Markets Update: 2021 Global Growth Outlook

January 8, 2021 U.S. Economic Outlook

• Jan Hatzias, Goldman Sachs Chief Economist, maintains a 6.4% GDP growth forecast for 2021, positioning it more than two percentage points above the consensus.
• The forecast assumes the virus remains a significant drag in the short term but expects a strong recovery in spring driven by seasonal factors and accelerated vaccination.
• Recent data shows a concentrated decline: December payrolls fell by 140,000, driven almost entirely by a 500,000 loss in leisure and hospitality; excluding this sector, employment rose by 350,000.
• High-frequency indicators, including ISM purchasing manager indices, remained elevated in December, suggesting the broader economy is less sensitive to current restrictions than in the spring of 2020.

Fiscal Policy Expectations Under Biden

• The Democratic control of the U.S. Senate following the Georgia elections is expected to facilitate a new COVID relief package of approximately $750 billion, likely to be enacted by early March.
• Proposed components of the new package include:
  • Tax Rebates: An estimated $300 billion for $2,000 per person (combined with the previous $600, though $600 for lower/middle-income earners is the baseline expectation).
  • State Aid: Approximately $200 billion directed toward state and local governments.
  • Unemployment Benefits: Extension of $300/week weekly supplements through mid-2021, followed by a gradual phase-down.
• Longer-term Biden agenda items (healthcare, education, infrastructure, climate) are expected to face delays, potentially materializing in the second half of 2021.
• Corporate tax increases are anticipated as a funding mechanism for long-term priorities, with Hatzias penciling in a rate increase to 25% rather than the 28% proposed by Biden, reflecting Senate constraints.

Global Economic Performance

• Europe: Expected to see a strong recovery with 5% to 6% GDP growth in 2021 and 2022, significantly above consensus, as economies lagging behind the U.S. in pandemic impact face improvement as restrictions lift.
• China: Forecast at slightly below 8% growth in 2021; unlike other major economies, China has already returned to pre-crisis GDP trends, leaving less room for rapid "catch-up" growth.
• Policy Divergence in China: Chinese policymakers are expected to pivot from aggressive stimulus to tightening credit growth and limiting budget deficits to prevent future asset bubbles and financial imbalances.

Monetary Policy and Central Bank Outlook

• Major central banks (Fed, ECB, Bank of England, Bank of Japan) are projected to remain dovish until 2024 or 2025.
• Interest Rate Hikes: No changes to policy rates are expected until 2024 or 2025, despite slightly faster growth forecasts; the Fed's first hike date was updated to the second half of 2024.
• Rationale for Dovish Stance: A flat Phillips curve suggests that strong growth and falling unemployment will not immediately translate into significant inflation pressure.
• Asset Purchase Tapering: While the Fed's rate hike timeline is clear, the timeline for tapering $120 billion in monthly asset purchases is more uncertain, with potential tapering starting in 2022 rather than late 2021 due to vague criteria for a "substantial improvement" in the labor market.

Key Lessons from the Pandemic Crisis

• Policy Response: The crisis is characterized as a "Keynesian triumph," demonstrating that decisive, large-scale monetary and fiscal stimulus (e.g., the CARES Act) is the optimal response to massive demand shocks.
• Productivity and Adaptability: Market economies proved adaptable, with significant shifts to remote work maintaining productivity and accelerating the transition to online retail distribution.
• Data Interpretation: Reported productivity increases are partly influenced by the elimination of lower-productivity, labor-intensive sectors (e.g., hospitality) from the workforce.