What’s different? Their forecast is noticeably above consensus, as gauged by the most recent Bloomberg survey of forecasters and IMF WEO interim update. Compared to other forecasters, they are significantly more bullish on growth prospects this year for the US, the EA, and China.
What is this based on? Well, vaccine production and distribution is picking up to the point where the achievement of herd immunity to Covid-19 will be within reach for significant portions of the globe over the quarters ahead. Pent-up consumer demand fuelled by ample fiscal support for household incomes in advanced economies will be boosting growth as economic activity normalizes. Major central banks have essentially committed to look through – indeed to look favourably upon – any transitory price pressures that arise in sectors that struggle to keep up with surging demand.
However, they highlight that Goldilocks could be accompanied by the elevated risk of a larger-than-desired jump in inflation. They weigh the Goldilocks growth scenario against the bear case for inflation and conclude that there is reason to be optimistic.
Furthermore, they say we are experiencing an unusual combination of conditions that could drive strong growth. These include significant progress in managing the pandemic; massive fiscal support in the US, and significant support in Europe and elsewhere; and huge household savings along with pent-up demand.
This mix should lead to highly accommodative central bank policy that could see global growth rise to nearly 7% this year, led by China, India and the US. This outlook is a percentage point higher than their forecast in November; and noticeably above consensus expectations, which may not yet fully reflect the latest US fiscal stimulus.
What about consumer prices? They expect consumer prices to accelerate this summer as supply lags surging demand. However, they highlight that experience teaches us that supply is flexible and that we also still have substantial resources we can deploy to limit any excesses. This leads us to believe that high inflation will be transitory.
But are we out of the woods?
Elevated inflation risk is centred in the US, they state. The Biden administration’s stimulus measures could drive output to an extent not seen since the 1960s, when high inflation last kicked off in the US. Meanwhile, a number of emerging economies—India most notably—are also experiencing persistent inflation pressures.
What’s ahead? A sustained overshoot of inflation into the 3-4% range would elicit a strong response from the Fed. This would hit global financial markets and a number of emerging market economies hard, very possibly moving the global economy into recession.
For the full story of how Goldilocks could stand up to the bears, read our Goldilocks with Inflation Risk report
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