Macro monthly | The great unlocking | Article – HSBC VisionGo

The great unlocking
Finance  ·    ·  7 mins read

  • The US economy continues to strengthen and service sector activity appears set to revive across Europe this summer…
  • … but India’s surge in cases is an acute reminder that only effective vaccine rollouts can allow a return to normality
  • We recently raised our 2021 GDP growth forecast for the UK to 6.8% but lowered it for India to 5.4%

The world has split in two: those with access to vaccines and low numbers of new COVID-19 cases, and those without. Despite a slow start, the European Union is ramping up its vaccine programme, looking set to join the UK and US in achieving ‘herd immunity’ by late summer. But on the other hand, global cases are on the rise again driven by surges in Brazil, parts of Europe, and especially in India.

US activity data is rebounding strongly

Strong US recovery

The US economy continues to recover, with high frequency data for April looking extremely strong. After the solid Q1 GDP print of 6.4% quarter-on-quarter (see Chart 1), Q2 is seeing consumers return to services spending and confidence is up, although the pace of new hiring disappointed in April’s labour market data. The high frequency data are striking – Americans are heading back onto planes and staying in hotels, and April consumer spending data could be comfortably higher than pre-pandemic levels (see Chart 2).

Economies that are opening are seeing strong rebounds…

Easing restrictions boosting growth…

Nowhere has had the same scale of fiscal support as the US in March/April, but the impact of easing restrictions bodes well for near-term growth in other economies. In the UK, where restrictions on outdoor dining and non-essential retail were lifted on 12 April, there has been a spike in mobility and restaurant sales. Given the further easing in May and June, this recovery may have a fair bit further to run, especially if accumulated savings are drawn down. Forward-looking survey components are picking up across the world, and the global services PMI is now pointing to faster growth than the manufacturing equivalent (see Charts 2 and 3).

…while some others continue to struggle

…but the pandemic is far from over

While some parts of the world may see a sharp rebound on the back of vaccines and reopening, that story isn’t being repeated everywhere. India provides a timely reminder that the pandemic is far from over, and as case numbers have surged, our India recovery tracker has fallen 24% below the pre-pandemic level in just a couple of weeks while mobility data have plummeted to new lows.

Inflationary pressures have seen investors chase unconventional assets

Inflationary pressures persist

The recovery in demand coupled with supply disruptions across the world are raising fears that the jump in headline inflation prints in the next few months may not quickly reverse. Commodity prices from lumber to oil are rising and house prices continue to hit new highs. But with the major central banks still suggesting they will keep policy very accommodative, institutional and retail investors continue to chase performance through unconventional assets, such as crypto and special purpose acquisition companies (SPACs).

We raised our 2021 UK GDP forecast but lowered for 2022

Our GDP growth forecasts

We recently revised our GDP growth forecasts for the UK and India. In the UK, we raised our forecast to 6.8% (from 5.8%) in 2021 and lowered it to 5.1% (from 6.1%) for 2022. This reflects: 1) better-than-expected Q1 2021 GDP data, meaning more of the recovery that we expected has already happened, and 2) stronger momentum into Q2 2021 than we had anticipated, as reflected in PMIs, consumer and business confidence, and the housing market. While the revisions we made look big, it’s more a question of timing. We still see GDP ending our forecast period (end-2022) 1.6% higher than its pre-pandemic peak.

We cut our 2021 India GDP forecast but lifted it for 2022

In India, we cut our GDP forecasts to 5.4% (from 11.0%) in 2021 and raised them to 6.3% (from 5.8%) in 2022. Although there are some signs that this wave of the pandemic may be peaking, there will be some severe economic costs. This wave is different on four counts – local lockdowns are more staggered, better-off households are more impacted, rural households are more affected and manufacturers’ margins are under more pressure. These new sources of uncertainty could lower confidence and hurt activity.

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