Summary

It is Phil’s view that we are on the edge of a new phase in the global recovery from the Covid-19 crisis. An acceleration in (sequential) GDP growth will occur in Q2, led by the United States. US strength is notable because it does not follow significant 20Q4-21Q1 weakness (contrast with EMU and UK). Phil thinks US growth in 2021 (Q4/Q4) will be at its strongest since the first half of 1984. There are still some rough months of data ahead, especially in Europe. There are several important drivers of this recovery. Globally, the most important is the moderation of the Covid crisis, thus clearing the way for a broader re-start of economic activity. High household saving ratios will decline as consumption possibilities expand. Another is continued supportive macro policies. In the majority of countries, there was dramatic fiscal easing in 2020; most are choosing to rein in that support in 2021. The EU is planning to boost investment by launching the Recovery Fund. The US is a dramatic outlier on the expansionary side. This support will be backed up (not offset) by continued very easy Fed policies. Significant parts of the private business sector have emerged from the short, sharp Covid recession in remarkably good shape. Capital spending is already strong in the US and will likely rise further in 2021. A strong run for capex would lift perceptions of both potential growth and the neutral policy rate. It would also support stronger real wage growth. Asia is benefitting from a tech boom. A greater focus on energy reform could also lift global capex. The flip side to these developments (global goods market strength) is rising global goods pricing pressures - the sharp end of the inflation process. For now, the rise in inflation and inflation expectations is tempering deflation fears, which had developed through the first half of 2020. The US (closely followed by Australia, UK, Canada and New Zealand) will lead inflation higher; Europe and Japan will lag.

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