From a growth perspective, we have revised our global outlook for 2021 slightly higher (global GDP from 5% to 6% 2021E, due to US upward revision in March). While the growth premium is still in favour of EMs, it has been declining marginally as the sharp resurgence in the pandemic across EMs affects mobility, even without triggering significantly broader restrictions. Moving forward, the growth premium is expected to rebalance more in favour of DMs, due to the positive economic momentum expected in the US on the back of the new fiscal package and the prosecution of the massive vaccination campaign. The recovery will remain multispeed, uneven and heterogeneous. While still dominated by base effects, the upward revision to the US outlook in particular is driving the improvement in developed markets, while the Eurozone is still in a tug-of-war between new waves of the virus and vaccination campaigns. EM 2021 GDP forecasts have remained stable. China’s recovery likely continue at a solid pace, with full-year growth of 9-10%. The growth premium vs. the US will narrow.
We are convinced that inflation next year will trend higher and episodically spike mainly on base effects.
The fiscal lever continues to play a pivotal role in supporting the recovery, especially among advanced economies, in a context of already supportive monetary policy. In the US, the approval of an unexpectedly massive $1.9 trillion fiscal package has lifted growth prospects significantly higher for 2021 and early 2022. Moreover, as we write, the recently unveiled American Job Plan (first of a likely two-tranche “Build Back Better” 10-year infrastructure plan) is beginning its legislative process through the US Congress, with the potential of providing a further boost to domestic demand and growth beginning next year. In the Eurozone, a new wave of Covid-19 spreading through countries will force governments to extend fiscal support to sectors affected by new lockdowns, with additional fiscal relaxation until the recovery is more firmly in place.The Eurozone recovery will be deferred, not derailed, by the vulnerabilities and delays of the vaccination campaign. On the one hand, Q4 GDP data have proven some degree of resilience and flexibility of Eurozone economies in adjusting to the “Covid-19 environment”. On the other hand, the extension of lockdown measures into Q1 and part of Q2 will inevitably weigh on activity in the first half of the year. Yet, the vaccine rollout is progressing and, barring any adverse developments on the virusvariants side, a more solid rebound should take place from summer onwards. From 2022, then, the Next Generation EU plan is expected to extend growth momentum, supporting growth above potential for several quarters and particularly in key vulnerable countries, thus providing a virtuous circle supporting the whole Eurozone. Among emerging markets, the policy mix looks more heterogeneous, and March saw the first decisive change in the policy mix and related market expectations since the beginning of the crisis. Early hikers moved because they had cut too low and needed to start removing the extraordinary accommodation now that the extraordinary times are in the rear-view mirror and inflation is printing uncomfortably higher than expected. Other central banks favoured considerations of financial stability or very prudent and forward-thinking monetary policy management while facing FX weakness that is further complicating their risk story. Overall, we remain on the dovish side vs. market expectations, which, in some cases, are particularly hawkish. In Asia, the monetary policy tightening cycle should be the story of early 2022, due to still benign inflation dynamics and resilient external positions.
With growth recovering faster, the annual inflation outlook has been revised higher for DMs, on a combination of higher commodity and energy prices, cost pressures and, in a few countries, stronger domestic demand prospects. Much of the expected rise and overshoot of headline inflation this year will be linked to transitory factors, which will begin to fade in 2022, leaving core inflation dynamics to set the trend. In this respect, while we expect core inflation rates to land in slightly higher than pre-pandemic ranges in 2022, the stabilisation in the medium term at or above the central bank target seems like a US-only story. In fact, as core inflation dynamics are being prominently driven by domestic drivers, the US economy will experience significantly lower labour slack and spare capacity compared to the Eurozone, where convergence to prepandemic levels will be reached much later than in the US.
Among emerging markets, inflation is picking up, while the 2021 picture remains still benign and mostly anchored to the CBs targets on average. Although the acceleration has proven stronger than anticipated, moderating dynamics are expected after the peak (between Q2 and Q3 2021). The main inflation drivers have been food and oil and commodity prices, all magnified by significant currency weakness since early 2021. Countries to watch for any persistence in inflation dynamics: Brazil, Mexico, the Philippines, Russia and India (Core). Turkey is still an idiosyncratic story.
In conclusion, while the recovery is progressing more confidently where the virus remains under firmer control (faster vaccination campaign and contained spread), several countries are currently experiencing a new wave of infections and selective lockdowns, thus confirming that the global economic recovery is increasingly uneven and heterogeneous. Nonetheless, the end of the tunnel is approaching, making global growth prospects from the second half of the year more confidently on a positive tone.
Inflation: the elephant in the room
In 2021, inflation and inflationary expectations are likely to be in the spotlight.
The Inflation Phazer is Amundi’s proprietary tool aiming to identify five inflation regimes, looking back at pricing data since 1960. The analysis is developed by looking at the historical evolution of the most relevant inflation indices in the US economy: Consumer Price Index (CPI), Producer Price Index (PPI), Core Personal Consumption Expenditure (Core PCE), and Unit Labour Costs (ULC) (see table below).
The Inflation Phazer gives each regime a monthly probability (see Chart 3), according to the values expected on each inflation index (see Chart 4).
According to Amundi’s current macro forecasts, there is a 70% to 80% probability through 2023 of US inflation being in the Normal to Inflationary regime.
Conveying our top-down assessment into the Advanced Investment Phazer framework.
We have described all the ingredients of our cycle indicator, the Advanced Investment Phazer, which underpins our medium-term investment views. Within this framework, we bridge our views and expectations on the macro outlook to our convictions and investment strategy.