Recovery to exceed expectations - Capital Economics
Global Economics

Recovery to exceed expectations

Global Economic Outlook
Written by Global Economics Team

While the immediate outlook is marred by renewed virus outbreaks, we think that the economic recovery later this year will be faster than most assume. Vaccines rollouts are set to accelerate, which should allow restrictions to be removed and activity to get back on track from the second quarter in most DMs. Some EMs will lag behind, particularly in Latin America and Africa, but China should continue to be a very strong performer this year. Inflation will pick up around the world in the months ahead, but this will be driven by temporary factors and should not be mistaken for a persistent demand-driven increase. With GDP still below potential in most economies, central banks are likely to keep policy very loose for a long time. This might ultimately lead to a sustained bout of higher inflation for some, but not in the next couple of years.

  • Global Overview – While the immediate outlook is marred by renewed virus outbreaks, we think that the economic recovery later this year will be faster than most assume. Vaccines rollouts are set to accelerate, which should allow restrictions to be removed and activity to get back on track from the second quarter in most DMs. Some EMs will lag behind, particularly in Latin America and Africa, but China should continue to be a very strong performer this year. Inflation will pick up around the world in the months ahead, but this will be driven by temporary factors and should not be mistaken for a persistent demand-driven increase. With GDP still below potential in most economies, central banks are likely to keep policy very loose for a long time. This might ultimately lead to a sustained bout of higher inflation for some, but not in the next couple of years.
  • US – Strong fiscal stimulus and a relatively rapid vaccine rollout should allow the US economy to outperform the consensus forecast, growing by 6.5% this year and 4.0% in 2022 and returning to its pre-virus trend.
  • Euro-zone – Vaccines should allow the economy to recover quickly later this year. But output will not return to pre-pandemic levels until mid-2022 and inflation will stay even lower than the ECB anticipates.
  • Japan – The vaccine rollout is somewhat slow, but the resilient labour market points to healthy growth this year.
  • UK – The economy is now suffering from a third lockdown, but the strength of fiscal support, a promising start to the vaccine rollout and the high level of household savings all bode well for the rest of the year.
  • Canada – Despite slow vaccine progress, a huge fiscal stimulus will see the economy perform very well.
  • Australia & New Zealand – Strong labour markets will mean tighter monetary policy than markets expect.
  • The Nordics & Switzerland – Will regain pre-virus levels of GDP this year but price pressures to stay weak.
  • China – China’s economy will continue to beat most expectations in the near term, as households spend more freely. But momentum will soften during the second half of the year as props from stimulus and exports fade.
  • India – While the economy will grow strongly this year, it will not return to full health given the extreme weakness of the banking sector and tepid fiscal support.
  • Other Emerging Asia – With GDP typically well below trend, interest rates look set to be cut further.
  • Emerging Europe – Good access to vaccines should allow these economies to recover faster than most EMs.
  • Latin America – Public debt issues will hold back growth and raise the risk of prolonged economic scarring.
  • Middle East & North Africa – The Gulf will outperform thanks to a rapid vaccine rollout and higher oil prices.
  • Sub-Saharan Africa – Poor access to vaccines and a lack of fiscal support bode ill for the region’s economies.
  • Commodities – We forecast that oil prices will rise and therefore outperform the prices of most industrial metals and agriculturals, which we expect to fall over the course of the year.

GDP Forecasts

Table 1: GDP (% y/y)

World

Average

Forecasts

Share1

2010-2016

2017

2018

2019

2020e

2021

2022

World (CE China estimate)

100

3.7

3.8

3.4

2.6

-3.7

6.7

4.6

World (Official China data)

100

3.7

3.9

3.7

3.0

-3.5

6.7

4.8

 

 

 

 

 

 

 

 

Advanced Economies

38.6

1.7

2.4

2.2

1.6

-5.2

5.1

4.0

 

 

 

 

 

 

 

 

US

15.9

2.2

2.3

3.0

2.2

-3.5

6.5

4.0

Euro-zone

12.5

1.1

2.8

1.9

1.3

-7.0

4.0

4.0

– Germany

3.5

2.1

2.9

1.3

0.6

-5.0

3.0

3.3

– France

2.4

1.2

2.4

1.7

1.5

-9.0

4.8

4.0

– Italy

2.0

0.0

1.7

0.8

0.3

-8.8

4.0

4.5

 

 

 

 

 

 

 

 

Japan

4.1

1.4

2.2

0.3

0.7

-5.0

3.7

2.3

UK

2.4

2.0

1.7

1.3

1.4

-10.0

5.5

6.5

Canada

1.4

2.1

3.2

2.0

1.7

-5.5

4.6

5.8

Australia

1.0

2.7

2.4

2.8

1.9

-2.7

4.5

3.5

 

 

 

 

 

 

 

 

Emerging Economies2

61.4

5.2

4.7

4.2

3.3

-2.8

7.7

5.0

 

 

 

 

 

 

 

 

Emerging Asia2

35.6

6.7

6.0

5.3

4.2

-1.8

9.4

5.4

China (CE estimate)

17.4

7.6

6.4

5.0

4.0

1.0

10.0

3.5

– China (Official data)

17.4

8.1

6.9

6.7

6.1

2.3

10.0

4.5

– India3

7.1

7.7

6.7

6.8

4.9

-7.7

12.0

9.5

– S. Korea

1.7

3.6

3.2

2.9

2.0

-1.1

5.0

4.0

 

 

 

 

 

 

 

 

Emerging Europe

7.9

2.7

4.2

3.3

2.4

-2.7

4.2

4.4

– Russia

3.1

1.6

1.7

2.4

2.0

-3.5

3.5

3.3

– Turkey

1.8

6.7

7.5

3.1

0.9

1.3

4.5

4.3

 

 

 

 

 

 

 

 

Latin America4

6.7

2.6

2.1

1.5

0.7

-6.9

5.0

3.4

– Brazil

2.4

1.4

1.6

1.2

1.4

-4.0

3.0

2.0

– Mexico

2.0

3.2

2.3

2.2

-0.1

-8.5

5.5

4.5

 

 

 

 

 

 

 

 

MENA

4.0

4.2

1.4

2.5

2.1

-5.1

5.0

5.6

– Saudi Arabia

1.2

4.8

-0.7

1.7

0.3

-4.3

2.3

6.3

– Egypt

0.9

4.1

5.0

5.4

5.6

1.0

6.0

6.3

 

 

 

 

 

 

 

 

Sub-Saharan Africa

2.5

4.4

2.8

2.9

3.1

-2.4

4.6

4.8

– Nigeria

0.8

4.4

0.7

1.9

2.2

-2.0

3.5

3.0

– South Africa

0.6

2.1

1.4

0.8

0.2

-7.3

4.3

4.0

Sources: Refinitiv, CEIC, IMF, Capital Economics.

1) % of world GDP in 2019 PPP terms, 2) We use our own China Activity Proxy (CAP)-derived GDP estimates for China in aggregates for emerging

Asia, emerging economies, and the world, 3) CE estimates from 2012 using old accounting methodology, 4) Excluding Venezuela.


Other Key Forecasts

Table 2: Other Key Forecasts

Latest

Average

Forecasts

(21st Jan)

2010-2016

2017

2018

2019

2020e

2021

2022

Inflation1

World2

2.0

3.5

3.0

3.1

2.8

2.6

2.9

2.6

Advanced economies

0.4

1.4

1.7

2.0

1.5

0.7

1.5

1.5

Emerging economies2

2.9

4.8

3.8

3.7

3.6

3.8

3.7

3.3

US

1.4

1.6

2.1

2.4

1.8

1.3

2.5

2.3

Euro-zone

-0.3

1.3

1.5

1.7

1.2

0.3

0.8

0.8

Japan

-0.9

0.4

0.5

1.0

0.5

0.0

-0.1

0.2

UK

0.6

2.2

2.6

2.5

1.8

0.8

1.3

1.7

China

0.2

2.8

1.6

2.1

2.9

2.5

1.5

1.5

World Trade1,3

-1.1

4.0

4.9

3.4

-0.4

-5.4

6.5

0.9

Exchange Rates4

US$ / €

1.21

1.32

1.20

1.14

1.12

1.22

1.25

1.30

Yen / US$

103

100

113

110

109

103

100

95

US$ / £

1.37

1.67

1.35

1.28

1.33

1.35

1.40

1.45

RMB / US$

6.46

6.75

6.51

6.88

6.97

6.53

6.20

6.20

Interest Rates4

US5

0.00-0.25

0.29

1.25-1.50

2.25-2.50

1.50-1.75

0.00-0.25

0.00-0.25

0.00-0.25

Euro-zone6

-0.50

0.04

-0.40

-0.40

-0.50

-0.50

-0.50

-0.50

Japan7

-0.10

0.07

-0.10

-0.10

-0.10

-0.10

-0.10

-0.10

UK8

0.10

0.49

0.50

0.75

0.75

0.10

0.10

0.10

Bond Yields4,9

US

1.09

2.90

2.40

2.70

1.92

0.93

1.00

1.00

Germany

-0.52

2.40

0.40

0.20

-0.19

-0.19

-0.50

-0.50

Japan

0.03

1.00

0.10

0.00

-0.01

0.03

0.00

0.00

UK

0.31

3.10

1.20

1.30

0.80

0.24

0.50

0.50

Equity Index4

S&P 500

3,851

1,402

2,239

2,674

3,231

3,756

4,200

4,500

Commodities4

Oil10

56

87

67

53

66

52

60

55

Gold11

1,872

1,364

1,303

1,281

1,521

1,896

1,900

1,800

Copper12

8,070

6,985

7,207

5,949

6,149

7,749

7,000

6,600

Sources: Refinitiv, CEIC, IMF, Capital Economics.

