Outlook for Global Growth: Less Synchronized, More Complicated

Federal Reserve Policy and Tapering Timeline

• Chair Powell's Jackson Hole remarks aligned with July FOMC minutes regarding the timing of asset purchase tapering.
  • The Fed intends to announce tapering by November 2021, with implementation likely starting in December.
    • September announcements are ruled out due to the requirement for advanced notice; an earlier announcement would only occur if the economic outlook deteriorates significantly.
  • Baseline expectations project a reduction of $15 billion per meeting from the current $120 billion pace, reaching zero by October 2022.
    • Some market participants advocate for a faster taper, but this remains an open debate.
  • Rate hikes are unlikely to occur while tapering is active, with the first hike potentially occurring in Q3 2023, contingent on stronger growth and inflation than currently forecast.

Global Economic Growth Forecasts and Revisions

• Goldman Sachs lowered its 2021 U.S. GDP growth forecast by approximately one percentage point, moving from >7% to 6%.
  • The revision follows a stronger-than-expected rebound in virus cases and their subsequent impact on activity, particularly in the service sector.
  • Quarterly GDP growth is expected to have peaked, with the business services sector likely seeing similar declines.
  • Sequential growth for the second half of 2022 is forecast at 1.5–2%, reflecting a necessary payback for the 2021 fiscal support surge.
• International forecasts have diverged based on pandemic trajectories:
  • China: Growth is downgraded due to strict "zero-COVID" restrictions, with Q3 sequential growth annualized at ~1.5% and full-year GDP lowered from 8.5% to ~8.2–8.25%.
  • Asia & Oceania: Significant downturns recorded in Southeast Asia and Australia due to severe outbreaks and lockdowns.
  • Europe & UK: Recovery remains robust despite outbreaks, with strong Q2/Q3 growth expected, though output remains 2–3% below pre-pandemic trend levels.
  • Latin America: Better virus outcomes have supported relatively stronger economic performance.

Inflation Outlook and Monetary Policy Implications

• U.S. core PCE inflation forecasts for 2021 have been revised upward to 3.75%, up from earlier estimates near 2.5%.
  • Despite higher 2021 figures, the inflation outlook remains "temporary" with a return to 1.8% core PCE in 2022.
• Under the Fed's average inflation targeting framework, the 2021 overshoot will raise the "hurdle rate" for future hikes.
  • Combined with forward guidance requiring 2% spot inflation, the cumulative average effect could move the first rate hike forward by several quarters.

Labor Market Dynamics and Wage Trends

• Extended unemployment benefits (including the $300 weekly supplement) significantly curtailed labor supply.
  • Micro-level analysis indicates that the expiration of these benefits in September–November 2021 will drive substantial additional job growth of ~1.5 million.
  • The unemployment rate is expected to decline sharply, though labor force participation will normalize slowly and likely remain below pre-pandemic levels for 1–2 years.
• Wage growth expectations are shifting based on the benefit cliff:
  • Extremely high annualized wage growth (25–30%) for leisure and hospitality workers (approx. $15/hr) is expected to moderate as benefits expire, though wages are unlikely to decline due to stickiness.
  • Higher-income segments ($25–$30/hr) are projected to sustain steady wage growth of ~3.5%, a pace potentially supported by productivity gains.

Forward-Looking Risks and Scenarios

• Primary Risk: The emergence of new, more infectious or vaccine-escape variants remains the dominant downside risk to global growth.
• Secondary Risk: A significant negative fiscal impulse as stimulus measures unwind could dampen economic activity.
• Vaccination Milestones: Goldman Sachs forecasts 50% of the global population fully vaccinated by year-end, a critical variable for long-term recovery prospects.