Global Investment Committee’s 12-Month Outlook: Continue Risk-Positive, Especially for Japan

Global economic recovery: more inflationary, central banks more hawkish than consensus

Out of the six scenarios presented, a narrow majority of our committee agreed again on a positive scenario in which the global economy matches the market consensus for solid growth, while equities continue to rally. Although we realize that variants present some risk, we estimate that vaccine distribution will, overall, prevent major lockdowns and, thus, continue to heighten optimism among investors, as will geopolitical risks not hampering economic activity. Meanwhile, we continue to expect the US Congress to pass additional fiscal stimulus via various compromises, leading to a mollified version of the Democratic agenda. However, due to increased global supply chain problems and electricity shortages in China (that will likely continue for many months), we now expect the economic recovery to experience higher inflation than consensus expectation, and thus, more hawkish global monetary policy.

In our June meeting, we expected GDP growth for the G-3 and China in 2021 to match consensus, but they moderately underperformed due to various problems, including virus related shutdowns in China, Japan and ASEAN, and many global supply chain problems. We also expected inflation to remain under control, and while prices surged in certain sectors, many (but far from all) were due to accident-related supply problems; however, these problems continued longer than expected, so inflation worsened. We now expect inflation beyond this year will remain high, but the 6-month annualized rates should significantly decelerate. Also, although “transient” remains an applicable term, there has been a large, mostly permanent step-up in overall consumer prices, which is particularly burdensome for low to middle-income households, and inflationary psychology has taken hold to a significant degree. Importantly, however, we expect virtually all this inflation to be driven not by raw material prices, but by services, including housing rents, and by finished goods prices not falling back like many expect.

Our new scenario predicts that globally, GDP will match consensus, with the US up 4.9% at a Half on Half Seasonally Adjusted Annualized Rate (HoH SAAR, as used in all references below) in the 4Q21-1Q22 period and 3.4% in the 2Q22-3Q22 period. Personal consumption should remain strong (after a 3Q shortage-related hiccup), especially in the re-opening services sectors, while private capex should continue to improve in most sectors (also after a 3Q hiccup). Construction spending outside of the infrastructure sector will likely be constrained, but government spending should contribute to grow due to the Democratic agenda, while net foreign trade will likely subtract from GDP growth.

After a virus-constrained 1H, Eurozone GDP grew sharply in the 3Q and should grow 5.2% in the 4Q21-1Q22 period and 2.8% in the 2Q22-3Q22 period. Japan’s 3Q was hurt by virus/vaccine issues (heightened by the burden of hosting a safe Olympics) and supply shortages, but should grow 3.2% in the 4Q21-1Q22 period and 2.5% in the 2Q22-3Q22 period. Deep consumer fears shifting toward optimism should be particularly pronounced in these two regions, with business confidence also boosting capex to a large degree, especially to solve supply chain issues and improve climate-related mandates. Japan’s economy should, in particular, benefit greatly from continued global tech demand and a rebound from hampered auto production.