1) Annual average, 2) Excluding Argentina and Venezuela, 3) CPB goods volumes, 4) End-year, 5) Federal Funds target rate range, 6) ECB deposit rate,

7) Bank of Japan overnight rate until 2015, interest on excess reserves thereafter, 8) Bank Rate, 9) 10-year government bond yields,

10) Brent ($ per barrel), 11) $ per ounce, 12) $ per tonne.


Global Overview

Recovery to exceed expectations

  • By the middle of the year, decent progress in the vaccine rollout in major economies should inject new life into the global recovery. We expect above-consensus global GDP growth of 6.7% in 2021. For now, though, the rampant spread of the virus will mean that most major economies will remain under tight restrictions in the coming months, keeping output subdued.
  • Having fallen by over 10% in the first half of 2020, we estimate that global GDP picked up to just 1.3% below its pre-virus level last quarter. Admittedly, this figure is flattered by the exceptional rebound in China’s economy, which we believe is larger now than it would have been without the pandemic. Elsewhere, GDP in most major economies remains 2-10% below pre-virus levels. (See Chart 1.)
  • Heading into 2021, the global recovery was already losing steam. Most of the rebounds in activity came through in the latter half of Q2 and into Q3. But by Q4, activity was flattening off or falling as resurgences in the virus forced governments to tighten restrictions. (See Chart 2.) Infections are still on the up in Latin America and South East Asia but seem to have turned a corner in many DMs, as well as in emerging Europe, the Asian Tigers, and South Africa. Even so, death rates are still high (see Chart 3), and health services remain under pressure. So, tight restrictions are likely to endure in most major economies throughout Q1 and into Q2 in some cases. It’s very early days, but high-frequency data suggest that economies are currently on track to perform worse in the first quarter than they did in Q4. (See Chart 4.)
  • However, further falls in output will not be anywhere near as big as they were in early 2020. Indeed, Q4 showed us that better prepared firms and households, more targeted restrictions, and up-and-running systems for government support all help to limit the blow to GDP. The simple fact that output is still weak to begin with also reduces the chance of further large declines.
  • Beyond the next few months, the path of the global recovery will clearly hinge on the evolution of the virus. Our base case is that, by the middle of the year, most major economies will have made sufficient progress in rolling out vaccines so that restrictions can be relaxed over the rest of 2021. This will allow firms to re-open and supply disruptions to ease. Households will be able to spend some of the savings they built up during lockdowns. Meanwhile, financial conditions, as well as fiscal policy in most cases, should stay supportive.
  • In general, DMs should make greater headway towards their pre-virus paths of output than EMs. Better access to vaccines, better resourced healthcare systems, and better coldchain infrastructure mean that they are better placed to immunise their populations quickly. They have already made more rapid progress. (See Chart 5.) But EMs that are slower at rolling out vaccines will still benefit from stronger demand elsewhere, as well as higher commodity prices in many cases. Meanwhile, China’s economy will continue to grow strongly this year.
  • Effective vaccines have come along earlier than we had assumed at the time of our last Outlook, so our global GDP forecast is now considerably higher. (See Chart 6.) We are now even further above consensus in almost all major economies. (See Chart 7.) Inflation will jump in the months ahead, but this will reflect an unwinding of temporary disinflationary factors – such as last year’s drop in oil prices (see Chart 8) – rather than excess demand. So, central banks should look through the rise in inflation and keep policy loose. Among major economies, we expect rate hikes only in China and Brazil in 2021.

Global Charts

Chart 1: Percentage Changes in GDP in Major Economies

Chart 2: Global Excl. China Goods Trade, Industrial Production & Real Retail Sales (Dec. 2019 = 100)

Chart 3: Daily New COVID-19 Deaths Per
Million Population (7DMA)

Chart 4: CE COVID Mobility Trackers vs. GDP
in Major Economies Excluding China (% q/q)

Chart 5: Total Vaccine Doses Administered Per Hundred People

Chart 6: World GDP (2019 prices & international dollars)

Chart 7: 2021 GDP Growth Forecasts (CE vs. Consensus)

Chart 8: Brent Oil Price & Energy Contribution to OECD Headline CPI Inflation

Sources: Refinitiv, CEIC, Google, Apple, Moovit, OurWorldInData, CE


United States

Vaccines and stimulus to boost recovery

  • Additional large-scale fiscal stimulus is likely to offset the near-term drag on activity stemming from the surge in COVID-19 cases. Meanwhile, vaccination programs are likely to reach critical mass by mid-year. Accordingly, we expect above consensus GDP growth of 6.5% this year and a modest slowdown to 4.0% in 2022.
  • The risks to our forecasts remain unusually high, on both the upside and downside. On the upside, incoming President Joe Biden is already targeting another $1.9trn for near-term rescue funds and is expected to provide additional long-term investment funding. With the Democrats still well short of a 60-seat filibuster-proof majority in the Senate, however, we are assuming that Mr Biden will have to settle for $1trn in near-term funds this year and $300bn for longer-term funds, with the latter spending spread over several years.
  • On the downside, the biggest risk is that the vaccine rollout doesn’t usher in a return to normalcy in the second half of the year.
  • The surge in coronavirus cases (see Chart 9) and the resulting restrictions imposed by many states means that fourth-quarter GDP growth will be a more modest 4.5% annualised. (See Chart 10.) But the new round of stimulus cheques and unemployment benefits should boost first-quarter GDP growth, particularly if the Democrats quickly pass another near-term stimulus during Biden’s first 100 days in office. The incoming survey-based activity data has also held up much better than it did during the first wave last spring. (See Chart 11.)
  • Our base case scenario assumes that COVID-19 case numbers have declined sufficiently by spring – and enough of the vulnerable populations have been vaccinated – to allow for an easing of restrictions that should trigger a marked pick-up in GDP growth from the second quarter onwards. We don’t expect the economy to suffer any permanent damage. (See Chart 12.)
  • The elevated household saving rate means there is scope for a significant release of pent-up demand once coronavirus restrictions are lifted. (See Chart 13.) That will more than offset any drag from fading fiscal stimulus. (See Chart 14.)
  • We also anticipate a near-full recovery in the labour market, with the unemployment rate falling back to 4.5% by end-2021 and 4.3% by end-2022. (See Chart 15.) A rapid turnaround in the labour market is one of the reasons why we expect inflation to surprise on the upside. (See Chart 16.) We don’t expect the Fed to respond to that upward pressure on prices, however, with its policy rate on hold until 2024 or later.

Table 3: United States Key Forecasts

% y/y unless otherwise specified

Ave.

Forecasts

09-18

2019

2020e

2021

2022

Private cons’ptn

2.0

2.4

-3.8

8.2

4.6

Total fixed invest.

2.3

2.3

-1.0

5.4

4.1

Gov’t cons’ptn

0.3

1.8

0.3

-0.7

2.0

Stockbuilding1

0.1

-0.5

-0.1

0.4

-0.2

Domestic demand

1.9

2.3

-3.3

7.2

4.0

Exports

2.9

-0.1

-12.7

6.4

2.3

Imports

3.2

1.1

-9.2

10.9

2.4

GDP

1.8

2.2

-3.5

6.5

4.0

Consumer prices2

1.6

1.8

1.3

2.5

2.3

Real disp. income

2.3

2.2

6.0

1.9

1.6

H’hold sav. ratio3

7.1

7.5

16.1

11.3

8.7

Employment

0.7

1.1

-6.2

4.2

2.3

Unemp. rate2,4

6.8

3.7

8.1

5.2

4.4

Interest rate4,5

0.6

1.63

0.13

0.13

0.13

Fed gov’t bal.1

-5.3

-4.6

-16.0

-14.3

-10.0

Current account 1

-2.4

-2.2

-3.0

-3.1

-2.8

Sources: Refinitiv, Capital Economics.

1) % of GDP, 2) Annual average, 3) % of disposable income,

4) %, 5) Mid-point of fed funds target range, end-year.

