, and among those we are considering are the following: 1) Economies may not achieve herd (vaccination) immunity, resulting in weaker growth and potentially a need to re-deploy lockdown policies. 2) Consumers permanently, or for an extended period, changing economic behavior; 3) Persistently high unemployment due to a significant number of companies not surviving the economic downturn and childcare and school openings uncertainty, 4) Virus-related fears and supply chain disruptions affecting the future of globalization, and 5) The potential for policy errors including the risk of removing support measures too quickly or maintaining them too long.