by Carl R. Tannenbaum, Ryan James Boyle and Vaibhav Tandon, Northern Trust
We expect the second quarter to mark the beginning of a synchronized interval of global growth. Since the start of the year, China has held its momentum, U.S. progress slowed, and the U.K. and eurozone likely fell into lockdown-induced recessions. As vaccination progresses, we expect most of the world to join the growth parade. Already, measures like purchasing managers indices (PMIs) are showing strong recovery.
Yet the global recovery will not be complete until emerging markets return to their former levels of activity, and they are still struggling to contain the virus. Tourist economies are not working at their usual capacity, and markets dependent on oil imports are at the mercy of rising commodity prices. While improvement in advanced economies is welcome, a K-shaped recovery where developing countries are left behind is a risk to the global outlook.
Though there are reasons for optimism that the worst of the outbreak is in the past, COVID-19 remains at large, with new variants emerging. The following is our outlook on how major economies are poised for this year of reopening.
United States
- After registering its deepest economic contraction since the Second World War last year, the U.S. economy is set to post its strongest year of growth in almost four decades. Expanding vaccination programs will allow for fewer public health restrictions and broad-based reopening. For the first time since the outbreak, the economic risks for the U.S. are tilted to the upside. Inflation will rebound, but won’t run out of control.
- The recently passed American Rescue Plan (ARP) will further underpin the recovery. The ARP will not only provide support to households through checks, unemployment insurance and new tax benefits, but will also deliver assistance to businesses and state and local governments. Looking ahead, we expect another $1.5 trillion in infrastructure spending spread over several years, which will potentially be paid for by tax increases. It is too early to gauge the economic impact of this package.
Eurozone
- Amid a widespread return to lockdown measures, none of the euro area’s member states is thriving. Though the bloc is poised to come out of recession in the second quarter, its growth will start in a sluggish manner. Vaccination efforts have encountered many temporary setbacks, but these will not be permanent impairments. The tourism sector has been deeply damaged by travel restrictions, but while international traffic is diminished, the sector will benefit as more residents of the common currency zone resume traveling in the second half of the year.
- Temporary support measures like worksharing have helped eurozone residents weather the downturn. Unemployment may rise as these programs expire. However, business investment and exports are poised for growth in the global rebound, which will help to put more people back to work at a critical juncture.
United Kingdom
- By contrast with those of most European nations, lockdowns in the U.K. are ending and did not weigh on economic outcomes as severely. The government extended its COVID-19 support programs and has modified the tax code to encourage firms to bring forward investment. These accommodations will help blunt the effect of the expiration of Britain’s furlough program in September, which may raise unemployment marginally. The U.K.’s first-doses-first vaccination strategy has helped cover a large share of the population. Already this week, non-essential retail and outdoor hospitality businesses have reopened.
- Brexit has attracted less attention this year but is far from a settled matter. From candy eggs to financial services, trade between the U.K. and the rest of the world remains uncertain. The stress has become tangible, with Brexit a contributing factor to civil unrest in Northern Ireland, but we do not expect the uncertainty to weigh further on growth.
Japan
- The Japanese economy remains mired in a long malaise. Even good news has been disappointing: Tokyo will host the postponed 2020 Olympics this year, but with limited attendance; this will, in turn, limit the economic benefits that usually accrue to the host country. The nation has done a good job of managing COVID, with cases increasing only mildly this year.
- On the back of rising global yields, the Bank of Japan unveiled the results of its three-month monetary policy review. It will maintain a marginally wider 0.25% range (0.20% previously) around its 0% 10-year government bond yield target, and it will have more leeway to purchase ETFs and REIT assets. Though only incremental changes, these actions show the central bank’s commitment to continued accommodation.
China
- China has been the pacesetter of COVID-19: First with an outbreak, first to recover, and now, first to experience outsized base effects of economic measurements. Business activity is posting strong year-over-year readings when compared against an interval of no activity.
- Even in recovery, domestic demand had been sluggish. That may change in the year ahead as Chinese residents gain more freedom to travel, supporting continued growth. The recovery had been led by strong export demand, which will pivot away from COVID-dependent products like personal protective equipment and household electronics.