United States Charts

Chart 9: Coronavirus Infections & COVID-19 Deaths (Daily, 7DMA, 000s)

Chart 10: Real GDP

Chart 11: ISM Activity Indices

Chart 12: Real GDP ($trn)

Chart 13: Personal Saving Rate (% of Disp. Income)

Chart 14: Federal Budget Balance (% of GDP)

Chart 15: Unemployment Rate (%)

Chart 16: CPI Inflation (%)

Sources: Refinitiv, CE


Euro-zone

Vaccine to drive recovery but risks remain

  • Provided that our vaccine assumptions prove correct, the economy should recover quickly from the second quarter of this year. But output will not regain pre-pandemic levels until mid-2022 and inflation will stay even lower than the ECB anticipates.
  • The latest mobility data show that the number of journeys made for work and recreation purposes is still below its level from before Christmas. (See Chart 17.) Euro-zone GDP will probably drop to around 6% below its pre-coronavirus level in Q1 this year. However, the services sector should spring back to life when restrictions are lifted. Based on our assumptions about the vaccine rollout, this should begin in Q2.
  • Private consumption will be the main driver of the rebound. Households have forced savings to use (see Chart 18) and will be eager to spend on hospitality and travel. That said, in countries such as Italy and Spain, where household incomes have fallen (see Chart 19), consumption will probably remain subdued by pre-crisis standards.
  • Business investment will also pick up again (see Chart 20) but will not reach its pre-pandemic level for some time. The strength of manufacturing export orders suggests that net exports will contribute positively to GDP growth. (See Chart 21.) Our forecasts for strong growth in Asia and the US also bode well for exports.
  • There will be no return to the kind of fiscal austerity which precipitated the euro-zone crisis, but equally, there is little chance of additional stimulus of the scale we expect in the US. (See Chart 22.) The grant element of the EU’s Recovery Fund is worth only 5.3% of EU GDP and will be disbursed over five years. And the ECB hasn’t been able to provide as much support as other central banks as rates were below zero when the pandemic hit.
  • We think euro-zone GDP will regain its pre-pandemic level in Q2 2022, though with big differences between countries. (See Chart 23.) The main risk is that the virus is not brought under control as fast as we have assumed.
  • Meanwhile, inflation will rise this year as the past plunge in prices of oil and tourism-related services drops out of the year-on-year rate. But it will remain well below even the ECB’s forecast. (See Chart 24.) Against this backdrop, we expect the ECB to continue net asset purchases under its Pandemic Emergency Purchase Programme (a form of yield curve control) until December 2022. It is likely to leave the deposit rate at -0.5%, though a further cut is more likely than a hike.

Table 4: Euro-zone Key Forecasts

% y/y unless otherwise stated

Ave.

Forecasts

09-18

2019

2020e

2021

2022

Private cons’ptn

0.6

1.4

-7.9

4.1

4.8

Total fixed invest.

0.2

5.7

-9.6

4.9

7.2

Gov’t. cons’ptn

0.9

1.9

0.7

1.0

1.0

Dom’stic demand

0.6

1.9

-6.7

3.5

4.5

Exports

3.3

2.5

-10.9

5.9

6.0

Imports

2.9

3.9

-10.5

4.9

7.2

GDP

0.8

1.3

-7.0

4.0

4.0

Current account1

1.7

2.3

1.5

2.0

2.2

 

Headline Inflation

1.3

1.2

0.3

0.8

0.8

Core Inflation

1.1

1.1

0.8

0.5

0.5

 

Employment

0.0

1.2

-2.0

0.5

2.8

Unemp. rate2

10.3

7.6

8.0

8.5

8.0

 

ECB Deposit Rate3

-0.1

-0.4

-0.5

-0.5

-0.5

Gen’l gov’t bal.1

-3.1

-0.6

-8.5

-5.3

-2.5

Sources: Refinitiv, Capital Economics

1) % of GDP, 2) % year average, 3) % year-end.

Euro-zone Charts

Chart 17: Google Mobility Data
(% diff. from pre-virus level)

Chart 18: Euro-zone Household Saving (€bn)

Chart 19: Household Disposable Income (Q1-Q3 2020, % y/y)

Chart 20: EC Business Climate Indicator & Investment

Chart 21: Euro-zone PMI Export Orders

Chart 22: Increase in Structural Fiscal Deficit in 2020
(IMF Forecasts, % of GDP)

Chart 23: GDP (Q4 2019 = 100)

Chart 24: Euro-zone Inflation (%)

Sources: Refinitiv, IHS Markit, Capital Economics


Japan

Slow vaccine rollout, but resilient labour market bodes well

  • Japan is battling its most severe virus wave yet and is lagging other advanced economies in the global vaccine rollout. Even so, we expect economic activity to return to pre-virus levels in the second half of this year as vaccines become widely available. Our forecast that GDP growth will average 3.7% this year and 2.3% next is well above the analyst consensus.
  • The number of new infections, deaths and severe cases has surged in Japan over the winter. (See Chart 25.) The government has now declared a state of emergency in 11 prefectures centred on the three major urban areas around Tokyo, Osaka, and Nagoya. (See Charts 26 and 27.) Those prefectures account for around 60% of GDP.
  • However, the restrictions currently only amount to a voluntary 8pm curfew. Based on restrictions in virus hotspots tightening further, we have pencilled in a 1.5% q/q drop in consumer spending in Q1. This would be much smaller than the 8% q/q slump in Q2 2020 since measures should remain less draconian than during the first state of emergency and the starting point for consumption is already depressed. In fact, we still expect rising investment and exports to result in a further increase in GDP this quarter. Indeed, surveys suggest that business investment is rebounding. (See Chart 28.)
  • Vaccinations are only slated to begin in Japan in late-February. What’s more, the share of Japanese willing to get vaccinated is low by global standards. (See Chart 29.) Even so, we suspect that most medical workers and the elderly will have been inoculated by the middle of the year. With PM Suga keen on reopening the economy, we expect the bulk of restrictions on activity as well as voluntary social distancing to come to an end then too. Our forecast that GDP will return to pre-virus levels by Q3 2021 would mean that Japan does not recover as rapidly as the US but outpaces the euro-zone. (See Chart 30.)
  • The labour market has proved more resilient than we had anticipated. With the participation rate now close to pre-virus levels, the unemployment rate will settle at 3% rather than our previous forecast of 3.5%. (See Chart 31.)
  • The decline in consumer prices has remained moderate in light of the huge slump in activity. Inflation should turn positive again, but in contrast to the US price gains will remain muted. (See Chart 32.) That underpins our view that the yen will strengthen from 104 against the dollar now to 95 by end-2022.
  • While the Bank of Japan has pledged another review of its monetary policy settings at its March meeting, we suspect policymakers will only tinker at the margins.

Table 5: Japan Key Forecasts

% y/y unless otherwise specified

Ave.

Forecasts

09-18

2019

2020e

2021

2022

Private cons’ptn

0.6

0.2

-6.1

2.2

4.1

Total fixed investm’t

0.8

0.9

-4.4

1.8

2.5

Public demand

1.2

2.1

2.7

4.6

-1.3

Domestic demand

0.7

0.9

-4.0

2.5

2.5

 

Exports

2.8

-1.8

-12.9

8.9

5.7

Imports

2.4

-0.7

-7.0

1.6

6.8

 

GDP

0.7

0.7

-5.0

3.7

2.3

Consumer prices

0.3

0.5

0.0

-0.1

0.2

Cons. pri. excl. tax

0.1

0.4

-0.3

-0.1

0.2

Unempl. (%)1

3.8

2.4

2.8

2.8

2.5

Policy rate (%)

0.1

-0.1

-0.1

-0.1

-0.1

10-yr JGB yield (%)

0.6

0.0

0.0

0.0

0.0

Gen’l gov’t bal.2

-6.4

-2.8

-12.4

-9.0

-8.0

Current account2

2.6

3.6

2.9

2.1

1.0

Sources: Refinitiv, Capital Economics. 1) Yearly Average, 2) % of GDP.

Japan Charts

Chart 25: New Coronavirus Infections
& Severe Cases

Chart 26: New Coronavirus Cases Per Million People
(7-day Ave.)

Chart 27: Hospital Beds Occupied by COVID-19 Patients (% of total)

Chart 28: Business Investment & BOS Survey

Chart 29: Share of people willing to get vaccinated against COVID-19 (%)

Chart 30: Real GDP (Q4 2019 = 100)

Chart 31: Unemployment Rate (%)

Chart 32: Consumer Prices (Excl. tax, % y/y)

Sources: Refinitiv, CEIC, MHLW, Ipsos, Capital Economics


United Kingdom

Fiscal support and high household savings point to a strong recovery

  • Our optimistic view that the UK economy will regain its pre-crisis peak in Q1 2022 and its pre-crisis trend in 2025 suggests that the budget deficit will shrink back to 2% of GDP without the need for major tax hikes and that the Bank of England won’t need to expand QE or use negative interest rates in 2021 or 2022.
  • January’s third COVID-19 lockdown may leave GDP 10% below its pre-crisis peak. (See Chart 33.) But the promising start to the rollout of vaccines suggest a major easing in COVID-19 restrictions should allow GDP to rebound rapidly from Q3. With households having built up their savings during the crisis while firms had to load up on debt to survive, consumer spending is much better placed to rebound than business investment. (See Chart 34.)
  • We think that people will quickly go back to the pubs/restaurants and that the economy’s supply potential won’t be permanently damaged by the crisis. This explains why, unlike most forecasters, we think that by 2025 GDP will be back to where it would have been had COVID-19 never existed. (See Chart 35.)
  • Of course, the scheduled expiry of the furlough scheme on 30th April may mean that the 1.4% fall in employment seen so far will turn into a 3.0% fall by the end of the year. But it would be a huge success if the furlough scheme meant that the 25% peak-to-trough fall in GDP during last year led to the unemployment rate peaking at only 6.5% later this year and falling back to 5.0% by the end of 2022. (See Chart 36.)
  • This has come at a huge fiscal cost with the government’s direct support for the economy so far costing £285bn (14% of GDP). After adding in the indirect effects of the weak economy, the budget deficit in 2020/21 may be about £410bn (19.6% of GDP).
  • If GDP regains its pre-crisis trend, then the resulting rise in tax revenues and fall in spending mean the budget deficit can fall back to 2% without major tax hikes. (See Chart 37.)
  • While there is a growing risk of a sustained rise in inflation once GDP has fully recovered, over the next couple of years lots of spare capacity will mostly keep inflation below 2%. (See Chart 38.) The Bank of England may respond by completing the extra £150bn of QE it launched in November over six months rather than 12 months. (See Chart 39.)
  • But our view that it won’t resort to negative interest rates (see Chart 40), is consistent with 10-year gilt yields rising from 0.30% now to around 0.50% by the end of this year.

