2021 started in a bullish mood. Our Research analysts called for risk assets to outperform and bond yields to drift higher, as the global economy began to emerge from the shadow of COVID-19. Three months on, the world is in a similar position. Three main themes dominate as our Research analysts survey the macro landscape now.
Good news on growth, especially from the US
The Trump administration passed a $935bn stimulus at the end of last year, and the Biden administration has just passed a new $1.9trn package. This super-charged fiscal boost should help the US economy surpass its pre-COVID-19 level by the second quarter – the very definition of a V-shaped recovery. China, too, will very likely be lifted by consumer spending, exports and manufacturing investment. Our analysts think those twin engines should power the global economy into achieving growth of 6.4% in 2021, the fastest pace in at least four decades.
The road to growth
The US and China are expected to power a global economic recovery in 2021, thanks to fiscal stimulus in the US and strong consumer spending in China.
There has also been a lot of progress on the COVID-19 front. Hospitalisations and new cases have fallen sharply across the West, and much of the high-risk population has been vaccinated. The US and UK are on track to achieve population immunity by mid-year, followed a few months later by Europe.
Households are in a strong position
Across the US, the UK and the euro area, households have accumulated excess savings of as much as 8-10% of GDP, over and above what they would have saved if COVID-19 had never happened. Some of this is due to government support, in the form of stimulus cheques and unemployment benefits. And precautionary savings do tend to rise in recessions, as households tighten their belts. But a large part of the COVID-19 savings seems to be “forced” in nature, caused by the widespread lockdowns.
Excess household savings
Households in the US, UK and Europe are sitting on added savings accumulated during Covid-19 lockdowns — especially affluent households, with a tendency to spend during “normal” times.
Our analysts also note that the savings are concentrated in households higher up the socio-economic spectrum, which have the means and the propensity to spend. The pace of the rebound in consumption will vary from region to region as economies re-open, but pent-up demand should be a big driver of growth.
Fears of overheating are overdone
The strong macro outlook has prompted some investors to worry about runaway inflation that may force the US Federal Reserve into sharp policy tightening that crushes the risk rally. Our analysts do not share these concerns. Bond yields have moved much higher this year, but that partly reflects a re-pricing of the outlook for growth, rather than a big rise in medium-term inflation expectations. Our analysts expect inflation to spike mid-year, but then come down by year-end, much in line with the Fed’s own forecasts.
A fly in the ointment is the bond sell-off and the fear that inflation will force the Fed into an aggressive hiking cycle that crushes the risk rally. We think these fears are overdone.
Ajay Rajadhyaksha, Head of Macro Research, Barclays
Our analysts caution that not every financial asset is a “buy.” Valuations are full in many markets, and some assets, such as emerging-market debt, have shown more sensitivity to the tussle between higher growth and higher yields. But our analysts' basic stance is unchanged, three months into the year. They maintain their bullish outlook on global growth and overweight risk assets over fixed income.
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Ajay Rajadhyaksha is Head of Macro Research at Barclays, based in New York. He oversees the global research and strategy efforts of the economics, rates, FX, commodities, emerging markets, securitised, and asset allocation teams. Since joining Barclays in 2005, Ajay has held various positions, including Co-Head of FICC Research and before that, Head of US Fixed Income Research and US and European Securitised Research.