An Update from our Director of Financial Planning – Matthew Tuton
Global Economic Outlook – Recovery delayed but undeterred
- We are now 16 months into the global recovery journey, following the onset of COVID-19. Global GDP growth momentum has now peaked and retraced to pre-pandemic levels.
- While we are not yet out of the woods, Industry Experts believe current headwinds (Covid uncertainties, fading stimulus and ongoing supply disruptions) are not significant enough to derail the overall recovery trajectory, which is expected to be supported by a still accelerating global vaccination drive, ongoing policy commitments by Central Banks and improving market fundamentals.
- To date, the pace of recovery has been uneven across economies, with China and the US the first to recover to pre-pandemic levels of growth. Moving forward Industry Experts expect US final domestic demand to soften to trend levels, although growth will still be supported by private sector demand (consumption, housing and business investment).
- Likewise, China’s recovery is expected to continue to fall back to more normalised levels, with exports and the property sectors slowing. Improving consumption and capex, along with the beginnings of policy easing should however see growth remain solid.
- Economies that were initial laggards in the recovery race are now catching up as vaccination rollouts advance. Europe’s recovery has now bounced back following some reopenings, with activity to remain reasonably resilient given relatively high vaccination rates. Australia’s recovery is also expected to rebound once vaccination rate targets are met and lockdown restrictions begin to ease.
The global economic recovery has been ongoing for 16 months now, following a dramatic two-month recession after the onset of COVID-19 in March 2020. This recovery period has been one of the sharpest the world has ever seen, with 3Q21 global GDP already ~2½% above pre-Covid levels, and only ~2% below the pre-Covid trend. Given the speed and progress of the rebound that has already occurred, Industry Experts now expect growth to slow back to a more normalised pace over the coming year.
Global growth to retrace to pre-Covid levels in 2022
Temporary speedbumps as the world “lives” with the virus
Industry Experts expect global growth to continue on an upward trajectory, with GDP forecast to expand by ~5½% in 2H21 (versus ~3½% in 1H21). We expect Covid uncertainties (new variants, vaccine efficacy, vaccine hesitancy), fading stimulus and supply chain disruptions to present ongoing recovery headwinds, however Industry Experts does not view these risks as material or more than just temporary speedbumps.
Indeed, from an economic perspective, the world appears to be getting better at living with the virus, with each successive Covid ‘wave’ having less of an impact on growth and markets. As vaccine rollouts continue to progress, we expect fatalities to remain below previous peaks, allowing for more severe social restrictions to ease and recovery to continue. With the recent evidence of fading vaccine efficacy, booster shots are also now being rolled out across the West, which should further support ongoing Covid control and allow the services recovery to continue.
Vaccine rollouts continue with EMs now catching up
Source: Our World in Data. Macrobond, Macquarie Macro Strategy, September 2021
US and China growth rates to normalise
Recovery has occurred at different speeds across the world, with the US and China the early leaders in returning to their pre-Covid levels of growth. Moving forward, we expect growth in the US and China to slow down to more normalised, but sustainable rates.
While US growth and final domestic demand have both surpassed pre-Covid levels, these dynamics are expected to soften in 2H21. Looking ahead to CY22, Industry Experts project real GDP to grow at 3% – significant slower than CY21 (5.6%), but still a solid and above-trend growth rate. We expect growth to be underpinned by private sector demand (consumption, housing, and business investment). Upside risks to this outlook include a more persistent and sustained inflation impulse while downside risks could result from greater than anticipated impacts from Covid through the coming Fall and Winter seasons.
Consumer fundamentals remain healthy
Source: Macrobond, Macquarie Macro Strategy, September 2021
Likewise, China’s economic recovery is expected to continue to slow in coming months, with GDP growth falling from 7.9% yoy in 2Q21 to 5.5% yoy in 3Q21, then to 5.0% in 4Q21. Key headwinds are likely to come from exports (decelerating external demand as fiscal impulse in advanced economies fade) and property (domestic policy curbs) sectors, which have been the top two drivers of China’s post-Covid recovery since 2Q20. Nonetheless, support to offset some of these headwinds are expected to come from improving consumption (as reopenings resume post the latest Covid outbreak) and capex (robust growth in industrial profits). Furthermore, policymakers have begun to signal the end of the policy tightening which started in 4Q20 in response to the deceleration of growth and are expected to step up fiscal spending in 2H21 as well as ease liquidity (acceleration in government bond issuance).
Recovery laggards to catch up
Growth is expected to pick up in economies previously lagging the recovery race, with rebounds to occur once Covid-induced lockdowns ease as vaccine rollouts progress and broader activity and mobility resume. Europe’s recovery has now resumed, with Australian and Japan likely to follow once latest Covid outbreaks are under control.
After a rocky start in 1Q21, Eurozone real GDP bounced by 2.2% in Q2 and is back within 2.5% of its pre-Covid peak – bolstered by increased vaccination rates and a slowing in the spread of Covid permitted a staged reopening across the region. While the Delta variant poses some downside risk, we expect this growth to continue into 3Q21 and several quarters thereafter given high-frequency measures of activity so far have remained strong, suggesting vaccine efficacy and economic resilience have held up in the face of the latest Covid wave. Although fiscal policy will do less of the economic heavylifting as Covid-related emergency measures are gradually withdrawn, policy is expected to remain accommodative, with the European Recovery and Resilience Facility to significantly boost public and private investment
High activity levels aiding Europe’s resilience against latest Covid waves
Source: IHS Markit, Macrobond, Macquarie Macro Strategy, September 2021
Australian growth fundamentals remain strong
Australia’s early recovery success has hit a speedbump, with latest Delta outbreaks resulting in nearly 60% of the population having to go under stay-at-home orders for most, if not all, of 3Q21. As such, Macquarie expects these restrictions to cause 3Q21 GDP to fall by nearly 4% q/q, although the acceleration of vaccine rollouts should hasten reopenings and support a solid rebound in economic growth in Q4, thus avoiding a technical recession.
While consumer spending has taken a hit during the lockdowns, labour market conditions have remained relatively resilient (with businesses now mindful of holding on to workers in anticipation of rebound demand based on previous experience). Therefore, while employment may decline in Q3, we expect hours worked to bear the brunt of the labour market adjustment for the quarter. Furthermore, the RBA is expected to keep rates on hold until it is staring at inflation, with no changes likely until 2H23.
Remaining positive and risk-on …
Despite headwinds and uneven growth rates, the economic outlook remains solid. Growth rates are set to normalise in those economies that experienced the sharpest recoveries through 2020 while for those that were laggards, the outlook appears rosier as vaccinations rates improve and economies reopen. Once again, we are reminded of the link between the economic outlook and the health crisis. Without getting on top of the health crisis, economies are vulnerable to outbreaks that cannot be controlled without large economic consequences. Improving vaccination rates are now allowing more and more countries to “live” with the virus rather than trying to eliminate it.
Ultimately, we do not see any short-term economic disruptions to be significant enough to derail the current equity bull market, and we expect global markets – including Australia – to push higher into year end and beyond. While risks such as ongoing Covid uncertainties (new variants), the potential for monetary and fiscal tapering and supply disruptions do exist, we believe the accelerating global vaccination drive, ongoing policy commitments by Central Banks and improving fundamentals are all supportive of a global rebound, even if it is at an uneven pace across economies.
Global economic forecasts
Sourced from Macquarie Investment Update #69 – This research contains general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider if it is appropriate for you. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. Past performance is not a reliable indicator of future performance. You should consider all factors and risks before making a decision.
Director of Financial Planning