The cyclical recovery that started late in 2020 has continued to accelerate, particularly as more countries make significant progress with vaccinations and continue to ease restrictions. At 5.7% for 2021, our global growth forecast has edged 0.1 percentage point (pp) higher since May and continues to reflect this cyclical pick up growth, particularly following the 3.4% contraction in output in 2020. That said, our growth forecasts for 2021 are slightly below consensus estimates, which put global growth at 6.0%. Since our last publication in May, and as more Q121 real GDP data were released, we have made several changes to our forecasts, which include upward revisions to Australia (0.8pp to 4.5%), Brazil (0.3pp to 4.2%), Mexico (0.3pp to 5.5%), the UAE (0.1pp to 4.1%), South Africa (0.8pp to 3.5%), Turkey (0.3pp to 5.9%) and Romania (0.9pp to 6.0%). However, these improvements to growth were mostly offset by revisions lower for Portugal (0.5pp to 4.5%), Argentina (1.5pp to 5.6%) India (0.5pp to 9.0%), Indonesia (0.3pp to 5.1%) and Thailand (0.3pp to 3.0%).
While year-on-year growth will accelerate sharply in Q2, we believe that global growth will peak over the coming months but still remain at robust levels - Purchasing managers’ index (PMI) readings may already be signalling this. On a quarter-on-quarter basis the biggest improvement in growth will occur as countries start reaching herd immunity levels and economies re-open more fully, which we believe is currently the case in the US and Europe, which together account for about 40% of global GDP. At the same time, year-on-year base effects will be strongest in Q221 given that output contracted sharply between April and June 2020. While emerging markets (EMs) are still struggling with renewed outbreaks, many will not see a dramatic acceleration in growth, as restrictions have already been eased in many countries. We also believe that GDP growth in China (which accounts for another 18% of global GDP) has already peaked.
Rebound In Output Has Been Very Uneven
Global - Q121 Real GDP Relative To Pre-Covid Levels, %
Despite the strong recovery in global GDP, output in many economies is still well below pre-pandemic levels, although we expect the majority of this shortfall to be closed in the next few quarters. Nonetheless, we note divergences that currently exist. Q121 data show that India, China, Turkey and South Korea had all exceeded their pre-pandemic levels of output, while Brazil almost closed the gap. Other countries have not done as well. Output in Spain, for example, was still 9.3% below pre-crisis levels in Q121, and the UK economy was still 8.7% smaller.
We continue to highlight that rising inflationary pressures and delayed vaccination programmes across EMs pose the largest downside risks to growth. As of early June, inflation was above policymakers’ mid-point target in nine of the 24 large markets that we follow in our inflation tracker (which covers 80% of global GDP). In four of the nine, inflation was above the target range. Inflationary pressures will likely continue to strengthen in the next two-to-three months, driven by base effects, rising commodity prices and strong demand. Even so, we continue to expect that inflation will ease as base effects from 2020 start wearing off and as rising production helps to ease localised supply shortages. EM vaccine drives continue to lag behind those in developed markets (DMs), but President Joe Biden’s recent announcement that the US will donate 25mn vaccines and that the G7 will donate 1bn of vaccines, combined with support from Chinese and Russian vaccines, may help to accelerate the rollout across EMs.
Uneven Rollout Of Vaccinations
Global - Share of People Who Have Received At Least One Vaccine, %
Although we expect that most EM central banks will ease or remain on hold in 2021, rising inflation has seen many central banks start to hike interest rates. For example, among major EMs, Brazil (+150 basis points - bps), Russia (+125bps), Turkey (+200bps) and Ukraine (+150bps) have hiked interest rates, and we expect further hikes in Russia (+50bps) and Brazil (+150bps) and expect the central banks of Argentina (+600bps), Czech Republic (+25bps) and South Africa (+25bps) to start raising interest rates before the end of 2021. While we do not expect DM central banks to hike anytime soon, the Bank of England and the Bank of Canada have both started to taper their asset purchases. In the event of a faster-than-expected hawkish shift by global policymakers, this could significantly increase global market volatility, particularly for EM currencies and bond yields.
