In November 2020, as positive news was breaking on vaccine efficacy, equity markets were slow to grasp the significant prospect of reopening economies. They have since caught up, but continue to underestimate the global economic growth potential for 2021 and 2022.1
For example, the US Federal Reserve (Fed) raised its US growth forecast for 2021 from 4.2 per cent in December - when our estimates were already above six per cent - to 6.5 per cent in March. This is a significant change for a central bank.2 Published sell-side consensus has risen accordingly, yet risks remain tilted to the upside.
Figure 1: Bloomberg economist consensus for 2021 US real GDP growth (year-on-year, per cent)
Markets remain too pessimistic on growth
Two key areas might drive upside risks, in the US and China respectively. First, while the size of US fiscal stimulus is broadly understood and discounted, it is more difficult to assess the willingness to spend of individuals and companies. The private sector has built up large savings over the past year and could release a meaningful amount as the US economy reopens. Market forecasts do not yet fully account for this, most assessments conservatively discounting pre-pandemic levels of spending and not much more.3
- ‘House View Q2 2021', Aviva Investors, April 8, 2021
- ‘US economy to grow faster than forecast, says Federal Reserve', BBC News, March 17, 2021
- ‘The world's consumers are sitting on piles of cash. Will they spend it?', The Economist, March 13, 2021
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