We now expect global GDP to expand by 6.1% this year, revised up from 5.3% in our December 2020 GEO. GDP outturns were stronger than expected in 4Q20 - particularly in Europe and emerging markets (EM) - and world GDP declined by 3.4% in 2020 as a whole, compared to our previous forecast of a 3.7% decline. World GDP is now expected to be 2.5% higher in 2021 than in the pre-pandemic year of 2019.
"The pandemic is not over, but it is starting to look like we have entered the final phase of the economic crisis" said Brian Coulton, Chief Economist.
Fitch now forecasts US GDP growth at 6.2% in 2021 (revised up from 4.5%), China at 8.4% (from 8.0%) and the eurozone at 4.7% (unchanged). Growth in EM excluding China is forecast at 6.0% (up from 5.0%).
The main driver of our global forecast revision is the much larger-than-expected fiscal stimulus package recently passed in the US. The USD1.9 trillion price tag represents more than 2.5% of global GDP. Fiscal support had a powerful cushioning impact in 2020.
Further fiscal easing has also been announced in the UK, Italy, Japan, Germany and India, while the EU’s Next Generation EU recovery fund (NGEU) should provide a sizeable boost to eurozone growth in 2022. China is the only major economy that is starting to normalise macroeconomic policy settings, where the fiscal deficit is being scaled back and credit growth is slowing as the economic recovery matures.
Unemployment forecasts for the major economies have been cut but job market recoveries continue to lag. Leisure and transport (L&T) industries are labour-intensive and are still afflicted by social distancing. US employment is still 6.1% below pre-pandemic levels (compared to GDP which is 2.4% lower), while L&T accounts for more than one-third of furloughed workers in the EU.
Vaccine rollout has gained momentum, particularly in the UK and US. The eurozone has had a slower start but the programme should accelerate in 2Q21. It is still reasonable to assume that the health crisis will ease by mid-year, allowing social contact to start to recover. But immunisation delays or problems remain the key downside risk to the forecast.
Improving growth prospects, commodity price increases, and short-term supply constraints in some manufacturing sectors have renewed focus on inflation risks. US bond yields are up by 60bp this year.
The rate of headline US inflation could rise above 3% yoy in April but underlying inflation will increase much more gradually given labour market slack. The Fed is focused on unemployment, more tolerant of higher inflation and will remain patient. Core inflation will stay well below target in the eurozone and the ECB will continue to purchase assets through 2022.
