Summarising prospects for the post-pandemic rebound, the IMF this week in its April World Economic Outlook upgraded its forecasts for global growth in 2021 from 5.5% to 6.0% and in 2022 from 4.2% to 4.4%. Significant fiscal stimulus packages, most notably in the US, as well as wider reopening efforts due to vaccine rollouts are the key factors behind the upgrades, though the group emphasised that there will be a vast spread in the pace of recoveries from country to country and that overall uncertainty over the outlook remains elevated. The pandemic continues to be the main risk to the global recovery, with variant virus strains and operational issues around vaccine rollouts — highlighted this week with many countries (including Australia) now working through adjusting plans following concerns over side effects linked to the AstraZeneca vaccine — potential headwinds.
The uplift to the growth outlook in the US was a sharp 1.3ppts to 6.4% in 2021 followed by a further 1.0ppt increase to 3.5% in 2022. This has GDP on track to return to its pre-pandemic level after the first half of this year, with the Biden Administration's direct support payments and accumulated savings set to drive a sharp rebound in household consumption spending. In past cycles, accelerating growth would have prompted tighter monetary policy settings, but the message from the Federal Reserve continues to be that it will be a very different story this time around. This week's FOMC minutes from the March meeting reaffirmed the Fed's commitment to its more patient reaction function, with policy to respond to actual rather than forecast outcomes. The indications are that the current pace of Fed purchases ($120bn/mth) will be maintained "until substantial further progress" is made towards reducing spare capacity in the economy. FOMC Chair Jerome Powell reiterated during an IMF seminar that while the reopening is anticipated to see inflation rise sharply, the increase is expected to be temporary rather than sustained, consistent with subdued price pressure dynamics that have persisted for the past 25 years or so. The main US data point to highlight was the ISM services index for March, which surged to a record high of 63.7, well clear of the 50 line that signals expansion and up from a read of 55.3 in February. Accelerating domestic activity was reflected in the internals with the new orders (+15.3pts) and production (+13.9pts) sub-indexes surging to their highest levels on record, while the index measuring price changes for materials and services lifted 2.2pts in the month with logistics delays a key factor.
The contrast in the outlook for Europe compared to the US was underlined by both the IMF and ECB this week. The effects of renewed lockdowns across Europe will weigh heavily over the near term before the vaccine rollout enables the economy to rebound over the second half of the year. As a result, forecast growth in the bloc was upgraded by the IMF only modestly relative to the January update, lifting from 4.2% to 4.4% in 2021 and 3.8% in 2022 from 3.6% previously. These forecasts are similar to those recently published by the ECB for growth of 4% in 2021 and 4.1% in 2022, with GDP only being restored to pre-pandemic levels mid-way through next year — around 12 months later than is expected in the US. At the time of the ECB March policy meeting, short-term economic weakness and elevated uncertainty over the outlook further out together with the rise in global bond yields prompted a response from the Governing Council. The account of the meeting revealed that the decision to conduct PEPP purchases at a "significantly higher pace" than earlier in the year was taken to ward off a tightening in financing conditions as risks to the economic outlook were intensifying. Meanwhile, the March account attributed the rise in bond yields largely to a recalibration of inflation expectations, though if it were to be real rates on the rise, an intervention by the ECB would not necessarily follow if it reflected improving economic prospects.
Turning to Australia, it was the RBA in focus this week with the Board leaving all policy settings unchanged at its April meeting (reviewed here), while the Bank also published its half-yearly Financial Stability Review (FSR). The main theme from the Board this week was that while the economic recovery was well underway and is expected to continue at a strong pace through this year and next, its commitment to its forward guidance on rates is clear. In his decision statement, Governor Philip Lowe noted that there was still "considerable spare capacity" in the economy and that the unemployment rate was elevated. The Board continues to expect that the macro conditions will not be consistent with its full employment and inflation objectives "until 2024 at the earliest". While it is not the consensus call by markets, my expectation remains that the Board will fully demonstrate its commitment to this guidance by extending the maturity of its 3-year yield target policy to the November 2024 bond from the April 2024 bond later on this year. The other key point was that the Board is prepared to further expand the $200bn envelope of the bond purchase program if it will assist in the recovery effort. Purchases under this program are now 50% complete having commenced in November (see chart below).
Chart of the week
Meanwhile, rising house prices at a time of low rates have certainly been a key point of discussion of late in Australia, though the week's communications from the RBA indicate no immediate concern. The April FSR notes that while house prices have lifted strongly over recent months, debt has not matched this pace of increase. For now, the emphasis is on maintaining the quality of lending standards to avoid excessive risk-taking.