Table 6: United Kingdom Key Forecasts*

% y/y unless otherwise specified

Ave.

Forecasts

09-18

2019

2020e

2021

2022

 

Private cons’ptn

1.9

1.1

-11.7

7.5

8.8

Total fixed invest.

3.2

1.5

-11.5

4.0

11.0

Gov’t cons’ptn

0.9

4.0

-8.4

11.5

2.0

Stockbuilding1

0.3

0.1

0.5

-0.7

0.0

Domestic demand

2.0

1.6

-11.2

7.2

8.0

 

Exports

3.2

2.7

-13.0

5.0

8.7

Imports

3.6

2.7

-17.9

10.2

13.5

 

GDP

1.9

1.4

-10.0

5.5

6.5

 

Consumer prices2

2.3

1.8

0.8

1.3

1.7

RPIX2,3

3.2

2.6

1.7

2.2

2.1

 

Real disp income

1.7

1.9

0.8

2.5

1.2

H’hold sav. ratio4

8.4

6.8

18.0

14.2

7.8

Employment

1.2

1.1

-0.4

-1.3

2.0

Unemp. rate2

6.3

3.8

4.5

6.0

5.5

 

Interest rate5

0.48

0.75

0.10

0.10

0.10

PSNB1

5.0

2.5

19.6

7.1

3.3

Current account1

-2.9

-3.1

-3.2

-3.5

-4.0

Sources: Refinitiv, Capital Economics.

* Assumes that severe COVID-19 restrictions stay in place in Jan-Mar, that they are eased in Apr-Jun and that there are few restrictions after June.

United Kingdom Charts

Chart 33: Monthly Real GDP (February 2020 = 100)

Chart 34: Quarterly Real GDP (Q4 2019 = 100)

Chart 35: Quarterly Real GDP (Q4 2019 = 100)

Chart 36: ILO Unemployment Rate (%)

Chart 37: Public Sector Net Borrowing (As a % of GDP)

Chart 38: CPI Inflation (%)

Chart 39: Bank of England Quantitative Easing (£bn)

Chart 40: Bank Rate Expectations (%)

Sources: Refinitiv, OBR, Bank of England, Capital Economics


Canada

Benefitting from strong policy stimulus despite vaccine hold-up

  • The vaccination process looks set to lag a few months behind that in the US but, due to significant policy support, the eventual recovery should be stronger than in many places.
  • Canada must wait until April for its vaccine deliveries to ramp up, which means the process will continue to lag well behind the front-runners like the US and UK. (See Chart 41.)
  • Nevertheless, there is still ample scope for a strong recovery from the second quarter. Those firms not directly affected by the restrictions have adapted well to the new environment, and employment in sectors that pay above-average wages rose further above pre-pandemic levels in December. (See Chart 42.) Together with ongoing financial aid for those still out of work, household income has been much stronger than the headline labour market figures suggest.
  • Moreover, firms’ hiring and investment intentions have rebounded faster than after the financial crisis. (See Chart 43.) The rebound in oil prices that we forecast will also support a recovery in the energy sector, although exporters will still have to wait a while for global demand for energy products and capital goods to recover. (See Chart 44.)
  • On top of this, the government has outlined plans for a further investment-focused stimulus worth 4.3% of GDP. That would bring the value of the direct fiscal measures announced since the pandemic to 20% of GDP, which is more than in most countries. Canada should also benefit from the further stimulus that we expect to be passed in the US this year. (See Chart 45.)
  • The bright outlook for consumption and large policy response lead us to expect a stronger recovery than most. Our forecasts for growth of 4.7% in 2021 and 5.8% in 2022 imply GDP will be 2.7% higher by the end of 2022 than the consensus forecast. (See Chart 46.) Inflation is also likely to jump; we expect it to be above 2% for most of 2021. (See Chart 47.)
  • As GDP will still be below potential, the Bank of Canada is likely to view the period of above-2% inflation as temporary and so stick to its pledge to keep rates low across the yield curve. We expect it to maintain its asset purchases throughout 2021 and to signal that it will keep rates unchanged until 2023. One risk to our view stems from the housing market. We expect house price inflation to slow this year but, if it were to remain stronger than we forecast (see Chart 48), the Bank might try to cool the housing market by allowing yields to rise more quickly.

Table 7: Canada Key Forecasts

% y/y unless otherwise specified

Ave.

Forecasts

09-18

2019

2020e

2021

2022

 

Private cons’ptn

2.3

1.9

-6.1

5.5

6.1

Total fixed investm’t

0.9

3.0

-5.4

3.2

3.0

Gov’t cons’ptn

1.5

1.7

-0.4

2.3

2.5

Stockbuilding1

0.0

0.2

-0.1

0.0

-0.2

Dom’stic demand

1.8

2.0

-4.5

4.4

4.9

Exports

2.0

0.4

-9.7

5.7

6.5

Imports

2.3

0.8

-11.7

9.6

6.4

GDP

1.7

1.7

-5.5

4.6

5.8

Consumer prices2

1.6

1.9

0.7

2.2

1.8

Real disp income

1.5

3.5

5.0

-1.5

1.0

H’hold sav. Ratio3

3.8

2.7

16.0

6.5

4.5

Employment

0.9

2.1

-5.3

5.1

4.8

Unemployment2

7.1

5.7

9.5

7.5

6.0

Interest rate4

1.75

1.75

0.25

0.25

0.25

Federal gov’t bal.1

-1.0

-1.0

-16.0

-7.0

-3.5

Current account1

-3.0

-2.1

-1.6

-1.8

-1.9

Sources: Refinitiv, CE

1) As a % of GDP, 2) Year average, 3) As a % of disposable income, 4) Bank of Canada overnight target rate (end of period).

Canada Charts

Chart 41: Vaccine Progress
(Doses administered per 100 people)

Chart 42: Employment (% y/y)

Chart 43: Business Outlook Survey 12-Month Employment & Investment Intentions (Net Bal., %)

Chart 44: Canada’s Total Exports & Imports
($bn, 2015 Prices)

Chart 45: Planned Additional Spending & Foregone Revenue in Response to COVID-19 Crisis
(% of GDP, includes measures up to 2023)

Chart 46: GDP ($bn)

Chart 47: CPI Inflation (%)

Chart 48: House Prices (% y/y)

Sources: Refinitiv, Bloomberg, Capital Economics


Australia & New Zealand

Monetary policy to be tightened as recoveries surprise to the upside

  • The recovery in GDP and employment in both Australia and New Zealand is set to continue surprising to the upside. As such, we expect the RBNZ to hike interest rates next year and the RBA to stop its QE programme in April.
  • New Zealand’s GDP returned to pre-virus levels in Q3, whereas output in Australia was still 4% below. Electronic card transactions have risen further in both countries in recent months, underlining that the recovery in New Zealand’s domestic demand is sustainable. (See Chart 49.) We have pencilled in another 2.5% q/q rise in GDP in Q4 in both countries.
  • The further recovery of both economies will partly hinge on the speed of the vaccine rollout. Both countries have ordered sufficient doses to vaccinate their entire populations twice over. (See Chart 50.) Australia has indicated that it will start inoculating people from late-February, whereas New Zealand may only start vaccinating from Q2.
  • One reason to be optimistic about the outlook is that housing markets in both countries are roaring back to life. House prices in New Zealand are rising by around 20% y/y and the recent pick-up in finance commitments suggests that prices in Australia may soon be rising at a double-digit pace too. (See Chart 51.)
  • With some of the strongest fiscal support among advanced economies, we’re sticking to our forecast that Australia’s GDP will rise by 4.5% this year. And we think New Zealand’s GDP will expand by 6.5% this year.
  • Our forecasts imply that New Zealand won’t do much better by end-2022 than the US while Australia will fall short. (See Chart 52.) Australia’s underperformance reflects both the escalating trade conflict with China as well as he sharp slowdown in population growth in the wake of the border closure.
  • In the near term, headline inflation will rise due to energy and other temporary effects, but underlying inflation looks set to fall at the same time. (See Chart 53.) For now, central banks will look through this. But in time, they will be more focused on the strength of labour markets. Our forecast that Australia’s unemployment rate will fall to 5.8% by year-end is well below the consensus forecast of 6.5%. So is our forecast that the unemployment rate in New Zealand will decline to 5%. (See Chart 54.)
  • We estimate that the RBA will own less than 15% of outstanding bonds when its current quantitative easing programme expires in April. (See Chart 55.) But with the labour market set to recover much faster than the Bank anticipates, we do not expect it to extend its purchases any further. And we think that the strong rebound in New Zealand’s economy will encourage the RBNZ to hike interest rates in the second half of next year. This points to further upside for the Kiwi. (See Chart 56.)

