Head of Global Economics
BofA Global Research
Midyear Report: A mostly constructive first half
As we reach the middle of the year, we are struck by the number of unexpected developments over the last six months. Fortunately the news flow has been positive on net for the global economy. The global growth outlook has improved significantly since our year-ahead publication last November: as a result our global economists have revised their 2021 and 2022 growth forecast upwards.
Head of Global Economics Ethan Harris argues that the most important reason has been a very fast vaccine rollout. Last November we were assuming "a broad roll out of two or more vaccines by the middle of 2021 in DM economies". Fast forward to mid-year and we have seen more than just a broad roll-out. By the end of June, several European countries would have joined the U.S., the UK, Canada and a few smaller economies in having at least partially vaccinated more than half their populations. Moreover, the vaccines have proven to be highly effective to date.
Faster vaccination has meant much faster reopening than expected, particularly in the U.S., where we forecast nearly 10% annualized GDP growth over the spring and summer. Reopening has lagged in the Euro area and the UK because of lockdowns to contain the spread of more transmissible virus variants. We believe this has delayed, but not derailed, the recovery. Elsewhere, China continues to outpace the rest of the world in its recovery from the pandemic, as expected. With GDP having returned to trend, China is another engine of global growth.
However, as economies around the world reopen the burst in demand has run into constrained supply. Shortage issues have rippled through global supply chains, causing a major upside inflationary surprise. The strength of price pressures owing to the supply/demand imbalance in commodities and other goods far exceeded consensus forecasts. We think these shortages, coupled with the rebound in beaten-down travel-related components amid economic reopening, largely reflect transitory price pressures. That said, the risk is that some of this transitory strength will feed into persistent inflation.
In recent months the Fed has had a remarkably dovish message, brushing aside a long string of high-growth, high-inflation developments. However, this week’s FOMC meeting saw the Fed acknowledge positive surprises on growth and inflation and the possibility of persistent inflation. The FOMC is now projecting two hikes in 2023. In Europe the ECB is likely to taper its asset purchases later this year, although we do not see rate increases on the horizon. Meanwhile some of the smaller G10 central banks have been notably more hawkish and could move ahead of the Fed. We have changed our policy call for China: we now think policymakers will delay tightening and shift to a more data-dependent stance in response to the recent data slowdown.
In short, our outlook is generally optimistic: a red-hot U.S., China on trend and the rest of the world recovering steadily through 2023. That said a number of key risks remain: vaccine-resistant virus variants, premature fiscal consolidation outside the U.S. and overheating of the U.S. economy.
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