ING Monthly Economic update: Another sequel no one needed
Cracks are starting to appear in our base case scenario of a synchronised global recovery in the second half of the year, but we remain optimistic that better times are coming.
US: Waiting for lift-off − The economy will likely continue struggling for the next month or two, but with vaccinations accelerating and households looking cash rich, a reopening of the economy could see growth reach multi-decade highs.
Eurozone: A delayed recovery − With more stringent lockdowns in the offing and a still underwhelming vaccination campaign, the eurozone economy is likely to shrink again in 1Q. A recovery can still be expected from 2Q, though some headwinds remain. Inflation is likely to be temporarily higher. Meanwhile, the European Central Bank seems to be moving towards yield curve control.
UK: Three reasons to be cheerful − The UK’s vaccination programme has exceeded all expectations so far, and it’s not inconceivable that all adults will have been offered a first dose by the end of the second quarter. The lockdowns also appear to be working, and a spring recovery now looks likely. The major risk now is that a new, vaccine-resistant strain requires a return to lockdown.
China: Impact of muted spring travel − The Chinese New Year is coming and this year is different, as new partial lockdowns reduce domestic travel. We discuss the impact of the change to this big event as well as the progress made in deleveraging reform.
Asia: Covid catches up − Towards the end of last year, the relatively good performance of most Asian economies in terms of the Covid pandemic started to crack. The deterioration has not been as dramatic as in Europe or the US, but the tolerance for Covid in Asia is very much lower, and some restrictions have already been re-introduced.
CEE: Delayed recovery but no fundamental change to the outlook − The recovery is delayed, but not derailed. Although coming later than expected, we still look for a meaningful rebound from the second quarter. Our outlook for central banks and asset markets is unchanged. The Czech central bank should hike twice this year, while Poland and Hungary should stick to QE. CZK remains our top pick while HUF is the least preferred.
FX: Challenging our bearish dollar forecast − Our bearish dollar view for 2021 has been built firstly on the Federal Reserve keeping policy very loose and secondly on the synchronised global recovery providing attractive alternatives outside of the US. Both premises are coming into question. Yet we think it too early to be making wholesale changes to our dollar forecasts
Rates: January, a month of Mondays? I don’t think so − Often in January, we’d get some direction for the year ahead. Well this year, take your pick. We’ve been all over the shop, in rates, credit, equities, you name it. Direction be damned, it’s all about volatility! To get back on track to hit a 1.5% US yield, volatility needs to calm considerably; that’s not easy given how frothy risk assets are in valuation terms.
The return of inflation − The return of inflation could be a major theme in markets this year. It will force the Federal Reserve and the European Central Bank to balance even more carefully its communication to avoid any taper tantrum.
Eurozone politics: A taste of what’s to come − When it comes to politics this year, there are three countries to watch: Italy, the Netherlands and Germany. All three have dominated the headlines in the first weeks of the new year.
Brexit: Taking stock after a chaotic month − Trade disruption could deliver a sizeable hit to UK manufacturing output this quarter, while lingering uncertainty and potential instability surrounding the future of the UK-EU trade deal will keep a lid on investment during the post-Covid recovery.