Cyclical Outlook Takeaways: Bounded Optimism on the Global Economy

The global economy is likely to make good progress along the path to recovery over the cyclical horizon, especially in the second half of 2021. However, much of this growth is already priced in to markets. Investors should also beware of several macro risks that command careful portfolio construction to weather renewed bouts of volatility in financial markets.

In our January 2021 Cyclical Outlook we discuss the outlook for global growth, policy, and inflation in 2021, together with the implications for markets and investors. This blog post is a distillation of our views.

Baseline outlook: growth rebound, elusive inflation

Following an outsized contraction of economic activity in 2020, global output and demand are likely to rebound strongly this year. We expect the current renewed weakness due to lockdowns in major economies to give way to accelerating gross domestic product (GDP) growth from around the second quarter, driven by the broadening rollout of vaccines and continued fiscal and monetary policy support. Coming off a low base, world GDP growth in 2021 is expected to be the highest in more than a decade.

Consumer price inflation is likely to creep up only moderately during this year and generally remain below central banks’ targets in all major economies.

Monetary and fiscal policy support growth

Central banks will likely keep borrowing costs low in order to enable ongoing fiscal support for years to come. Policy rates are likely to remain at present levels in the foreseeable future or could even be reduced further in some countries. Asset purchases are likely to continue throughout, and likely well beyond, 2021.

Fiscal policy remains a key swing factor in our cyclical outlook. Most governments are likely to keep propping up household incomes via transfers and supporting companies via loan guarantees, subsidies, and tax breaks.