Table 8: Australia & New Zealand Key Forecasts

% y/y unless otherwise specified

Ave.

Forecasts

09-18

2019

2020e

2021

2022

Australia

GDP

2.6

1.9

-2.7

4.5

3.5

Unemployment1

5.5

5.2

6.5

6.0

5.6

Consumer prices2

2.1

1.6

0.7

1.4

1.4

RBA cash rate3

2.8

0.75

0.10

0.10

0.10

Gen’l gov’t bal4

-2.2

-4.3

-10.8

-5.5

-4.1

Current account4

-3.5

0.7

2.7

2.9

0.3

New Zealand

GDP

2.5

2.4

-2.1

6.5

2.9

Unemployment1

5.6

4.1

4.8

5.2

4.7

Consumer prices2

1.6

1.6

1.6

1.5

2.0

RBNZ cash rate3

2.5

1.00

0.25

0.25

0.50

Gen’l gov’t bal4

-1.7

2.4

-7.7

-6.1

-4.0

Current account4

-3.0

-3.3

-0.6

-1.0

-1.8

Sources: Refinitiv, Capital Economics

1) Unemployment rate, 2) Year average, 3) End-year, 4) As a % of GDP.

Australia & New Zealand Charts

Chart 49: Electronic Card Transactions (Feb. 2020 = 100)

Chart 50: Vaccine Orders
(% of Total Population Covered)

Chart 51: Aus. Housing Finance Commitments &
House Prices

Chart 52: Real GDP (Q4 2019 = 100)

Chart 53: Core Consumer Prices (% y/y)

Chart 54: Unemployment Rates (%)

Chart 55: Central Bank Holdings of Government Bonds (% of total outstanding)

Chart 56: Exchange Rates

Sources: Johns Hopkins, Refinitiv, Treasuries, Bloomberg, CE


The Nordics & Switzerland

Maintaining their lead over the euro-zone

  • The Nordics and Switzerland saw some of the shallowest recessions of the advanced economies last year and will regain pre-virus levels of activity soon. With price pressures weak, policy tightening is still years away.
  • Economic activity in the Nordic countries and Switzerland rebounded in the second half of 2020. Monthly activity indicators and business surveys (see Chart 57) suggest that they probably avoided contraction in Q4. But the surge in cases and associated tightening of restrictions, point to a fall in GDP in Q1. This is particularly true in Sweden where rising pressure on the healthcare system suggests it is only a matter of time before rules are tightened further; the final nail in the coffin of the country’s previous laissez-fair approach.
  • The saving grace is that the vaccine rollout has started. We assume that this allows for the bulk of restrictions to be lifted by May and June, in which case GDP should get a significant boost and regain its pre-virus level earlier than in the euro-zone. (See Chart 58.)
  • Nonetheless, underlying price pressures will stay low in Sweden and Switzerland next year and will drop back towards the Norges Bank’s target in Norway as the inflationary impact of previous falls in the krone shifts into reverse. (See Chart 59.) Against this backdrop, we expect central banks to leave policy rates unchanged over our forecast horizon. The one exception is Denmark where current pressure on the krone suggests that a rate cut is more likely than not. (See Chart 60.)
  • We think that a continued increase in risk appetite will drive the Norwegian krone (NOK) and Swedish krona higher against the euro in 2021. The NOK will also be supported by higher oil prices: we forecast Brent to rise to $60pb by year’s end – and by the prospect of a more hawkish Norges Bank. We expect the NOK to outperform other G10 currencies (see Chart 61) and regain parity with the Swedish krona by end-2021. (See Chart 62.)
  • In contrast, reduced safe-haven demand for the Swiss franc should cause it to ease back against the euro. The SNB will be able to avoid intervening in the FX market as heavily as it did in early 2020. (See Chart 63.)
  • The global sectoral rotation in equities seen just after the Pfizer vaccine news, which benefited stock markets in Norway and Sweden more than those in Switzerland and Denmark, has faded. As the pandemic is brought under control, we think that equities will recover across the board and at around the same pace.
  • In bond markets, we expect accommodative monetary policy to keep bond yields low. (See Chart 64.) And we suspect that the spread between Swiss and German 10-year bonds, which narrowed as the ECB ramped up Bund purchases under QE, will stay around zero.

Table 9: The Nordics & Switzerland

World

GDP (% y/y)

Inflation2 (%)

Share1

2019

2020e

2021

2022

2019

2020e

2021

2022

Sweden

0.42

1.3

-3.0

2.5

3.0

1.7

0.7

1.2

1.4

Switzerland

0.46

1.1

-3.0

2.3

2.8

0.4

-0.8

0.5

0.3

Norway3

0.26

2.4

-3.5

3.5

3.3

2.3

3.0

2.0

2.0

Denmark

0.26

2.3

-3.8

3.3

3.3

0.7

0.3

0.8

0.8

Sources: Refinitiv, CE. 1) Share of world GDP in 2019 PPP terms, 2) Year average, EU harmonised prices bar Norway (CPI-ATE), 3) Mainland GDP.

Nordics & Switzerland Charts

Chart 57: Manufacturing PMIs

Chart 58: Real GDP (Q4 2019 = 100)

Chart 59: CPI Inflation (%)

Chart 60: Policy Interest Rates (%)

Chart 61: G10 Currencies Vs. US Dollar
(CE Forecast Chg. Between 19th Oct & End-2021, %)

Chart 62: Norwegian Krone per Swedish Krona

Chart 63: Swiss Francs per Euro & SNB Interventions

Chart 64: 10-Year Government Bond Yields (%)

Sources: Refinitiv, CE.


China

A year of two halves

  • China’s economy will continue to beat most expectations in the near term, as households spend more freely. But momentum will soften during the second half of the year as props from stimulus and exports fade.
  • GDP rebounded rapidly from the slump in Q1 last year. Our China Activity Proxy (CAP) suggests that y/y growth was well above pre-virus rates by the end of 2020. (See Chart 65.) Output will remain strong for a few months.
  • The rebound in domestic activity was led by investment spending, which as usual for China has been the main channel for policy support. (See Chart 66.) Households remained more cautious in their spending as the economy opened up. But with the labour market largely back to normal and consumer confidence recovering, last year’s surge in the savings rate will unwind before long. (See Chart 67.)
  • Vaccines promise to reverse lingering virus-linked disruptions which are still evident in long-distance passenger travel. (See Chart 68.) China’s domestic vaccines are in ample supply and seem to be effective. We expect much of the population to be inoculated by year-end.
  • Survey data suggest that exports will remain strong in the near term, as Chinese factories continue to benefit from a pandemic-induced shift in global consumption patterns. This has driven a sharp increase in capacity utilisation rates (see Chart 69), which should continue to support manufacturing investment.
  • The prospect of output remaining well above trend for another couple of quarters, coupled with the flattering base effects from last year’s downturn, are the main reasons we expect above-consensus growth of 10% in 2021 (on both the CAP and official GDP).
  • But there are good reasons to think that the shine will start to wear off during the second half of 2021. For a start, we doubt that the recent jump in China’s share of global exports will last once vaccines bring the virus under control elsewhere. (See Chart 70.)
  • Meanwhile, the central bank has already started to tighten monetary conditions, which has contributed to a slowdown in lending. (See Chart 71.) With further tightening on the cards and fiscal support set to be partially withdrawn, credit creation is likely to be more modest this year. This won’t immediately derail China’s rebound. But it does mean that the current tailwind from policy stimulus will turn into a headwind later this year.
  • One sector that could see a particularly stark reversal is real estate. Property investment was one of the fastest growing parts of China’s economy in 2020. But subdued growth in housing demand, coupled with new limits on the amount of credit flowing to the sector point toward a pullback in construction.
  • All told, we expect output to drop back to its pre-virus trend by year-end. (See Chart 72.) This would set the scene for below-consensus growth of around 4% in 2022.

Table 10: China Key Forecasts

(% y/y unless otherwise stated)

Ave.

Forecasts

09-18

2019

2020e

2021

2022

GDP (CAP-based)1

7.2

4.0

1.0

10.0

3.5

GDP (Official) 1

8.0

6.1

2.3

10.0

4.5

Consumer Prices1

2.2

2.9

2.5

1.5

1.5

Policy Rate2

2.80

2.50

2.20

2.50

2.50

Exchange Rate2,3

6.50

6.97

6.53

6.20

6.20

Gen’l gov’t bal 4,5

-2.9

-4.9

-5.8

-5.0

-5.0

Current Account4

2.3

1.0

2.5

2.0

1.0

Sources: CE.

1) Annual Average, 2) end-period, 3) vs. US Dollar, 4) % of GDP,

5) CE augmented budget balance.

