Quarterly macro and market insights from Capital Group’s fixed income team

 

The rollout of vaccinations has bolstered optimism around the outlook for the global economy in 2021. Even so, the trajectory of the pandemic will continue to hold sway over near-term economic activity.

A new US$900 billion stimulus package in the US will not fully offset the negative impact of COVID-19, in our view. The final bill was less extensive than had been proposed. About 36% is directed to small businesses, 31% to individual direct payments and extended unemployment benefits, and 27% is allocated to vaccine development, education support, nutrition and housing assistance. 

The risk of a severe downturn does, however, appear to be diminished. Signed into law in December, the new coronavirus relief package will act as a backstop, picking up the slack as earlier measures expire. Political change in the US suggests further fiscal measures are coming. Electoral wins for Joe Biden in the presidential race and the Democrats in Georgia’s Senate runoffs have upended the balance of power.

Positive news on unemployment may require a slight reality check. Arguably, the official unemployment rate doesn’t fully account for shifts in participation. After adjusting for home schooling and other societal shifts, we estimate the actual figure is closer to 9%. Even so, the official rate’s trend lower —14.8% in April to 6.7%1in December —is encouraging.

Unemployment informs our near-term outlook for muted inflation. A sizeable output gap and low velocity of money round out the deflationary backdrop. That said, the pandemic does introduce uncertainty here. Looking further out, the US Federal Reserve’s willingness to tolerate inflation if and when it exceeds 2% (announced in August 2020) also opens up the possibility of persistently higher inflation.

Manufacturing and trade data signal a synchronised global recovery. Any near-term positive impact from vaccinations will, of course, depend on their successful distribution and administration. Hopes that the global economy “returns to normal” later in 2021 appear to hinge on widespread and speedy vaccination. In the meantime, historically loose financial conditions in the US and beyond are helping to support markets.

 

 

 

 

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