|Real GDP Growth (%)|
|Consumer Inflation (avg)|
|Interest Rates (Eop)|
|Fed funds rate||2.250||1.500||0.000||0.000||0.000||0.250||0.750||1.000|
|ECB refinancing rate||0.000||0.000||0.000||0.000||0.000||0.000||0.100||0.250|
|Japan overnight call rate||-0.100||-0.100||-0.100||-0.100||-0.100||-0.100||0.000||0.000|
|Exchange Rates (avg)|
|Oil Prices (avg)|
|OPEC basket (USD/bbl)||69.78||64.04||41.40||62.00||61.00||62.00||67.00||69.00|
|Brent crude (USD/bbl)||71.69||64.16||43.21||66.00||64.00||65.00||70.00||72.00|
|Sub - Saharan Africa||2.8||2.6||-2.6||3.1||3.8||3.9||3.8||3.8|
|Middle East & North Africa||1.8||0.7||-4.1||3.6||4.3||3.7||3.3||3.2|
|Developed Market Exchange Rates|
|Emerging Market Exchange Rates|
|South Korea||KRW/USD, ave||1100||1165||1180||1100||1060||1100||1115||1130|
|South Africa||ZAR/USD, ave||13.23||14.45||16.46||14.52||15.01||17.10||18.00||18.26|
DMs: Growth Gathers Traction As Post-Covid Recovery Strengthens
We have kept our 2021 real GDP growth forecast for DMs at 5.1% in June, as our upward revision to Australia was offset by our downward revision to Portugal. We now expect that Australia will grow by 4.5% in 2021, from 3.7% previously, owing to stronger-than-anticipated real GDP growth in Q121 (1.1% y-o-y). By contrast, a sharp real GDP contraction in Q121 (5.4%) prompted us to cut our 2021 growth forecast for Portugal by 0.6 percentage points (pp) to 4.5%.
High-frequency data and sentiment surveys suggest that the recovery continued to gather momentum in early Q221. May’s PMI reflected an improvement in private sector activity on the back of mass vaccinations and ongoing fiscal support, which we think will continue to work their way through to the real economy over the coming months. That said, composite PMI data suggest that there are differences in the speed of the economic recovery, with the US and the UK leading peers and Japan struggling (see left-hand chart below). This is broadly in line with our real GDP growth forecasts for 2021, which see all the biggest DM economies growing well above trend but at different rates. In particular, we forecast that the US and the UK will grow the most after Spain, at 6.4% and 5.5% respectively. Japan will grow the least, at 2.5% (see right-hand chart below). We see some upside risks to quarterly growth for more service-intensive economies, such as the US, the UK, Italy and Spain, as we believe that the ongoing lifting of restrictions will see services progressively take over from manufacturing as a key contributor to growth over H221.
Steady progress on mass vaccination campaigns has helped to firm up consumer confidence across DMs, with positive knock-on effects on private spending, and thus growth. In particular, sentiment data from GfK, Westpac and the European Commission show that consumers in the UK, Australia, Canada, Italy, Spain and France are currently at least as optimistic as they were before the pandemic hit in early 2020.
Reflecting rising consumer optimism and the effect of the gradual easing of restrictions on consumer spending, retail sales rose in April as several DMs, expanding by 9.0% m-o-m in the UK, 3.6% in Canada and 1.1% in Australia. In the US monthly sales volumes were flat but surged by 51.2% y-o-y due to base effects.