China Charts

Chart 65: GDP & CE China Activity Proxy (% y/y)

Chart 66: Official GDP by Expenditure (% y/y)

Chart 67: Savings Rate & Unemployment Rate (%)

Chart 68: Long Distance Passenger Traffic

(person-km, % y/y)

Chart 69: Industry Capacity Utilisation Rate (%)

Chart 70: Exports ($bn, 2010 prices, SA)

Chart 71: Aggregate Financing*

Chart 72: GDP (Q4 2019 = 100, SA)

Sources: CEIC, Refinitiv, WIND, Capital Economics


India

On a slow road to recovery

  • The drop in new COVID-19 cases and the resulting scaling back of containment measures in India has provided a boost to the economy, and an effective vaccine will further support the recovery in 2021 and 2022. But even widespread vaccination won’t restore the economy to full health given the extreme weakness of the banking sector and tepid fiscal support. Output is likely to remain below its pre-virus trend for many years.
  • COVID-19 ravaged India’s economy in 2020 and GDP is all but certain to have suffered its largest slump on record last year. But new virus cases have dropped sharply (see Chart 73) and the recent approval of two vaccines has brightened the outlook. We are assuming that most of India’s most vulnerable people will be vaccinated within the next 12-18 months. That would allow a rolling back of restrictions on most domestic activity during the second half of this year. Despite being loosened, restrictions are still tighter than in most other EMs. (See Chart 74.) Fears over the virus should subside too, which will support consumer spending.
  • But there are still headwinds to the recovery. The severe downturn – exacerbated by the government’s slow and weak fiscal support (see Chart 75) – will leave lasting wounds in the form of firm closures and higher unemployment, even in a large informal economy like India.
  • All of this will further impair the banking sector, which entered the crisis in poor health. India’s non-performing loan ratio was already one of the highest among EMs (see Chart 76), and it is likely to rise further now that the RBI’s debt moratorium and other extraordinary measures have elapsed.
  • A strong recovery in growth is likely this year and next, but we think that GDP in 2022 will still be 6% below its level had the virus not existed. (See Chart 77.)
  • In these circumstances, policymakers should be focussed on doing as much as possible to support the economy. One constraint has been high inflation. But headline CPI inflation dropped sharply towards the end of 2020 (see Chart 78), and should remain anchored this year. In all, we think markets are too hawkish in expecting rate hikes over the next 12-18 months – we are expecting further modest rate cuts in the near term. (See Chart 79.)
  • On the external sector, India’s rare current account surplus in 2020 is likely to flip back into a small deficit this year, but should remain small by past standards. (See Chart 80.) Capital inflows are also likely to hold up well as global risk appetite improves. We doubt the external sector will return as a source of vulnerability.
  • On the longer-term outlook, the BJP has recently expedited land and labour reforms that normally face stiff political resistance, ostensibly as part of efforts to support the recovery from the COVID-19 crisis. This will do little to boost demand in the near term. But if India does contain the virus, the reforms could lay a foundation for faster growth further ahead.

Table 11: India Key Forecasts

% y/y unless otherwise specified

Ave.

Forecasts

09-18

2019

2020e

2021

2022

GDP

7.1

4.9

-7.7

12.0

9.5

Consumer prices1

7.6

3.7

6.4

5.3

4.3

RBI Repo Rate2

6.80

5.15

4.00

3.50

3.50

Cent’l gov’t bal3,4

-4.8

-3.4

-4.6

-8.0

-6.0

Current account4

-2.4

-1.0

1.5

-1.0

-1.5

Sources: Refinitiv, Capital Economics.
1) Annual average, 2) End-year, 3) Fiscal Years, Excl. State Deficits 4) % of GDP

India Charts

Chart 73: New Recorded COVID-19 Cases in India
(7d. Avg)

Chart 74: Government Response Stringency Index

Chart 75: Direct Fiscal Response to COVID-19*
(% of GDP)

Chart 76: Non-Performing Loans
(% of Total, Latest)

Chart 77: Real GDP (2019 = 100)

Chart 78: Consumer Prices (% y/y)

Chart 79: Repo Rate (%)

Chart 80: Current Account Balance (4Q Sum, % of GDP)

Sources: WHO, Oxford University, CEIC, Refinitiv, Capital Economics


Other Emerging Asia

New virus outbreaks pose downside risk to above-consensus forecasts

  • Our forecasts for GDP growth across Emerging Asia in 2021 are much higher than consensus expectations. (See Chart 81.) However, with GDP well below its pre-crisis trend nearly everywhere, interest rates are still likely to be cut further over the coming year.
  • Taiwan and China were the clear outperformers in 2020. Output in both is already back at or above the pre-crisis trend. The strong performance is largely due to success in containing the virus. If infections remain under control, domestic economies should continue to fare relatively well. However, with output gaps now closed, GDP growth will slow in q/q terms.
  • Vietnam and Singapore have also contained the virus successfully. However, their sizeable tourism sectors have been destroyed by the pandemic. (See Chart 82.) Tourism should start to recover as the roll-out of vaccines allows borders gradually to be reopened, but a full recovery remains some way off.
  • Korea, Malaysia, Hong Kong and Thailand are all suffering from major new outbreaks, which pose significant downside risks to our upbeat GDP forecasts for these countries. The success these countries had in supressing earlier outbreaks of the virus gives us hope that they will be able to contain the new outbreaks without too much economic damage. But recent drops in mobility suggest that conditions will be weak in the near term. (See Chart 83.)
  • Lasting damage from the virus is likely to be greatest in India and the Philippines. (See Chart 84.) Inadequate fiscal support and their poor record suppressing infections (which has meant restrictions have been in place for longer than elsewhere in the region) mean that the pandemic will leave a legacy of job losses, higher debt, and impaired banking systems.
  • Asia’s recovery has been helped by the resilience of merchandise exports. (See Chart 85.) The region has been a big beneficiary of changes in global consumption patterns which have led to an increase in demand for consumer goods. A return to normality in the rest of the world will lead to a drop-off in demand, as spending switches back from (foreign) goods to (domestic) services.
  • Given economic weakness, the onus will be on most governments and central banks to keep policy loose. Although the crisis has led to a sharp rise in government debt (see Chart 86), policymakers are in little rush to tighten fiscal policy. Budget deficits are likely to come down only gradually.
  • We also think that monetary easing cycles have further to run. Policymakers have little to fear on the inflation front. After an oil-related rise in the coming months, large output gaps should help keep inflation low. (See Chart 87.) We expect further rate cuts in the Philippines, Indonesia, Vietnam, Malaysia, and India over the coming year. (See Chart 88.)

Table 12: Selected Other Emerging Asia Key Forecasts

World Share 1)

GDP

2019 2020e 2021 2022

Inflation

2019 2020e 2021 2022

Emerging Asia 2)

10.9

3.9

-2.3

7.0

6.1

2.6

6.0

2.6

2.0

Indonesia

2.6

5.2

-1.5

7.5

6.5

2.8

2.0

2.0

3.5

Philippines

0.7

6.1

-9.5

11.0

11.0

2.5

2.6

3.0

2.5

South Korea

1.6

2.0

-1.1

5.0

4.0

0.4

0.5

1.0

0.7

Thailand

1.0

2.6

-6.0

6.0

6.0

0.7

-0.8

1.0

1.0

Sources: Refinitiv, Capital Economics. 1) Share of World GDP in 2019 PPP terms. 2) Excluding China and India

Other Emerging Asia Charts

Chart 81: GDP (% y/y)

Chart 82: Singapore Changi Airport Monthly Passenger Movements (SA, Millions)

Chart 83: CE COVID Mobility Trackers
(% difference from Jan. baseline)

Chart 84: GDP
(% difference from pre-virus forecasts, end-21)

Chart 85: Emerging Asia Merchandise Exports

Chart 86: Government Debt (% of GDP)

Chart 87: Emerging Asia Inflation (%)

Chart 88: Change in Policy Rates during 2021
(CE forecast, bps)

Sources: Refinitiv, IMF, Google, Apple, Moovit, Capital Economics


Emerging Europe

  • Prolonged virus restrictions mean that activity in Emerging Europe will remain depressed at the start of 2021. But the region is well-placed to access and distribute vaccines which should allow activity to recover from the crisis more quickly than in most other EM regions.
  • Economies came through the second wave of the virus relatively well. Activity weakened across the region in Q4, but retail sales and industrial production were strong in Turkey and close to pre-virus levels in Central and Eastern Europe (CEE). In Russia, activity has struggled to regain momentum since Q2. (See Chart 89.)
  • While virus outbreaks have mostly improved since November, the situation in the Czech Republic has deteriorated. (See Chart 90.) Containment measures are likely to be kept tight in the coming months. Export-orientated sectors will hold up well in Central Europe but consumer facing sectors will stay depressed. We expect regional GDP to stagnate in Q1.
  • The outlook is brighter further ahead. The region has good access to vaccines and vaccinations in Russia and CEE have taken off. (See Chart 91.) That said, priority groups account for half the populations in Russia and CEE and a third in Turkey (see Chart 92) and vaccinating them will take time. Based on a rough schedule, we think restrictions won’t be relaxed until the end of Q2. (See Chart 93.)
  • GDP should bounce back in the second half of the year. Croatia, and to a lesser extent Turkey and Hungary, will be the beneficiaries of a revival in tourism. The export-dependent economies of Central Europe will benefit from stronger euro-zone demand. But Russia’s economy will experience a smaller vaccine boost given the low share of services sectors.
  • Policy should remain loose in Central Europe. The Czech income tax cut and investment-led support in Hungary will boost growth, while EU funds will support investment. We expect strong disinflationary pressures across the region as lockdowns are eased (see Chart 94), which should allow interest rates to be kept low for longer than most expect. (See Chart 95.)
  • Inflation should also fall back below the central bank’s target in Russia and allow the easing cycle to resume later this year. But fiscal policy is unlikely to be as supportive for growth as it was in 2020. And in Turkey, the central bank will keep monetary conditions tight to claw back its credibility. This will take the steam out of credit growth and weigh on the recovery.
  • Overall, we expect regional GDP to grow by 4.2% in 2021 following a 2.7% slump in 2020. Fast vaccine rollout and a smaller hit to balance sheets mean that output should recover more strongly than other EMs, with Poland leading the way. (See Chart 96.)

