From early to late cycle in 15 months
From early to late cycle in 15 months
As befitting a global pandemic, the recession in GDP growth was not only the most internationally synchronised of the last 40 years, the rebound is also setting speed records. We are just one year away from closing the gap to the pre-pandemic trend, and if the current pace of employment improvement is maintained, the global economy will start to look increasingly 'late cycle' by the second half of next year. Conditional on continued 'expenditure switching', and bottlenecks easing from Q1, we see global growth running at +7% into year-end, stepping down to 5% in H1-22 and then 3½% late next year as we run out of labour market slack. We model three alternative scenarios as well: (a) a mutant virus that evades vaccines, (b) a structural increase (100bp or higher) in inflation, and (c) an accelerated recovery.
Through 20 short essays we address the big questions
Through 20 short essays we address the big questions
Here is a sampling: we show
Q: Should we worry about a wage/price spiral?
No. Although each 1pp decline in unemployment would tend to push up wages by 42bp (median for our DM and EM sample), prices tend to increase much less (15bp on avg). Moreover, the feedback from wages to prices is even smaller: 100bp of wage growth generate only 4bp of incremental price growth. So while directionally it is true that labour markets will tighten and wages will increase, evidence is scant that this will cause strong price effects. Being wrong on the duration of bottlenecks will be orders of magnitude more important than being wrong on wage growth next year.
Q: Could China's property downturn threaten global growth?
Both structural and cyclical factors are behind China’s property downturn. A 10% decline in total construction output could drag China’s GDP growth lower by 2.5ppts, or 1¼ppts lower than our baseline. This could lead to a significant impact on commodities (mainly minerals and metals) and related EM economies, and take a little over 1pp off of global growth (one third reduction in China's own growth contribution and the rest 'beta' effects from other countries). Economies most exposed to China’s domestic demand include Chile, Australia, Vietnam, Malaysia and Taiwan. Given that we have part of this risk already in our baseline, the incremental drag of this scenario materializing is worth about 50bp of global growth.
Q: How much can US real yields rise?
Rising forward inflation expectations at a time when global central bank rhetoric has been decidedly hawkish is among the greatest disconnects we see in financial markets. We think US 10y real yields can rise to -10bps by year-end 2022, which represents a 70 basis point sell-off above forward rates. UBS Economists expect monthly inflation gains to cool and headline CPI to fall to 1.5% by December '22. Stalling headline readings should reduce investor demand for inflation protection, particularly from nontraditional buyers. At the same time as demand is easing, the TIPS market will be contending with positive net supply for the first time since 2019.