On the political front, we note that the Christian Democratic Union’s (CDU) victory in the state election in Saxony-Anhalt, Germany, on June 6 should provide a boost to the party’s leader Armin Laschet, making him the most likely candidate to lead the CDU/Christian Social Union into the federal election on September 26. That said, the result is only likely to provide a limited boost to the CDU nationally, and there remains a significant degree of uncertainty around the composition of the next German federal government after the elections
|Developed States Aggregate Growth||2.3||1.7||-4.6||5.1||3.6||2.0||1.8||1.7|
|Selected Developed States|
EMs: Weak Q121, But Growing Optimism
Despite weak Q121 figures, we have raised our forecast for aggregate EM growth in 2021 from 6.4% to 6.5%. Malaysia and Poland - where output fell in Q420 but rose in Q121 - were the only major EMs that performed better at the start of 2021 than they did at the end of 2020. In many EMs, including Mexico and China, growth slowed dramatically (see chart below).
A Weak Performance
EMs – Real GDP Growth, % q-o-q
The generalised slowdown was, however, probably inevitable. Growth surged far above potential in Q320 and Q420 as economies reopened following shutdowns earlier in 2020, and this could not be sustained indefinitely. Even though growth slowed in Q121, Brazil and Chile joined China, India and Turkey in surpassing their pre-crisis level of GDP. In Colombia and Malaysia, output was less than 1.0% lower than it was in Q419. Other EMs have further to go. In the Philippines, the worst-performing major EM, GDP was 19.3% lower in Q121 than it was in Q419 (see chart below).
Making Up Lost Ground
EMs – Real GDP, Index 100 = Q419
This suggests that the EM recovery is now broadening out and that more economies are following China, which recovered to its pre-crisis level of GDP in Q320. We expect that the GDP of major EMs (excluding China) rose marginally above the pre-crisis level in Q121 (see chart below).
High-frequency data suggest that activity strengthened further at the start of Q221. Manufacturing PMIs, for instance (which compare a given month to the previous month) remained above 50 in almost every major EM in April and in May (see chart below).
PMIs Point To Strong Growth
EMs – Manufacturing PMIs
With the recovery seemingly well under way, attention has shifted to rising inflationary pressures. Inflation in major EMs rose on average from 4.8% y-o-y in March to 5.5% y-o-y in April. Inflation is now above the target mid-point in most major EMs (see chart below). We expect that EM inflation will continue to pick up in Q221.
Above-target inflation will add to the pressure on EM central banks to hike their key policy rates, as they did recently in Brazil (+75bps in May) and Russia (+50bps in April and +50bps in June). We expect that policymakers in Argentina will hike by the most, raising their key interest rate by 600bps. We also expect 100bps or more of tightening in Brazil, Vietnam and Nigeria.
EM Asia: Downward Revisions, But Still Out Ahead
Against a general backdrop of growing optimism towards EMs, we have become a bit less bullish about several key Asian economies, and we expect the region to grow by 8.0% in 2021. The biggest of these was India, for which we reduced our 2021 (FY2021/22) growth forecast from 9.5% to 9.0%. The country is suffering from a painful wave of Covid-19 infections, which we expect disrupted economic activity in the March-May quarter. Even so, we expect that India will be the best-performing large EM in 2021, with growth exceeding even China’s 8.5% (see chart below).
India Out Ahead
EMs – Real GDP Growth Forecasts, % (2021)
Elsewhere in the region, we became a bit less optimistic about Indonesia and Thailand. We revised down our 2021 forecast for Indonesia from 5.5% to 5.1% after figures from Q121 were weaker than we had anticipated. We also reduced our 2021 growth forecast for Thailand, from 3.3% to 3.0%. Like much of South East Asia, Thailand is experiencing a new wave of Covid-19 infections, which we expect will delay the reopening of the tourism sector. Even so, we remain optimistic that South East Asian economies will outperform EM peers over the coming years.
EM Europe: Turkish Recovery Will Boost Region
We have revised up our 2021 GDP growth forecast for emerging Europe from 3.7% to 4.1% this month. While we became slightly more optimistic about economies across emerging Europe, the more bullish view was mostly due to an upward revision to our forecast for Turkey. We raised our 2021 forecast for Turkish growth from 4.7% to 5.9% this month after Q121 data were stronger than we had expected and showed a robust acceleration in fixed investment, private consumption and exports. This would make the economy one of the fastest growing in emerging Europe (see chart below).