Table 13: Emerging Europe Key Forecasts1

World Share2

GDP

Inflation

2019

2020e

2021

2022

2019

2020e

2021

2022

Emerging Europe

7.9

2.4

-2.7

4.2

4.4

6.4

5.3

5.9

4.6

Russia

3.1

2.0

-3.5

3.5

3.3

4.5

3.4

4.3

3.8

Turkey

1.8

0.9

1.3

4.5

4.3

15.2

12.3

13.5

8.8

Poland

1.0

4.5

-3.0

4.8

5.3

2.3

3.4

2.3

2.5

Czech Republic

0.3

2.3

-6.3

4.5

6.0

2.9

3.2

2.0

2.3

Hungary

0.2

4.6

-5.8

5.0

6.3

3.4

3.3

2.5

2.8

Sources: Refinitiv, Capital Economics. 1) % y/y. 2) Share of World GDP in 2019 PPP terms.

Emerging Europe Charts

Chart 89: Industrial Production & Retail Sales
(Seas. Adj., % Change, Feb. to Nov. 2020)

Chart 90: New Daily COVID-19 Cases
(7DMA, per 100,000)

Chart 91: Vaccine Doses Administered (% of Pop.)

Chart 92: Priority Vaccination Groups (% of Population)

Chart 93: COVID-19 Vaccination Rollout Schedule

Chart 94: Inflation (%)

Chart 95: Policy Interest Rates (%)

Chart 96: GDP (vs. Pre-Virus Forecast at End-2022, %)

Sources: Refinitiv, BMJ, CEIC, Bloomberg, IMF, Capital Economics


Latin America

Vaccines won’t heal all scars

  • Vaccines offer Latin America a route out of the crisis, but lingering public debt issues will hold back the recovery relative to other EMs and raise the risk of long-lasting economic scarring. One consequence is that interest rates will stay low for longer than most expect.
  • Headwinds to the near-term outlook are growing. COVID-19 outbreaks across the region have worsened (see Chart 97) and lockdown measures have been tightened in recent weeks. (See Chart 98.) With healthcare systems stretched, stringent restrictions will probably stay in place throughout Q1, causing the regional recovery to grind to a halt.
  • The rollout of vaccines offers hope. Chile and, to a lesser extent, Mexico, look best placed to benefit on this front. Both countries have sizeable orders (see Chart 99) and have already started administering jabs. We assume that the most vulnerable citizens in Chile and Mexico will be vaccinated by the end of Q2, allowing containment measures to be gradually eased. But this process is likely to be slower in Brazil, Argentina, Colombia, and Peru, where access and distribution problems will probably be more acute.
  • The region should also benefit from higher commodity prices. Although we think that the rise in metals and agricultural prices has almost run its course, our forecasts suggest that the terms of trade across most of the region will improve this year. (See Chart 100.)
  • However, debt issues will cast a shadow over recoveries. Aside from in Chile and Peru, governments will consolidate fiscal positions, which will weigh on domestic demand. Limited fiscal support risks causing higher unemployment and business closures, leading to long-term scarring. That’s a key reason why GDP will stay some way below its pre-crisis trend over the next two years. (See Chart 101.)
  • At a country level, we think that Chile’s economy will be closest to ‘normal’ by end-2022, while most others will fare poorly by EM standards. (See Chart 102.) Our GDP growth forecasts lie above the consensus, except for Brazil. But the continued spread of COVID-19 or problems with vaccine rollout pose major risks to our forecasts.
  • Weak recoveries mean that output gaps will remain large and core inflation soft. Aside from Mexico, we doubt that there is scope for further monetary easing. But policymakers will be slower to shift to tightening than most currently anticipate. (See Chart 103.)
  • Meanwhile, we expect improving global risk appetite to boost the region’s financial markets and currencies. (See Chart 104.) But politics is a major risk. There is a threat of a populist shift in elections in Ecuador, Peru, and Chile this year. And we suspect that Brazil’s government will cast aside the spending cap ahead of the 2022 general election, which will flare up concerns about public debt.

Table 14: Latin America Key Forecasts1

World Share2

GDP

Inflation

2019

2020e

2021

2022

2019

2020e

2021

2022

Latin America3

6.7

0.7

-6.9

5.0

3.4

3.4

3.0

4.0

3.1

Brazil

2.4

1.4

-4.0

3.0

2.0

3.7

3.2

4.5

3.0

Mexico

2.0

-0.1

-8.5

5.5

4.5

3.6

3.4

4.0

3.8

Argentina

0.8

-2.1

-10.0

6.0

2.5

53.5

42.0

45.0

38.0

Colombia

0.6

3.3

-7.0

6.0

4.5

3.5

2.5

2.8

2.8

Chile

0.4

1.1

-6.3

6.5

5.5

2.3

3.0

3.3

2.8

Sources: Refinitiv, CE. 1) % y/y. 2) %, 2019, in PPP terms. 3) Regional GDP excludes Venezuela; regional CPI excludes Argentina & Venezuela.

Latin America Charts

Chart 97: Daily New COVID-19 Cases
(7d Avg., Thousands)

Chart 98: Government Response Stringency Index
(100 = Most Stringent)

Chart 99: Confirmed Vaccines Ordered
(% of Population)

Chart 100: CE Estimate of Change in Net Commodity Exports (% of GDP, Over Year as Whole)

Chart 101: Latin America Real GDP
(Index, Q4 2019 = 100)

Chart 102: Real GDP at End-2022
(% Difference from Pre-Crisis Trend)

Chart 103: Policy Interest Rates (%)

Chart 104: Currencies Vs. US Dollar
(%, Change Now to End-21)

Sources: Refinitiv, Bloomberg, Oxford Uni., Intracen, Duke GHIC, CE


Middle East & North Africa

Gulf to lead the recovery

  • A rapid rollout of coronavirus vaccines and higher oil prices will support a quick recovery this year in the Gulf countries. But other parts of the region are likely to take longer to recover.
  • The region recorded its worst downturn since the 1980s last year and the pain is likely to endure a while longer amid fresh waves of the virus (see Chart 105) and tightening restrictions.
  • However, the rollout of vaccines offers hope. The UAE ranks among the best in the world in terms of the speed of its vaccination programme (see Chart 106) and will probably lift most restrictions in Q2. The other Gulf countries are in a good place to roll out vaccines quickly, although a reluctance among citizens to be vaccinated in some countries presents a hurdle.
  • Vaccination programmes are likely to be slower in many non-Gulf countries, which suffer from low vaccine access and more severe distributional challenges. The one crumb of comfort is that vulnerable populations are proportionally smaller than in many parts of the world. (See Chart 107.) As a result, governments may be in a position to lift most restrictions later this year.
  • Those economies that have been suffering heavily recently with COVID-19 outbreaks, as well as those where sectors vulnerable to social distancing are large (see Chart 108), will enjoy the largest “vaccine bounce”. Dubai stands to be a major beneficiary.
  • There will also be substantial indirect benefits as vaccines are rolled out globally. Rising oil output to meet higher global demand will provide a lift to the Gulf. (See Chart 109.) Oil prices are also likely to rise, further boosting the value of oil exports and supporting an improvement in budget and current account positions. (See Chart 110.) Dollar pegs will hold. Further austerity is unlikely, but unlike many other parts of the world, fiscal policy will not be particularly accommodative either.
  • Outside of the Gulf, a recovery in tourism will support a narrowing of current account deficits and the recent pick-up in capital inflows is likely to be sustained. The scope for increasing fiscal stimulus will be limited by the poor state of public finances, raising the risk of scarring effects from the crisis that have lasting effects on growth. But Egypt’s central bank is likely to deliver further rate cuts later this year, after inflation peaks this year. (See Chart 111.)
  • All told, we forecast the region’s economy as a whole to be around 1% below its pre-virus trend by the end of 2022. (See Chart 112.)
  • Recent peace deals with Israel, the lifting of the blockade on Qatar, and efforts to jumpstart the Iran nuclear deal mean that geopolitical tensions may continue to dissipate, although the economic impact is likely to be limited. Ten years on from the Arab Spring, social unrest remains a major threat in several of the region’s economies.

Table 15: Middle East & North Africa Key Forecasts1

World Share2

GDP

Inflation

2019

2020e

2021

2022

2019

2020e

2021

2022

Middle East & North Africa

4.0

2.1

-5.1

5.0

5.6

1.5

4.1

4.9

3.3

Saudi Arabia

1.2

0.3

-4.3

2.3

6.3

-2.1

3.4

3.8

1.8

Egypt

0.9

5.6

1.0

6.0

6.3

8.6

5.2

5.8

4.5

UAE

0.5

3.0

-9.0

9.8

6.8

-1.9

-2.0

2.5

3.0

Morocco

0.2

2.3

-6.5

9.5

4.3

0.7

0.8

0.8

0.8

Sources: Refinitiv, Capital Economics. 1) % y/y. 2) Share of World GDP in 2019 PPP terms.

