Global Macroeconomic Outlook

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Global Economy: Growth remains on the mend

U.S. Recovery Gathers Strength

We expect U.S. economic growth to gain momentum in 2021, as the easing of coronavirus restrictions unleashes pent-up consumer demand. However, the resumption of normal economic activity may face a bumpy road. Supply chain disruptions are driving prices higher, while the federal government’s enhanced unemployment benefits are contributing to labor market shortages.

Europe Slower to Rebound

The European economy is slowly recovering from the effects of COVID-19. Improving vaccine availability and the lifting of lockdowns—along with significant fiscal and monetary support—should help restore economic growth to the region. In the U.K., where vaccination rates have exceeded those in Continental Europe, we expect growth to return to pre-pandemic levels by year-end. It struggled with an early 2021 surge in virus cases and subsequent lockdowns but is now reopening its economy.

U.S. Demand Boosts China’s Prospects

The recovering U.S. economy continues to drive demand for goods made in China. Factory shutdowns in other export-driven emerging markets countries plagued with COVID-19 outbreaks have also aided China’s manufacturing sector. While rising raw materials costs and supply bottlenecks are creating headwinds for China, we expect the nation’s export-heavy economy to exhibit strong growth this year. Accommodative fiscal policy should also help.


Inflation: Inflation rising in developed markets

U.S. Shelter Costs Pressure Inflation Rate

Supply chain shortages recently drove the inflation rate to multiyear highs. The Fed believes most price increases are transitory, and we generally agree. However, we believe services inflation, particularly rents, will continue to climb and keep the inflation rate elevated. Massive government debt, a weaker U.S. dollar and onshoring trends among U.S. businesses, along with the Fed’s average inflation targeting, will also likely keep inflation elevated.

Prices Edging Higher in Europe

Outside the U.S., inflation remains weaker but is also trending upward. Expanding vaccine availability and the corresponding return of economic activity is gradually forcing eurozone and U.K. inflation higher. Base effects from last year’s shutdowns along with temporary factors, including supply bottlenecks and rising raw materials prices, are also to blame. Similar to the Fed’s strategy, eurozone and U.K. central bankers remain content to let inflation rise for the time being.

Inflation Easing in Emerging Markets

Although consumer prices have risen in emerging markets, inflation momentum is subsiding in most countries. In general, emerging markets inflation remains below average and sharply lower than the peaks recorded in recent years. We expect inflation to remain below central bank targets in several countries, including China, Malaysia, India, Colombia and South Africa.


Monetary Policy: Central banks still supportive

Fed Reluctant to Alter Policy

Despite improving economic growth and rising inflation, we expect the Fed to remain accommodative. Policymakers warn the economic recovery is far from complete, reinforcing the central bank’s commitment to low rates and a steady level of bond buying. Labor market challenges remain a concern. This factor, coupled with the Fed’s desire to raise inflation expectations, should ensure monetary policy remains supportive well into 2022.

European, U.K. Programs Continue

European Central Bank (ECB) officials recently committed to maintaining their bond purchase program—and the resulting favorable financing terms—at least through March 2022. Despite rising interest rates and inflation, economic growth remains slow, underscoring the need for continued ECB support. Conversely, the Bank of England is tapering its bond purchases and remains on track to end its emergency support program later this year. But the central bank has no plans to lift interest rates until inflation is sustainable at 2%.

China Maintains Rate Cuts

People’s Bank of China officials remain committed to the monetary stimulus they launched in early 2020, including two interest rate cuts. Risks to China’s growth, including onshoring trends, supply chain disruptions and weak domestic demand, should keep China’s corporate and household interest rates unchanged in the near term.


Interest Rates: Most rates slowly rising

U.S. Rates to Settle in a Range

We believe economic gains combined with aggressive fiscal and monetary support will continue to push Treasury yields higher and steepen the yield curve. Expectations for higher inflation also should lift longer-maturity rates. We expect the 10-year Treasury yield to settle in a range of approximately 1.75% to 2.00% over the next several months. Meanwhile, the Fed’s near-zero monetary policy should keep shorter-maturity yields anchored at ultralow levels.

Most European Yields Turn Positive

Economic gains and improving outlooks are driving yields higher in Europe. Government bond yields in all European countries except Germany have returned to positive territory. U.K. rates are also rising, while rates in Japan are hovering slightly above the central bank’s 0% target. We expect rates in developed markets to inch modestly higher but remain relatively stable through 2021.

Rates Higher in Emerging Markets

Government bond yields in most EM countries are notably higher than in developed markets. In our view, countries with low yields remain the most vulnerable to rising U.S. Treasury yields. Accordingly, we prefer countries where real rates (rates adjusted for inflation) are high or expected to increase. We favor government bonds in China, which offer additional yield versus U.S. Treasuries but are closely correlated with yield movements in the U.S.


Q3 2021 Investment Outlook Resources

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