Europe – Real GDP Growth Forecasts, % (2021)
However, Turkey’s economy remains fragile, with the current account deficit posing a particular threat to macroeconomic stability, and monetary tightening and lockdowns in May likely capping momentum in Q221. We also raised our forecast for Romania (5.2% to 6.0%) following strong Q121 data. Despite an increase in Covid-19 cases in late Q121 and early Q221, the country has so far avoided another national lockdown, which will help to support the recovery. We also revised up our 2021 growth forecasts for Poland (3.7% to 4.0%).
MENA: A Mixed Picture
In aggregate, we moved our 2021 growth forecast for the Middle East and North Africa (MENA) from 3.3% to 3.6%, but this figure obscures significant variation between countries. The upward move in the headline figure was due to our more optimistic views on the UAE, Kuwait and Iraq (see chart below).
Mostly Upward Revisions, But Lebanon Slips
MENA - Real GDP Growth Forecasts, % (2021)
We have raised our 2021 forecast for Kuwait from 2.8% to 3.2% due to looser fiscal policy; the recent budget suggests that a planned VAT hike has been delayed and that spending will remain higher than we expected, boosting consumption. It is a similar picture in the UAE, for which we have revised up our forecast from 4.0% to 4.1%, although we expect that consumer-driver Dubai will outperform oil-rich Abu Dhabi. Conversely, we reduced our 2021 forecast for Lebanon from a contraction of 2.5% to a fall of 5.1% because we think that the disruptions caused by 2020’s explosion will weigh heavily on the economy in 2021.
SSA: Slight Upward Revision
We have revised up our regional growth forecast for Sub-Saharan Africa (SSA) from 3.0% to 3.1% but still think that the region will be the worst performing in the EM world (see chart below). Governments in SSA provided much less fiscal support to consumers in 2020 than did peers elsewhere, leaving populations to face the economic disruption by themselves.
Asia Ahead, SSA Falling Behind
EM Regions - Real GDP Growth Forecast, % (2021)
We have left our forecasts for most major economies in the region unchanged. We are most optimistic about growth in Côte d’Ivoire, where we expect growth of 6.4% in 2021. In SSA’s two key oil exporters, however, we expect that weak consumer spending and a lack of fiscal support will keep the recovery weak. We expect growth of just 1.8% in Nigeria and 1.7% in Angola. The very slight upward revision was due to a very slightly more optimistic view on South Africa. While South Africa’s economy contracted by 2.6% y-o-y in Q121, we expect that the significant base effects caused by2020’s economic contraction will flatten growth later in 2021. We expect that the economy will return to year-on-year growth in Q221 and expand by 3.5% over 2021 as a whole.
Latin America: Growing Optimism
We have revised our 2021 growth forecast for Latin America from 4.4% to 5.0% over the past month, the largest increase in any EM region. We revised up our forecasts for medium-sized economies, including Peru (7.5% to 8.5%) and Chile (5.6% to 6.1%). However, tthe key drivers of our more optimistic regional forecast were revisions to our views for Latin America’s two largest economies, Brazil and Mexico. In Brazil, a stronger-than-expected Q121 GDP figure and evidence of a strong performance in the industrial sector in early Q221 led us to raise our 2021 forecast from 3.2% to 4.2%. The reinstatement of emergency health benefits will also help consumption. In Mexico, we revised our forecast from 4.2% to 5.5% following data revisions from the authorities which showed that the economy bottomed out in early Q121 and entered Q221 with more momentum.
Argentina A Lone Downward Revision
Latin America - Real GDP Growth Forecasts, % (2021)
We have become a bit more pessimistic about Argentina. We cut our forecast for the country from 7.1% to 5.6% after a severe wave of Covid-19 infections prompted the re-imposition of mobility restrictions. This was, however, an exception in the region (see chart above).
|Emerging Market Aggregate Growth||4.6||3.9||-1.7||6.5||5.0||4.7||4.6||4.5|
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