Macro monthly | Changing drivers of economic growth | Article – HSBC VisionGo

Changing drivers of economic growth
Finance  ·    ·  8 mins read


  • Fiscal and monetary support have helped the global economic recovery from the depths of the pandemic
  • But as fiscal support fades and economies reopen, growth drivers are set to change; we outline five key trends
  • We recently raised our global GDP growth forecasts to 5.9% (from 5.5%) for 2021 to 4.2% (from 4.1%) for 2022

Central banks had a common response a year ago to the pandemic: turn on the liquidity taps. The global economic rebound has been stronger than feared – but inflation has been higher too. Policymakers are now responding in their different ways, with some starting to reduce stimulus while others wait to see how high inflation goes and for how long. But the mix of growth and inflation drivers are likely to change this year and we examine some of these major trends.

1. Fiscal support fading

US fiscal impulse to fade next year, but less so in the EU

The fiscal impact will very hugely between countries. Over the past year, US fiscal spending has dwarfed anywhere else in the world but the bulk of the latest package already hit the economy in the first half of this year. In the Eurozone, there will be less of a step down in fiscal impulse next year, both because it was smaller than in the US in 2021 and because of the EUR750bn Next Generation EU fund in 2022.

Many support measures have expired in emerging markets

In emerging economies, stimulus packages have generally been smaller than in the advanced economies, with a couple of outliers including Brazil and Russia. And, while many fiscal measures (such as labour support schemes) will be in place for a least a few more months in advanced economies, most have already expired in the emerging market countries (see Figure 1).

2. Consumer goods demand growth to slow

Production is slowing in some sectors boosted by pandemic-included demand

The revival in spending from the lows of one year ago has largely been driven by goods demand. Spending on cars, consumer electronics, housing, and furniture have all boomed, and global industrial production is already back to its pre-pandemic trajectory.

But, as vaccine rollouts permit reopening and more spending on services, we may have already seen the best of the industrial upswing and rebound in goods trade. Indeed, production is already softening in some sectors, especially those that saw the biggest resurgence in demand early in the pandemic, notably pharmaceuticals.

3. Services demand reviving

Services are recovering, with hardest-hit sectors faring the best

The rotation back towards spending on services, which typically accounts for 50-70% of household consumption in advanced economies, now seems underway and we expect it to continue.

US consumer spending for March and April show the hardest-hit sectors over the past year saw the biggest bounce, like food services, public transport and accommodation (see Figure 2). We expect a similar picture in Europe in Junes and July as restrictions ease, but in Asia, mainly within ASEAN, renewed restrictions on rising cases mean the bounce in services will lag.

4. Stronger capital goods demand as capital expenditure recovers

Capital expenditure should rebound, with the EU seeing the strongest bounce-back

We expect spending on capital goods to return to growth in 2021, after a slowdown in 2020. While the levels of capital expenditure are expected to be well below the previous peak (in the Americas and Europe, Middle East, and Africa), there is scope for upside risks to modest expectations for 2022. Regionally, we see the biggest bounce-back in Europe, and in virtually all categories of capital spending from manufacturing to utilities. Helped along by the EU Recovery fund, European investment rates should return to pre-2008 levels by mid-2023.

5. Housing markets – huge uncertainty

Government policy could look to slow booming housing markets

House prices have been soaring around the world. Most of the advanced economies for which we have timely data have seen annual house prices rise by 10% or more over the past year and, given these moves, there is great uncertainty about the next likely developments.

Supportive factors, such as low interest rates, are likely to remain in place to some extent, which could keep some upward pressure on house prices. But, due to the speed of the moves, government policy could seek to slow increases if there is more focus on the challenges that booming house prices create, notably around generational inequality and financial stability.

How are central banks responding?

The labour market is the biggest area of uncertainty

The scale and timing of shifts in these growth drivers are impossible to predict. In the words of Federal Reserve Chair Jerome Powell "there is no template" to follow as an economy recovers from a pandemic. But the biggest area of uncertainty for central banks is the labour market, both for the next phase of growth recovery and for the medium-term inflation outlook.

What the US Federal Reserve (Fed) does matters most for global financial markets, and it has just taken a hawkish turn, signalling slower asset purchases and two possible rate rises in 2023. Its new 'average inflation target' regime allows it to moderately exceed the 2% goal but the Fed now seems willing to overshoot even further – temporarily.

We do not expect the Fed to raise rates before mid-2023

We still expect a fairly patient Fed to start tapering its asset purchases in December, but we do not expect interest-rate rises before mid-2023. Some central banks could raise interest rates earlier including in the UK, Norway, New Zealand, and Canada while others with higher inflation expectations, like Brazil and Russia, have already raised rates significantly.

Our growth forecasts

We recently raised our 2021 global GDP growth forecast to 5.9% (from 5.5%)

Our global growth forecasts have been revised up to 5.9% (from 5.5%) for 2021 and to 4.2% (from 4.1%) for 2022 thanks to upgrades for North America, Europe, Australasia and some emerging economies. Consumer spending momentum in the US has remained firm so far in 2021, fuelled by economic reopening and successive rounds of fiscal support. While in the Eurozone, falling COVID-19 cases and an accelerating vaccination programme have led to an easing of restrictions and a recovery in economic activity.

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