Middle East & North Africa Charts

Chart 105: COVID-19 New Cases
(Change in 7-Day Rolling Avg. 1st Jan – Latest)

Chart 106: Total Coronavirus Vaccine Doses Administered* (% of Total Population, Latest)

Chart 107: Priority Vaccination Group
(% of Population)

Chart 108: Sectors* at Risk of Social Distancing
(% of GDP)

Chart 109: Gulf* oil production

Chart 110: Current Account Balance (% of GDP)

Chart 111: Egypt Consumer Prices &
Overnight Deposit Rate

Chart 112: Middle East & North Africa GDP
(Index, Q1 2020 = 100)

Sources: CEIC, Refinitiv, Capital Economics


Sub-Saharan Africa

Held back by slow vaccine rollout and limited fiscal support

  • Worsening COVID-19 outbreaks across Sub-Saharan Africa will keep economic activity depressed over the coming quarters and, even once vaccines belatedly reach the region, recoveries will remain weak.
  • Downturns in 2020 were mostly smaller than in other EMs, reflecting the fact that discretionary spending tends to be low and agricultural sectors are large in most places.
  • A recent surge in COVID-19 cases has already prompted a tightening of containment measures in South Africa. Similar moves are likely in other parts of the region. (See Charts 113 & 114.) This will weigh on activity in the coming months (see Chart 115) and, while our working assumption is that the stringent curbs of the first wave will be avoided, there is little hope for a rapid lifting of restrictions. After all, vaccines will probably be distributed with quite some delay and will remain in short supply for much of the region.
  • Vaccine rollouts are unlikely to start in earnest before the second half of 2021 and, as a result, prolonged restrictions will constrain recoveries and raise the chances of further economic scarring. Fiscal support has been sparse throughout the crisis and that is unlikely to change. If anything, policymakers may turn to austerity to deal with higher public debt-to-GDP ratios. (See Chart 116.)
  • By and large, immediate debt risks have subsided. Pockets of risk remain – most notably in Ethiopia, Kenya and Ghana – where governments could run into trouble servicing debt and end up following Zambia’s path to sovereign default. But improving risk appetite has already lowered sovereign borrowing costs across the board. (See Chart 117.) It has also taken some of the wind out of the sails of debt relief efforts, which we think are unlikely to make much more headway.
  • Compared to 2020, elevated commodity prices over this year as a whole will reduce balance sheet pressures in major producers of oil (Nigeria, Angola) and industrial metals (Zambia, South Africa) and give a much-needed leg-up to recoveries. (See Chart 118.) And tourism-dependent economies will benefit from visitors trickling back as vaccination campaigns are ramped up across the globe. (See Chart 119.)
  • For the most part though, we think that recoveries in the region will be weaker compared with other EMs. (See Chart 120.) By end-2022, GDP in South Africa and Nigeria will still be 2-4% below its pre-virus path.
  • Central banks will probably keep monetary conditions loose for some time. In South Africa, the repo rate is likely to stay low for longer than most analysts anticipate. The Central Bank of Nigeria may opt for additional loosening once headline inflation drops back.

Table 16: Selected Sub-Saharan Africa

World

GDP

Inflation2

Share1

2019

2020e

2021

2022

2019

2020e

2021

2022

Sub-Saharan Africa

2.5

3.1

-2.4

4.6

4.8

8.3

9.6

9.2

8.2

Nigeria

0.9

2.2

-2.0

3.5

3.0

11.4

13.2

15.0

13.0

South Africa

0.6

0.2

-7.3

4.3

4.0

4.1

3.3

3.8

3.3

Angola

0.1

-0.9

-5.0

3.5

2.5

17.1

22.2

21.0

16.0

Kenya

0.1

5.4

-0.5

6.0

6.5

5.2

5.3

5.5

5.0

Sources: Refinitiv, IMF, NBS, Stats SA, INE, KNBS, National Sources, Capital Economics. 1) Share of World GDP in 2019 PPP terms. 2) Annual average

Sub-Saharan Africa Charts

Chart 113: New Daily COVID-19 Cases
(7-day moving average)

Chart 114: Oxford University Government Response
Stringency Index

Chart 115: Retail & Recreation Visits* (Google Mobility Data, % Relative to 3rd Jan-6th Feb, 7d avg.)

Chart 116: Gross Government Debt (% of GDP)

Chart 117: JP Morgan EMBI Yields (bp)

Chart 118: Forecast Change in Net Exports Due to Changes in Commodity Prices (% of GDP, 2021 vs. 2020)

Chart 119: Tourism (Latest, % of GDP)

Chart 120: GDP (% y/y)

Sources: Refinitiv, CEIC, Oxford, BMJ, WTTC, IMF, Capital Economics


Commodities

Oil to outperform in 2021

  • We expect the divergence between the prices of oil and most other commodities – which characterised 2020 – to continue this year, but in reverse. We forecast that oil prices will rise and therefore outperform the prices of most industrial metals and agriculturals, which we expect to fall over the course of the year.
  • In 2020, oil prices only partially recovered from the virus-related collapse (see Chart 121) as demand remained weak. By contrast, industrial metals prices more than clawed back their losses as a result of a stimulus-induced recovery in China’s economy. (See Chart 122.) (China accounts for around 50% of consumption of most metals.) Agricultural commodities prices also jumped, amid supply disruptions.
  • In 2021, we anticipate a surge in oil demand in the second half of the year as the rollout of vaccines enables economies to open up and travel and hospitality to resume. However, the potential for higher oil prices will be dampened by the huge amount of oil output capacity that is currently offline and which could be brought back on stream at the right price. Based on its current quota, OPEC+ would still have a production cut of 5.8 bpd by the end of this year. (See Chart 123.) What’s more, US output is now around 2m bpd less than its recent peak in March 2020. (See Chart 124.)
  • Our forecasts assume a revival in US output and some slippage in OPEC+ compliance, but the oil market should still be in a small deficit. (See Chart 125.) As a result, we expect the price of Brent to rise to $60 per barrel by end-2021.
  • The rally in industrial metals prices could continue early this year given the momentum in China’s economy. However, we expect prices to start falling in the second half of the year as the lagged effects of China’s earlier fiscal stimulus start to fade. What’s more, the virus-induced boom in China’s metals-intensive electronics exports (see Chart 126) should ease back as consumers in developed markets start to spend more on services.
  • Meanwhile, the price of gold should continue to benefit from ultra-low US interest rates and a weaker US dollar. Indeed, we expect US real yields to nudge lower, as inflation expectations pick up, which is particularly positive for the price of gold. (See Chart 127.) That said, as the global recovery gathers pace, lower safe-haven demand will act as a cap on prices. We see prices rising to $1,900 per ounce by end-year.
  • Agricultural commodity prices have soared recently, as adverse weather and virus-related labour problems raised concerns about supply. Investor enthusiasm has added to upward price pressure. (See Chart 128.) But we think, for the most part, that supply will recover next season leading to lower prices by year-end.

Table 17: Commodity Prices (Year-end)

Forecasts

2018

2019

2020e

2021

2022

 

S&P GSCI Index

374

436

409

430

410

Bloomberg Index

321

355

397

390

370

Energy

Brent ($ per barrel)

54

66

52

60

55

US Natural Gas(1)

2.9

2.2

2.5

3.0

3.5

Coal(2)

102

67

81

65

52

Metals ($ per tonne)

Copper

5,949

6,149

7,749

7,000

6,600

Aluminium

1,863

1,781

1,781

1,850

1,775

Iron Ore

72

92

160

100

70

Gold ($ per oz)

1,283

1,517

1,896

1,900

1,800

Agriculturals (US cents per bushel)

Corn

375

388

484

450

425

Soybeans

883

943

1,315

1,000

925

Wheat

503

559

641

480

475

Sources: Refinitiv, Bloomberg, Capital Economics.

1) Henry Hub, $ per mBtu, 2) Newcastle, $ per tonne

Commodities Charts

Chart 121: S&P GSCI Commodity Prices
(1st Jan. 2020 = 100)

Chart 122: China Manufacturing PMIs & Industrial
Metals Prices

Chart 123: OPEC Production & Quotas (Mn. BpD)

Chart 124: US Oil Production (Mn. BpD)

Chart 125: Oil Market Fundamentals (Mn. BpD)

Chart 126: China Exports & Industrial Metals Prices

Chart 127: US Real Yield & Gold Price

Chart 128: Futures Position in Agriculturals
& Price Index

Sources: Refinitiv, IHS Markit, IEA, BP, OPEC, Capital Economics


Jennifer McKeown, Head of Global Economics Service, jennifer.mckeown@capitaleconomics.com
Simon MacAdam, Senior Global Economist, simon.macadam@capitaleconomics.com
Gabriella Dickens, Global Economist, gabriella.dickens@capitaleconomics.com
Kieran Tompkins, Assistant Economist, kieran.tompkins@capitaleconomics.com